How to Write a Business Plan in South Africa

Part 6 of 15 · Financial forecasting

Part 6: Building a Funding-Grade Financial Model

Written for people who are not accountants. By the end of this part you will be able to build a three-statement model that a credit analyst can audit, and defend every number in it without saying “my bookkeeper did that.”

There is only one rule that matters in financial modelling: every number is either an assumption you can defend or a calculation from those assumptions. Nothing else is permitted. A model containing typed-in numbers in the middle of a calculation is a model nobody can trust, including you.

Chapter 36Model architecture

Build the model in five separated layers. This structure is used by every corporate finance team, and it is the reason their models survive interrogation.

The five-layer model

1Assumptions sheet. Every input in one place, colour-coded blue, each with a source note. Prices, volumes, growth rates, cost ratios, debtor days, interest rate, tax rate, escalation.
2Calculation sheets. Revenue build, cost build, payroll, capex and depreciation, debt schedule, working capital. No hard-coded numbers — formulas only.
3Three statements. Income statement, balance sheet, cash flow statement. Monthly for year 1–2, annual for years 3–5.
4Outputs and ratios. DSCR, break-even, margins, IRR, NPV, payback, gearing — the numbers the funder actually reads.
5Scenarios. Base, downside and upside, driven by switching a small number of assumptions — never by editing the statements directly.

Chapter 37The Revenue Forecast

Never forecast revenue as a single growing number. Always build it from drivers, because drivers can be defended and a growth percentage cannot.

Revenue build patterns by business type

SERVICES / CONTRACTS
  Revenue = Active contracts x Average monthly fee x Retention

RETAIL / FOOD
  Revenue = Transactions per day x Trading days
            x Average basket value

MANUFACTURING
  Revenue = Units produced x Utilisation % x Sell-through %
            x Price per unit

PROJECT / CONSTRUCTION
  Revenue = Projects won x Average project value
            x % completed in period

TRANSPORT / LOGISTICS
  Revenue = Vehicles x Trips per month x Revenue per trip
            x Utilisation %

SUBSCRIPTION
  Revenue = Opening subs + New subs - Churned subs
            x ARPU

Revenue build — worked example, cleaning services, year 1 (months 1-12)
	M1	M3	M6	M9	M12	Year 1
Contracts — opening	0	3	7	11	15	—
New contracts won	2	2	2	2	2	24
Contracts lost (churn 2%)	0	0	0	(1)	(1)	(4)
Contracts — closing	2	5	9	12	16	—
Average monthly fee	R14,500	R14,500	R14,935	R14,935	R14,935	—
Contract revenue	R29,000	R72,500	R134,415	R179,220	R238,960	R1,486,300
Ad hoc / deep clean	R0	R28,000	R28,000	R56,000	R56,000	R336,000
Total revenue	R29,000	R100,500	R162,415	R235,220	R294,960	R1,822,300

Chapter 38Costs, Gross Profit, Operating Expenses and EBITDA

Separate variable from fixed — rigorously

Direct (variable) costs move with volume; operating (fixed) costs do not. Getting this split wrong makes your break-even analysis meaningless, which makes your risk section meaningless.

Cost classification
Cost	Classification	Behaviour
Raw materials, stock purchases	Direct	Moves 1:1 with volume
Production/field labour	Direct (usually)	Steps up with volume; not smooth
Delivery fuel and vehicle running	Direct	Moves with trips
Sales commission	Direct	Moves with revenue
Rent, rates, insurance	Fixed	Independent of volume
Admin salaries and management	Fixed	Steps up at capacity thresholds
Marketing	Fixed (budgeted)	A choice, not a consequence
Depreciation	Fixed, non-cash	Below EBITDA
Interest	Fixed, financing	Below EBITDA

The profit waterfall — and why each line exists

  Revenue                                    R 1,822,300
- Direct costs                              (R 1,210,000)
= GROSS PROFIT                               R   612,300     33.6%
    "Can this business make money on each sale?"

- Operating expenses                        (R   398,000)
    Rent, admin salaries, marketing, insurance,
    professional fees, utilities, IT, other
= EBITDA                                     R   214,300     11.8%
    "Does the operation generate cash before
     financing and accounting decisions?"

