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Control your WCR and optimize your company’s financial autonomy

Control your WCR and optimize your company's financial autonomy

Working capital requirement (WCR) is a treasury flow indicator that is essential to understand and control within a company. It shows how much money a company needs to cover treasury gaps between expenditures and incomes. If miscalculated and misinterpreted, it could impact the financial health of the business. Why is it important? How to calculate your WCR? How can it be better managed?

Working capital requirement: definition

To better understand the importance of working capital requirement, we need to look at concrete examples.
When a company sells a service or a product, it will set a payment deadline with its customer, the receivable will not be paid immediately.
Similarly, when it needs to replenish its stocks, it will make a mass purchase. However, the stock will not sell out immediately and will therefore not generate any immediate income.
While waiting for its receivables, a company will still have to pay its debts and its employees. This can lead to gaps in its treasury and therefore create financial needs in the short term. Either the company has the necessary funds in its treasury or it will need a working capital requirement. In any case, it is strongly advised to anticipate and calculate this potential gap in its treasury budget.

WCR offers an insight into the company’s financial autonomy. It is one of the few indicators that is best kept negative.
If it is equal to 0 or negative, this means that the company is able to cover its short-term debts, i.e. to fully finance its next operating and employment cycle. Moreover, when the WCR is under 0, we no longer speak of working capital requirement, but of working capital resources.

If, on the other hand, it is positive and you have no treasury surplus to cover it, you will have to think of a way to finance it.

How to calculate your wcr ?

Why and how to calculate your WCR?

Calculating your working capital requirement allows you to know how healthy your treasury is. It is possible to calculate it easily thanks to your Balance sheet. On the latter, the WCR corresponds to the difference between current assets and current liabilities:

  • WCR = current assets – current liabilities

You can do the calculation yourself using the following formula:

  • WCR = (amount of stocks in progress + amount of receivables in progress) – debts

How to better manage your WCR?

WCR can depend on different elements. The main elements will be the period of receivables granted to customers and the period of payment set by suppliers. It is better to be paid before you pay to reduce your working capital requirement. Also consider optimising your customer direct debit methods.

The length of the company’s operating cycle can also have an influence. The longer it is, the higher the working capital requirement is likely to be.

The quantity and level of stock turnover should also be taken into account. It is better to avoid dormant stocks which increase working capital requirement as long as they are unsold.

How to finance your working capital requirement?

However, if your working capital requirement turns out to be higher than 0, your company will need to find a means of financing. There are differents ways of financing working capital requirement:

  • Negotiate an authorised bank overdraft if your WCR is low
  • Bring in equity capital if you have the possibility to do it
  • Apply for a loan at your bank
  • Use debt collection methods such as cession dailly or factoring
  • Seek investors to get financing

Obviously, you will need to assess which option is the best, taking into account the amount of your working capital requirement and whether your financial needs are likely to be short, medium or long term.

Comment financer son bfr ?