How to Prepare a Financial Plan for a Biogas Power Plant
Biogas has massive potential in producing renewable energy. The raw materials can be found in the environment, and most are disposable wastes harmful to the environment if not disposed of properly. However, before you start the project, you should first establish its viability since there are a lot of factors you have to account for.
Preparing a financial plan for your biogas venture will require you to evaluate how you can earn profit and the costs involved. Then how much initial investment is needed, where will you source out funds, and are there enough raw materials. These are the key points that should be answered.
1. How will the business generate revenue?
To project sales, you have to identify first the production volume and prices. The production volume will depend on the quantify of raw materials processed and the capacity of the digester. For biogas, the efficiency rate is almost 100% which means the energy almost translates to power.
Biogas can either be sold at an off-take price or market price. But to protect you from price fluctuations, you should secure a Power Purchase Agreement of at least 25 years.
Moreover, other income is derived from the sale of fertilizers.
2. Identify Costs of Goods Sold (COGS) and Operating Expenses (OPEX)
COGS is mainly for the biomass to be processed into biogas. It is crucial to secure the raw materials requirements from different sources to ensure that biogas volume requirements by buyers are met.
The operating expenses include personnel salaries, transportation, external services, maintenance, property taxes, insurance, and administrative expenses.
Projecting the timing of cash outflows will help you match your available resources so that you won't run out of cash.
3. Where will you source out funds?
Funding biogas project will need a significant amount for land acquisition, land improvements, and setting up the power plant.
Presenting a financial plan to banks and investors will increase your chance of getting funds. It is the most scrutinized by funders when deciding to lend or invest capital into your business. You should know the detail of your project to explain and answer questions by the funders confidently.
4. Prepare Financial Statements
The three-statement model is the primary financial model to prepare when financial planning.
Projecting the income statement allows you to assess the accounting profit of your business if the revenue is enough to cover the COGS and operating expenses.
The balance sheet provides information on the projected increase in assets and equity. Also, it is helpful to know whether the business is highly-leveraged or not.
The cash flow is crucial to assess the timing and availability of cash to avoid problems on the lack of cash to finance the day-to-day operation. In dealing with renewable energy production such as biogas, it may take months before cash comes in.
5. Evaluate the Financial Ratios and Metrics
The financial ratios and metrics help assess the financial economics better. The financial ratios you can utilize are liquidity ratios (current ratio), profitability ratios (ROE, ROCE), efficiency ratios (inventory turnover, cash receivable turnover), leverage ratios (debt service coverage ratio), and growth ratios (profit growth, EBITDA growth).
Financial metrics are excellent financial planning tools, in addition to financial ratios, when deciding whether to pursue your biogas project or not.
In Conclusion:
Preparing a financial plan will need you to project and do the following:
· How will the business generate revenue?
· Identify Costs of Goods Sold (COGS) and Operating Expenses (OPEX)
· Where will you source out funds?
· Prepare Financial Statements
· Evaluate the Financial Ratios and Metrics
Doing these will help you know your project deeper and make intelligent decisions. And you may find it helpful to utilize a financial model template when doing your financial planning. You can check financial model templates prepared by eFinancialModels specifically for biogas projects.
