Part 7 of 15 · Financial forecasting
Part 7: Break-even, Sensitivity, DSCR, IRR, NPV and Valuation
The outputs section of your model. These are the numbers a credit committee or investment committee actually discusses — and the tests they run on your assumptions when you are not in the room.
Chapter 41Break-even Analysis
Break-even tells the funder how much room for error exists. It is the single most useful diagnostic in an SME plan and takes ten minutes to produce.
Break-even, three ways
BREAK-EVEN REVENUE
= Fixed costs / Gross margin %
BREAK-EVEN UNITS
= Fixed costs / (Price per unit - Variable cost per unit)
MARGIN OF SAFETY
= (Forecast revenue - Break-even revenue) / Forecast revenue
WORKED EXAMPLE
Fixed operating costs per month R 33,167
Loan repayment (cash, not P&L) R 59,838
Cash fixed costs per month R 93,005
Gross margin 33.6%
----------------------------------------------
ACCOUNTING break-even revenue R 98,712 / month
CASH break-even revenue R 276,801 / month
Forecast month-12 revenue R 294,960
Margin of safety (cash basis) 6.2%
==> Revenue can fall only 6.2% before the
business cannot meet its loan repayment.
THIS IS TOO TIGHT. Options: longer term,
larger owner contribution, or a moratorium.
Chapter 42Debt Service Coverage Ratio — the number that decides
For debt applications, DSCR is the most important single output in your model. If DSCR fails, nothing else in the plan rescues it.
DSCR
DSCR = Cash available for debt service
/ Total debt service (capital + interest)
where Cash available for debt service
= EBITDA
- tax paid
- maintenance capex
- increase in working capital
WORKED EXAMPLE (Year 2)
EBITDA R 986,000
Less: tax paid (R 118,000)
Less: maintenance capex (R 90,000)
Less: working capital increase (R 142,000)
------------------------------------------------
Cash available for debt service R 636,000
Annual debt service R 718,056
================================================
DSCR 0.89x FAIL
After restructuring to 84 months:
Annual debt service R 546,000
DSCR 1.17x MARGINAL
Plus 6-month capital moratorium:
Year 2 DSCR 1.42x PASS
| DSCR | Interpretation | Likely outcome |
|---|---|---|
| Below 1.00x | Cannot service debt from operations | Decline |
| 1.00x – 1.19x | No margin for error | Decline or heavy restructuring |
| 1.20x – 1.34x | Acceptable minimum for most SA lenders | Approve with conditions and covenants |
| 1.35x – 1.74x | Comfortable | Approve |
| 1.75x and above | Strong | Approve; may support a larger facility |
Chapter 43Sensitivity and Scenario Analysis
Sensitivity moves one variable at a time to find what the business is fragile to. Scenario analysis moves a coherent set of variables together to describe a plausible world. Do both; they answer different questions.
| Variable | −20% | −10% | Base | +10% | +20% |
|---|---|---|---|---|---|
| Revenue | 0.42x | 0.92x | 1.42x | 1.92x | 2.42x |
| Gross margin (pp change) | 0.51x | 0.97x | 1.42x | 1.88x | 2.33x |
| Operating expenses | 1.71x | 1.57x | 1.42x | 1.28x | 1.13x |
| Interest rate | 1.49x | 1.46x | 1.42x | 1.39x | 1.35x |
| Debtor days | 1.56x | 1.49x | 1.42x | 1.35x | 1.28x |
Read the table across each row: the widest swing identifies your critical variable. Here it is revenue — a 10% shortfall drops DSCR to 0.92x and breaches covenant. That finding belongs in your risk register with a mitigation, and stating it yourself is a mark of seriousness.
| Metric (Year 3) | Downside | Base | Upside |
|---|---|---|---|
| Key assumptions | Revenue −25%, margin −3pp, debtors 75 days | As modelled | Revenue +15%, second shift from month 20 |
| Revenue | R2,730,000 | R3,640,000 | R4,186,000 |
| Gross margin | 30.6% | 33.6% | 34.8% |
| EBITDA | R289,000 | R986,000 | R1,342,000 |
| DSCR | 0.61x | 1.42x | 1.87x |
| Cash balance (closing) | (R412,000) | R684,000 | R1,205,000 |
| Management response | Defer second machine; cut marketing to R6k; draw standby facility; negotiate 6-month capital holiday | — | Accelerate second site; retain cash rather than distribute |
Chapter 44IRR, NPV, ROI and Payback
These four investment metrics answer different questions and are frequently confused. Grant and DFI applications in particular often require IRR and NPV explicitly.
