Financial Projections

Jump to section

• Overview & contents
• i. Important Notice
• 1. Executive Summary
• 2. Transaction and Funding Summary
• 3. Business Overview
• 4. Market Analysis
• 5. SWOT and Competitive Position
• 6. Service Offering and Revenue Model
• 7. Operations
• 8. Regulatory and Compliance Framework
• 9. Business Development and Client Acquisition
• 10. Management and Organisation
• 11. Financial Projections
• 12. Working Capital: The Central Finding
• 13. Funding Structure and Debt Service
• 14. Break-Even
• 15. Sensitivity and Scenarios
• 16. Risk Management
• 17. Implementation Roadmap
• 18. Investment Returns
• 19. Key Performance Indicators
• 20. Key Assumptions
• 21. Conclusion
• A. Appendix A: Consolidated Financial Summary
• B. Appendix B: Application and Sources of Funds
• C. Appendix C: Debt Schedules
• D. Appendix D: Risk Register
• E. Appendix E: Glossary

11.1 Basis of preparation

• All amounts are in nominal South African rand. Revenue is built from deployed volumes and billed rates by service line, with contract rates escalating at 6.0 per cent a year and direct protective labour at 6.7 per cent.
• Pre-opening and accreditation cost of R2.67 million — PSIRA and firearm licensing, SASSETA accreditation, recruitment and vetting, founding cadre certification, formation and launch — is a period cost and is charged to income in Year 1.
• Depreciation is charged on the R16.49 million of fixed assets and subsequent maintenance capital expenditure, at rates appropriate to fleet, armoury, control room and systems.
• Term loan interest and capital derive from the schedule in Appendix C: R14.608 million at 13.75 per cent over 84 months with an 18-month capital moratorium and 66 equal monthly instalments thereafter.
• The invoice discounting facility advances 65 per cent against eligible debtors at 15.0 per cent, and the drawn balance is bounded by the debtor book at all times.
• Corporate income tax is applied at 27 per cent with assessed losses carried forward subject to the section 20 limitation capping set-off at the higher of R1 million or 80 per cent of taxable income.
• The balance sheet is derived rather than plugged; shareholders’ funds roll forward from the R11.952 million subscription and retained earnings, and it balances to the rand in every year.

11.2 Projected income statement

The Year 1 loss after tax of R9.44 million comprises the R1.40 million EBITDA loss, R2.67 million of pre-opening and accreditation cost, R3.08 million of depreciation and R2.29 million of finance cost. Assessed losses accumulate to R9.47 million by the end of Year 2 and shelter the whole of Year 3 and Year 4 taxable profit within the section 20 limitation, leaving tax of R0.12 million and R0.26 million respectively. The shield is exhausted during Year 5, when tax of R0.83 million arises.

11.3 The cost structure

Of every rand of Year 3 revenue, 61.9 per cent is consumed by the direct cost of protective personnel before any overhead is met. Overhead salaries and fixed costs absorb a further 20.8 per cent and variable overheads 6.0 per cent, leaving an EBITDA margin of 11.3 per cent. A double-digit EBITDA margin is a good outcome in this sector, but it means the business has very little capacity to absorb an adverse movement in either its wage bill or its rate card.

11.4 Projected cash flow

Cash generated from operations turns positive in Year 2 at R1.08 million, but free cash flow to equity remains negative until Year 3. Closing cash opens at the R7.40 million working capital reserve, falls to R0.34 million at the end of Year 2, and recovers to R8.77 million by Year 5. The Year 2 position is the tightest point in the plan and it is entirely a function of working capital rather than of trading.

11.5 Revenue and cost per deployed officer

The clearest way to read a labour services business is per unit of deployment. The build below states every material line against the average deployed establishment, which strips out the effect of growth and shows whether the underlying economics are improving.

Revenue per deployed officer rises 33 per cent across the projection while gross profit per officer rises only 29 per cent — the difference is the wage differential compounding. What turns a negative R20 000 of EBITDA per officer in Year 1 into a positive R84 000 in Year 5 is almost entirely the dilution of overhead salaries, which fall from R125 000 per deployed officer to R89 000.

11.6 Projected balance sheet

Shareholders’ funds fall from the R11.95 million subscribed to R2.51 million at the end of Year 1 as the pre-opening charge and the first-year loss are absorbed, and recover to R15.22 million by Year 5. One feature deserves note: by Year 5 trade debtors at R18.20 million are the largest asset on the balance sheet, exceeding the R7.45 million net book value of the entire fleet, armoury and control room combined. That is what it means to say this is a working capital business.