Three tests behind a CFO verdict: cash, debt service, margin

A bakery owner in Dar es Salaam can report a profit and still miss a loan instalment. Profit is an accounting result for a period. An instalment is a cash payment on a date. The two can sit apart for months, and a lender reads the second more closely than the first.

A CFO verdict starts from that gap. The CFO Value Pack ends in one of three words, STRONG, WATCH or ACT NOW, and the word rests on three written tests, each run in the downside case: cash runway, debt service cover and net margin. A business that holds up only in a good year has not passed anything. This note sets out the three tests, the arithmetic behind each, the reporting framework that labels the pack, and what the verdict is not.

What does a CFO verdict actually test?

It tests whether the business can meet its obligations on the dates they fall due, and whether it still earns a profit when sales fall short. Owners usually know sales. The verdict needs three other numbers ⁷.

The same three tests apply to every pack, so the verdict for one business can be compared with the verdict for another. This note explains the tests. It does not restate the cut-offs between STRONG, WATCH and ACT NOW.

How is cash runway measured, and what does 30 days mean?

Runway is cash on hand divided by daily cash costs. A business holding TZS 18 million and spending TZS 600,000 a day in cash costs has 18,000,000 over 600,000, which is 30 days. The figure is only useful beside the date of the next large payment out and the date of the next large payment in.

Cash itself comes from the statement of cash flows. IAS 7 sets out how an entity presents how its cash and cash equivalents changed in a period, and it allows operating cash flows to be reported by the direct method, which shows major classes of gross receipts and payments, or by the indirect method, which adjusts profit or loss for non-cash items, accruals and deferrals, and items linked to investing or financing ¹. Either method gives the operating cash figure that the next test uses.

The business shows 30 days of runway and still runs short between day 21 and day 25. A headline runway figure therefore never replaces the dated schedule.

What is debt service cover and what does 1.60 mean?

Debt service cover is operating cash flow divided by scheduled loan payments. With TZS 48 million of operating cash flow and TZS 30 million of scheduled payments, cover is 48,000,000 over 30,000,000, which is 1.60. The business has TZS 1.60 of operating cash for each TZS 1.00 due to lenders.

In the downside case, operating cash falls by a quarter, to 48,000,000 times 0.75, which is TZS 36 million. Cover falls to 36,000,000 over 30,000,000, which is 1.20. A ratio under 1.00 means operating cash does not meet the payments. Lenders set their own minimum, and the figures above are an illustration, not a benchmark. The ratio is a lender's measure, and each lender defines it.

The wider lending picture gives the ratio context. The Bank of Tanzania reported that the banking sector's non-performing loan ratio fell to 3.3 per cent in December 2024 from 4.3 per cent in December 2023, and that 83.7 per cent of non-financial corporate borrowers were in good condition, against 80.1 per cent in 2023 ⁴. Those are sector figures for the banks' book as a whole. They set no minimum for any single borrower.

Why is net margin tested in the downside case?

Net margin is net profit divided by revenue. Tested in the downside case, it shows how much of a revenue shortfall the business can absorb before it stops making money. The measure is simple. The insight comes from how much sales can fall before profit reaches zero.

The shortfall the business can absorb equals net profit divided by the share of each shilling of sales that is left after variable costs. If that share is 30 per cent and net profit is TZS 27 million, the business absorbs 27,000,000 over 0.30, which is TZS 90 million of lost sales, or 10.0 per cent of TZS 900 million of revenue. A fall larger than that produces a loss.

Which reporting framework labels the pack?

A financial statement or model names its basis. The National Board of Accountants and Auditors sets the framework by the size and nature of the entity in Technical Pronouncement No. 1 of 2018, which applies to periods beginning on or after 1 April 2019 ³.

The third edition of the IFRS for SMEs was issued in February 2025 and is effective for annual periods beginning on or after 1 January 2027, with earlier application permitted ². Which edition applies to a given period is confirmed with the entity's accountant. TFRS 1 is the NBAA standard on the Report by Those Charged with Governance, effective for periods beginning on or after 1 January 2021. It applies to all entities except those applying the FRSME, which may opt to prepare the report ⁵.

These pronouncements are Mainland publications. Zanzibar has its own registry and revenue authority, and an entity registered there needs separate confirmation of the framework and the filing position.

Why does the downside case matter more than the base case?

Because the base case describes the year the owner hopes for, and the lender plans for the year that goes wrong. Lenders run downside tests of their own. The Bank of Tanzania reported that its stress tests found banks adequately capitalised to withstand both proportionate and sectoral increases in non-performing loans ⁴. A downside case in a borrower's pack follows the same logic at the level of one business.

• A base-case ratio shows capacity in a normal year.
• A downside ratio shows whether the loan survives a bad quarter.
• A dated cash schedule shows whether the timing of payments breaks a business that the ratios clear.

A pack that reports only the base case invites the question the downside answers. A pack that reports both answers it before the lender asks.

How is the STRONG, WATCH or ACT NOW verdict set?

The value pack applies written tests on cash, debt service cover and net margin in the downside case, the same tests to every pack, and states the result as STRONG, WATCH or ACT NOW ⁷. Because the tests are written and identical, no single case is tuned by hand.

The pack carries a ratios page and an action list beside the verdict ⁷. It gives an illustrative model estimate. It is not an audit, an assurance report or a valuation.

Is a CFO verdict a valuation, an audit or a credit decision?

It is none of the three. A valuation in Mainland Tanzania sits under the Valuation and Valuers Registration Act, 2016, Act No. 7 of 2016. The text read states that it applies in Mainland Tanzania and that a person or firm may not undertake valuation activity without a certificate from the Valuers Registration Board ⁶. The value pack is an illustrative model estimate, not a valuation under that Act.

It is not an audit or an assurance report, which carry their own standards and signatures. It is not a credit decision either. Banks, panels and officers decide for themselves, and the pack does not decide or guarantee any of those decisions.

What do the three tests show for one specimen business?

The example shows why the tests are read together. Each test clears in isolation, and the dated schedule shows the weakness. The verdict word is only as good as the schedule behind it.

How Zatra Consultants and NEMBO handle this

Zatra Consultants Limited authors and checks the content and the figures. NEMBO designs, produces and delivers. Short documents are targeted at under 30 minutes from complete details, standard documents take hours, and research documents are dated in the written quote. The pack names the reporting framework by category on its cover ⁷⁸.

No outcome is promised. The desk does not decide or guarantee any bank's, panel's, officer's or authority's decision, and the entity's own accountant confirms the framework tier that applies to it.

What to do now

1. Fix the basis Confirm the framework tier with the accountant, using turnover, total assets, average employees and public interest status.
2. List the loan schedule Write every scheduled payment for the next 12 months with its date, from the loan agreements.
3. Build the dated cash schedule Place known payments out and receipts in against the daily cash cost, and find the lowest balance.
4. Set the downside Choose one shortfall in sales, apply it to operating cash and to profit, and recompute cover and margin.
5. Read the result against the lender Ask the lender for its own minimum cover, since lenders set their own, and compare.