Sireletso Protective Group Business Plan — Working Capital: The Central Finding

Why payroll is paid weekly and clients settle in 45 to 60 days, what that gap does to cash, and the discounting facility that bridges it.

Working Capital: The Central Finding

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12.1 The counterfactual
12.2 Collection performance
12.3 Collection discipline

Figure 15. Working capital absorption against cumulative EBITDA.

R million	Year 1	Year 2	Year 3	Year 4	Year 5
Trade debtors	5.79	11.14	13.75	16.10	18.20
Inventory	0.46	0.89	1.10	1.29	1.47
Trade creditors	(0.69)	(1.33)	(1.65)	(1.94)	(2.20)
Net working capital	5.56	10.70	13.20	15.45	17.47
Absorbed in the year	(5.56)	(5.14)	(2.50)	(2.25)	(2.02)
Cumulative absorbed	(5.56)	(10.70)	(13.20)	(15.45)	(17.47)
Cumulative EBITDA	(1.40)	4.82	13.96	25.77	39.88

Across the five-year projection the Company generates R39.88 million of cumulative EBITDA and absorbs R17.47 million into working capital, principally trade debtors. Working capital consumes 44 per cent of everything the business earns before a single rand of interest, tax, capital expenditure or debt repayment is met.

In Years 1 and 2 the position is worse still: cumulative working capital absorption of R10.70 million exceeds cumulative EBITDA of R4.82 million outright. The business is, on a cash basis, running backwards while growing profitably. This is not a flaw in the plan; it is the arithmetic of a labour services business that pays weekly and collects in two months, and it is why the financing structure and not the operating model is the critical design decision in this transaction.

12.1 The counterfactual

Figure 16. Closing cash with and without the debtor finance facility.

R million	Year 1	Year 2	Year 3	Year 4	Year 5
Closing cash with the facility	1.31	0.34	1.35	4.41	8.77
Closing cash without the facility	(2.45)	(6.90)	(7.59)	(6.05)	(3.06)
Facility drawn	3.76	7.24	8.94	10.46	11.83
Facility headroom against the R12.00m limit	8.24	4.76	3.06	1.54	0.17

Without a debtor facility this business does not survive its own growth

Modelled on identical trading assumptions but without an invoice discounting facility, the Company’s cash balance turns negative in Year 1 at R2.45 million, deepens to R7.59 million in Year 3, and does not return to positive within the projection period. During that period the Company is profitable at the EBITDA line from Year 2 and unable to fund its payroll. Directors trading in those circumstances face personal liability considerations under the solvency and liquidity provisions of the Companies Act, and the practical outcome is either an emergency equity call on unfavourable terms or the deliberate refusal of profitable new contracts to conserve cash. The facility is drawn to R11.83 million by Year 5 against a limit of R12.00 million. Headroom is adequate at the base case debtor assumption of 62 days but disappears entirely if collections stretch beyond 70 days.

12.2 Collection performance

Figure 17. Facility draw required at Year 5 under different collection performance.

Figure 18. The debtor book against the facility that funds it.

Debtor days	Year 5 trade debtors	Facility draw required	Facility headroom	Position
45 days	R13.21m	R8.59m	R3.41m	Comfortable
55 days	R16.15m	R10.50m	R1.50m	Tight
62 days	R18.20m	R11.83m	R0.17m	Tight
70 days	R20.55m	R13.36m	(R1.36m)	Limit breached
78 days	R22.90m	R14.88m	(R2.88m)	Limit breached

The covenant is set at 75 days. At 70 days the facility is already exhausted, which means the covenant would be passed in the quarter that the business ran out of funding. A lender should set the debtor covenant at 68 days rather than 75, or increase the facility limit to R14.00 million, so that the covenant test and the funding constraint bind at the same point.

12.3 Collection discipline

A dedicated credit controller is appointed from Year 2 and is the first administrative hire after the finance manager, ahead of any additional business development capacity.
Invoices are raised within two business days of month end with the deployment record attached, because a query on a timesheet is worth a fortnight of collection period.
Every client is credit-assessed before the first deployment and re-assessed annually; the facility only advances against eligible debtors.
No single client is permitted to exceed a defined share of the debtor book, so that one slow payer is an irritation rather than a funding event.
The debtor age analysis is reviewed weekly by the finance director and reported monthly to the lender as part of the covenant pack.

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