The four investment metrics
NET PRESENT VALUE (NPV)
NPV = SUM [ CFt / (1+r)^t ] - Initial investment
Excel: =NPV(rate, cashflows) + initial_outflow
Decision rule: invest if NPV > 0 at your cost of capital
INTERNAL RATE OF RETURN (IRR)
The discount rate at which NPV = 0
Excel: =IRR(range_of_cashflows)
Decision rule: invest if IRR > cost of capital
RETURN ON INVESTMENT (ROI)
ROI = (Total gain - Cost) / Cost
Simple, ignores timing - use only for small decisions
PAYBACK PERIOD
Months until cumulative cash flow turns positive
Crude, but funders ask for it constantly
WORKED EXAMPLE (the R4.8m project)
Year 0 (R 4,800,000)
Year 1 R 310,000
Year 2 R 986,000
Year 3 R 1,486,000
Year 4 R 1,742,000
Year 5 R 1,880,000 + terminal value R 4,700,000
-----------------------------------------------------
Discount rate (WACC) 16.5%
NPV R 1,394,000
IRR 24.3%
Simple payback 3.4 years
Discounted payback 4.1 years
==> IRR of 24.3% exceeds the 16.5% cost of capital.
Project creates value.
Estimating your cost of capital
WACC for a South African SME
WACC = (E/V x Re) + (D/V x Rd x (1 - Tc))
E = equity value D = debt value V = E + D
Re = cost of equity Rd = cost of debt Tc = tax rate
COST OF EQUITY (build-up method, SA SME)
Risk-free rate (SA 10-year government bond) ~9.5%
+ Equity risk premium 5.5%
+ Small company premium 4.0%
+ Company-specific / illiquidity premium 5.0%
----------------------------------------------------
Cost of equity 24.0%
WACC EXAMPLE
Equity R1.9m (41%) at 24.0% 9.84%
Debt R2.7m (59%) at 12.5% x (1 - 0.27) 5.38%
====================================================
WACC 15.22%
Note: bond yields move. Source and date the risk-free
rate you use, and sensitise the WACC by +/- 200bp.
Chapter 45Valuation — only if you are raising equity
If you are raising debt, skip this chapter. If you are selling shares, you must be able to justify the number, because an unjustified valuation is the fastest way to end an investor conversation.
| Method | How it works | Best for | Typical SA range |
|---|---|---|---|
| EBITDA multiple | Normalised EBITDA × sector multiple | Profitable, stable businesses | 3–6x for SMEs; 6–10x for scale or scarcity |
| Revenue multiple | Revenue × multiple | High-growth or pre-profit tech | 0.5–2x general; higher for genuine SaaS with retention |
| Discounted cash flow | PV of forecast free cash flows | Asset-backed and long-horizon projects | Highly sensitive to WACC and terminal assumptions |
| Net asset value | Assets less liabilities, revalued | Property, plant-heavy, or distressed | Floor value; rarely the answer for a going concern |
| Comparable transactions | Multiples paid for similar businesses | Where data exists | Scarce and often private in SA |
Financial model quality control
- Balance sheet balances in every single period
- Cash flow closing balance equals balance sheet cash in every period
- No hard-coded numbers inside calculation formulas
- Every assumption has a source note on the assumptions sheet
- Revenue is built from drivers, not from a growth percentage
- Working capital scales with revenue on the balance sheet
- Capex, depreciation and the debt schedule are mechanically linked to the statements
- Interest is modelled at a realistic margin over prime, dated
- DSCR is above 1.25x in every year of the facility
- Cash break-even is calculated, not just accounting break-even
- Three scenarios are driven by switching assumptions, not by editing statements
- The downside scenario includes a written management response
- Owner’s salary is included in operating expenses
- Every number in the plan narrative matches the model exactly
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