Sources & Uses Statements

Simple Guide to Constructing Sources & Uses Statements to secure funding

A useful starting point for any project or venture seeking funding, the Sources and Uses of Funds statement captures how the money will be raised and spent. This applies across all types of deals, from new (“greenfield”) projects to venture capital to expansion, consolidation or buyouts.

Sources and Uses of Funds is a table summarizing the total amount of funding required by type (also called “asset class”) how those funds will be allocated, deployed, used, or spent. This is a “ground zero” fundamental but also formal disclosure that characterizes developer/owner expectations (sources reveal the desired asset classes of funds sourced, namely debt, equity, mezzanine debt, owner cash, grants or other contributions to the total funding request) as well as the type of deal — new construction, venture capital “seed” money, VC early stage, expansion, buyout, etc.

• Uses → The “Uses” side calculates the total capital required by category to make the deal workable (including the cost of all procurement plus design/engineering or other services, and fees).

• Sources → The “Sources” side details how the deal is going to be funded, including the preferred amount of debt and equity financing.

Why this matters: guiding principles for constructing statements

Sources & Uses Statements help lenders/investors get the lay of the land, an overview that offers transparency (disclosure of important costs in proportion to one another), as well as what has been accounted for, and what probably hasn’t. For instance, is the cost of financing included and disclosed? How about interest during construction, if any?

But even more importantly, they help developers/owners to articulate their own plan and intentions, control costs, make sure they don’t leave out anything important (running out of cash capital ahead of commencing or expanding operational cash flows must be avoided) and allow for important analyses like debt-to-equity, tangible assets versus working capital, fees or contingency, and efficiency measures like Internal Rates of Return (IRR).

1. Sources must match Uses. The same amount raised is used. Nothing extra or imaginary, but also no deficits or understatement. Just like how the assets side must equal liabilities and equity on a balance sheet, “sources” (total funding) must equal “uses” (total funds being deployed by category). This also provides evidence that proper accounting rules and disciplines are being employed.
2. Make the various Uses of Funds categories clear, descriptive, and reasonably precise, … with a % of the total for each one to make it easy to quickly discern how funds will be mainly deployed (80/20 rule).
3. Include at least 4 or 5 uses categories but not usually more than 12. No single category of less than 1% of total funding, typically, unless such disclosure is necessary for the sake of conveying important facts and/or completeness.
4. Sources accounts for and reveals the proposed capital structure — debt, equity, or both, any grants, new money from the owner(s) or a sponsor.
5. Sources captures the amount of owner “skin in the game” — new cash contribution to the round of funding, or if seeking 100% from one or more outside sources.
6. Credibility: Finally, such statements reflect whether or not the author is trained in standard accounting practices and has experience constructing proper, formal disclosure statements.

Explore and learn more via this step-by-step “how to” guide including samples and examples that also covers the cash flow demands during construction called a “draw schedule.”