- Depreciation & amortisation               (R    96,000)
= EBIT (operating profit)                    R   118,300      6.5%

- Interest                                  (R    72,400)
= PROFIT BEFORE TAX                          R    45,900      2.5%
- Tax (27% companies / SBC rates)           (R    12,393)
= NET PROFIT AFTER TAX                       R    33,507      1.8%

The costs South African SMEs routinely forget

Owner’s salary — if you exclude it, your profit is fiction and every funder knows it
Employer statutory costs: UIF, SDL, COIDA, leave provision (add 12–20% to gross salaries)
Bank charges and card acquiring fees (2–3.5% of card turnover in retail and food)
Backup power: generator finance, diesel at operating hours, solar maintenance
Insurance: public liability, goods in transit, SASRIA, key person, asset cover
Bad debts — provide 1–3% of credit sales; more for public-sector debtors
Waste, shrinkage and breakage — 2–5% in food and retail
Compliance: annual returns, B-BBEE verification, audits, licence renewals, professional indemnity
Working capital finance cost, which sits in interest but is caused by your debtor policy

Chapter 39Working Capital — the number that kills profitable businesses

Working capital is the cash trapped in your operating cycle. It is the most misunderstood concept in SME finance and the most common cause of business failure in South Africa.

The cash conversion cycle

Days Inventory Outstanding  (DIO)
    = Average inventory / COGS x 365

Days Sales Outstanding      (DSO)
    = Average debtors / Revenue x 365

Days Payable Outstanding    (DPO)
    = Average creditors / COGS x 365

CASH CONVERSION CYCLE = DIO + DSO - DPO

WORKED EXAMPLE  (wholesale distributor)
    DIO   48 days     stock sits for 7 weeks
    DSO   62 days     customers pay in 2 months
    DPO   30 days     you pay suppliers in a month
    ---------------------------------------------
    CCC   80 days

    Annual revenue                   R 24,000,000
    Daily revenue                    R     65,753
    Working capital required
        = 80 days x R65,753          R  5,260,240

    ==> Growing revenue by 40% requires an
        ADDITIONAL R2.1m of permanent funding
        BEFORE a single cent of extra profit.

Working capital levers — and what each costs you
Lever	Effect	Real cost
Settlement discount (2% for 15 days)	Cuts DSO sharply	Roughly 24% annualised — expensive but often cheaper than the alternative
Deposits on order (30–50%)	Cuts DSO to near zero	May cost you price-sensitive customers
Invoice discounting / factoring	Converts debtors to cash	Typically 2–5% of invoice value; fast and widely available in SA
Supplier terms extension	Increases DPO	May forfeit early-settlement discounts; strains relationships
Consignment or just-in-time stock	Cuts DIO	Requires supplier scale and reliability
Overdraft facility	Bridges the gap	Prime + 3–6%; must be repaid, so it is not a solution to a structural gap

Chapter 40Capital Expenditure, Depreciation and the Debt Schedule

Capex, depreciation and debt are mechanically linked. Get the linkage right and the model becomes self-consistent; get it wrong and nothing downstream can be trusted.

Capex and depreciation schedule
Asset	Cost	Useful life	Annual depreciation	Purchase month	Funding
Production equipment	R2,180,000	8 years	R272,500	Month 3	Term loan, 60 months
Delivery vehicles (2)	R690,000	5 years	R138,000	Month 3	Asset finance, 54 months
Generator 220kVA	R480,000	10 years	R48,000	Month 4	Term loan, 60 months
Fit-out and fixtures	R420,000	6 years	R70,000	Month 1	Owner contribution
IT and systems	R95,000	3 years	R31,667	Month 1	Owner contribution
Total	R3,865,000	—	R560,167	—	—

Debt amortisation — the formula and the schedule

MONTHLY REPAYMENT (annuity / level payment loan)

    PMT = P x [ i(1+i)^n ] / [ (1+i)^n - 1 ]

      P = principal
      i = monthly rate = annual rate / 12
      n = number of months

    Excel:  =PMT(rate/12, months, -principal)

WORKED EXAMPLE
    Principal                     R 2,660,000
    Rate  (prime 10.50% + 2%)          12.50%
    Monthly rate                       1.0417%
    Term                             60 months
    -------------------------------------------
    Monthly repayment              R   59,838
    Annual debt service            R  718,056
    Total interest over term       R  930,280

AMORTISATION EXTRACT
    Mth  Opening      Interest  Capital   Closing
      1  2,660,000    27,708    32,130   2,627,870
     12  2,254,318    23,483    36,355   2,217,963
     36  1,205,466    12,557    47,281   1,158,185
     60     59,222       617    59,221           0

Linking the three statements

How each transaction flows through all three statements
Transaction	Income statement	Balance sheet	Cash flow
Buy R2.18m equipment	No effect	Fixed assets +R2.18m	Investing outflow −R2.18m
Depreciation R272,500	Expense −R272,500	Accum. depreciation +R272,500	Added back in operating
Draw R2.66m loan	No effect	Cash +R2.66m; debt +R2.66m	Financing inflow +R2.66m
Repay R59,838	Interest expense only	Debt reduced by capital portion	Financing outflow −R59,838
Invoice R100,000 on 60 days	Revenue +R100,000	Debtors +R100,000	No cash yet — working capital outflow
Customer pays	No effect	Debtors −R100,000; cash +R100,000	Operating inflow +R100,000

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How to Write a Business Plan