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The working capital


Let's talk about the Working Capital Requirement (WCR) which includes Credit Management stakes.

What is the Working Capital Requirement ?

Working Capital Requirement is the amount of money needed to finance the gap between disbursements (payments to suppliers) and receipts (payments from customers).
Working capital requirements

Almost every company must incur expenses before obtaining the fruits of his labor (the payment of customer invoices). The nature of these costs depends on the activity.

For example, if the business activity consists to buy and resell goods, it will require to purchase a stock of goods before selling. If it's an industry, it is necessary to buy the raw material before transforming it and then sell the finished product.

This operating cycle must be financed because it is necessary in most cases to pay suppliers before being paid. The working capital requirement represents the amount necessary to finance this delay.
 
operating cycle

The financial resources of businesses are always limited. It is therefore desirable to minimize the Working Capital Requirement:
  • Because it is a major consumer of cash,
  • Because it reveals dysfunctions that have "in fine" an impact on the company's profitability:

    • Mismanaged the inventory will tend to swell it and cause dead inventory which will lead to losses due to the necessary decrease of the inventory value,
    • Lax management of receivables result in significant late payments that can not be recovered, that is generating losses due to bad debts,
The WCR is therefore central in the management of a company because it is the common denominator of three elements essential to the proper functioning of any business:
  • Cash,
  • Profitability,
  • Business organization efficiency.
The WCR may increase due to poor management of inventories and receivables, but also because of the growth of the business of a company. In this case, the offset of cash described above is carried out on larger volumes, resulting in an automatic increase of the working capital requirement. For this reason we talk about the financing of the growth, which is crucial though often neglected.
Some companies have a negative WCR! This is explained by the fact that they are paid by their customers before paying their suppliers. This is the case of large retailers. The activity itself generates cash, which is quite outstanding. The cash surplus obtained allows them to develop products that are unrelated to their core business (insurance, financing ... etc.).
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The WCR today !

At a time when margins are getting lower because of the increase of raw materials cost and an increasingly tense competition, where external financing (bank, investors) is less and less accessible, companies are obliged to find other means to finance their activities.

This concerns especially companies whose equity level is low, which is the case with many of them, particularly in France where the under-capitalization of companies is chronic.

The most obvious answer to this permanently stronger tension imposed by the outside world is to optimize the use of financial resources available internally to the company, through a precise and efficient management.

How to do that ? By reducing the WCR! This allows to improve cash and to use the financial resources available of the company for truly useful means: investment, development ... etc., instead of immobilizing them in areas that are inert like trade receivables and inventories.


Tools download:

Excel tool which allows to calculate the normative WCR and to determine what will be the WCR with the evolution of the turnover of your company.
WCR calculation tool based on a monthly basis in order to highlight where gains in WCR can be achieved.

WCR is piloted in days of sales for a better performance analysis.
Includes 4 management tools about working capital which allow to calculate the working capital requirement and to manage it:
  • Normative WCR calculation,
  • WCR calculation and management,
  • DSO calculation,
  • DPO calculation
DPO calculation tool which allow to manage the DPO which is a key indicator for working capital performance.
DSO calculation tool which allow to manage the accounts receivable performance from a cash and working capital standpoint.
This tool allows to calculate several discount rates based on cost of funding of your business and on the commercial context:
  • Standard offer.
  • Cash offer.
  • Risk offer.


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