What is positive WCR and how can it be managed?

Reminder of what WCR (working capital requirement) is and how it is calculated

Le BFR is one of the key indicators for assessing a company's financial performance.

Definition of WCR

Working capital requirement refers to the gap between a company's expenses and its revenues.

To operate, a company has to incur expenses, make investments, build up inventories and so on. It thus disburses funds. However, it does not collect its revenues immediately after withdrawing funds from its coffers. On the other hand, it does not sell off all its inventories immediately. The longer it takes to sell them off, the more they represent a loss. cost for the company. And the greater the company's working capital requirements.

In other words, a cash flow lag quickly sets in as soon as it accumulates stocks too long, or when customer receivables are collected over a long period of time.

How is it calculated?

WCR must be continuously calculated to assess your company's financial performance. This is due to its liquid, evolving nature. This indicator must therefore be calculated periodically and regularly to assess a company's cash position .

There are different ways of calculating WCR. Here's the simplest way:

WCR = Average inventories + Average trade receivables - Average trade payables

Concrete example of calculation

Here's a concrete example of how to calculate WCR.

Let's take the example of a company with the following data:

• Sales excluding VAT: 400,000 euros

• Sales including VAT (20%): 480,000 euros

• Purchases as a percentage of sales: 40%, i.e. 160,000 euros (192,000 euros inc. VAT)

• Customer payment terms: 40% within 30 days and 60% after 60 days

• Supplier payment terms: 55% within 60 days, 45% after 30 days

• Average duration of raw materials inventories: 1.5 months of purchases excluding VAT

• Average duration of finished goods inventories: 10 days of sales excluding VAT

Here's the calculation:

• Raw materials inventories :

160,000 euros x 1.5/12 months = 20,000 euros

• Finished goods :

400,000 euros x 10/365 days = 10,958.90 euros

• Trade receivables :

40% x 30 days = 12 days

55% x 60 days = 36 days

Total: 48 days' sales incl. VAT

480,000 euros x 48/365 days = 63,123.28 euros

• Trade payables :

55% x 60 = 33 days

45% x 30 days = 13.5 days

Total: 46.5 days

192,000 euros x 46.5 days/365 days = 24,460.27 euros

BFR = (20 000 + 10 000 + 63 123,28) - 24 460,27 = 68 663,01 euros

What does a positive WCR mean?

When calculating WCR, the result can be zero (or neutral), negative or positive. Each result reveals the financial state of the company.

A positive WCR is a common business scenario . As we have seen, the very concept of cash shortfalls is inherent to the normal operation of a company in certain sectors. With the exception of specific sectors such as catering or mass retailing, where payment is made in cash, most companies have a positive WCR . A positive WCR means that your trade receivables and inventories are greater than your trade payables .

On the other hand, by being positive, the amount of WCR can be raised or lowered. If it's high, the company will observe a significant time lag. Logically, this means an unenviable situation, since the company concerned has to find a source of funding to finance it.

WCR can also be positive, but the amount may not be very high. In this case, the company will have less difficulty financing it.

In other words, a positive WCR means that the company pays its suppliers before it collects its customers or sells off its inventory . It therefore has a short-term financing requirements.

Calculation example

Let's take the previous example. With these data, its WCR amounts to 68,663.01 euros. This is a fairly high positive WCR.

Now, let's suppose that the same company has better managed its inventories, supplier payment times and trade receivables.

Here are the new terms of payment for suppliers:

• Customer payment terms: 80% within 30 days and 20% after 60 days

• Supplier payment terms: 75% within 60 days and 25% after 30 days

• Average duration of raw materials inventories: 1 month of purchases excluding VAT

• Average duration of finished goods inventories: 5 days of sales excluding VAT

Here's how to calculate WCR:

• Raw materials inventories :

160,000 euros x 1/12 months = 13,333 euros

• Finished goods :

400,000 euros x 5/365 days = 5,479 euros

• Trade receivables :

80% x 30 days = 24 days

24.5% x 60 days = 12 days

Total: 36 days' sales incl. VAT

480,000 euros x 36/365 days = 47,342 euros

• Trade payables :

75% x 60 = 45 days

25% x 30 days = 75 days

Total: 120 days

192,000 euros x 120 days/365 days = 63,123 euros

WCR = (13 333 + 5 479 + 47 342) - 63 123 = 3031 euro

Compared with the previous example, which resulted in a high WCR of 68,663 euros, here we have a profit of much less important In other words supplier payment terms and customers have been put in place to reduce the company's WCR.

What are the advantages and disadvantages of having a positive WCR?

We've seen that having a positive WCR is part and parcel of business life. However, this is not necessarily a good or bad situation. It all depends on the amount of WCR.

A positive WCR means a need for financing. However, it all depends on the amount.

Too much WCR can be a source of disadvantages. It means :

• Greater dependence on borrowing. When working capital requirements are too high, the company will have to finance it . And all this via loans, fund-raising or venture capital, for example. But each of these solutions has its drawbacks. Bank loans represent a cost for the company, particularly in terms of interest and administration fees. Venture capital and fund-raising involve selling part of the company's shares to third parties.

• A loss of autonomy in managing the business. Excessive borrowing means greater risk of capital dilution. As a result, the entrepreneur is increasingly losing control of the business.

• Higher risk of failure. Too much WCR is synonymous with dysfunction within a company. This means that there is a gap in the company's debt collection policy, or that the company is unable to sell its inventory, or that inventory management is not optimal. All these situations can lead to insolvency. If the company is in debt even though it is unable to repay its debts, it is therefore exposed to bankruptcy.

How to optimize working capital so that it becomes negative?

Although negative WCR is an ideal solution, it is only possible in certain sectors.

However, it is still possible to optimize your WCR to reduce it to a minimum:

Optimize inventory management

To do this, you must carry out regular inventories and reduce your lead times Implement a just-in-time approach to reduce inventory to a minimum. To optimize stock rotation, it's best to order more often but in smaller quantities to avoid oversupply.

Optimize your supplier base

You need to sort through your current suppliers to reduce their number. With a limited number of suppliers, your average basket for each supplier will be higher. This will enable you to better negotiate price and payment terms.

If you can't negotiate with your suppliers, solutions such as Hero allow you to defer payments at lower cost.

Better management of trade receivables

In particular, you need to implement more rigorous policies by requiring payment of advances, by optimizing your customer reminder policy and reducing payment times . You can also set up a scoring system to categorize your customers and customize sales and payment terms according to their financial health, allowing you to adapt payment terms, outstanding amounts and payment conditions.

Another possibility is to use a solution like Hero to collect your accounts receivable in day 1 .

In which sectors/industries do you find positive WCR?

Positive WCR is the most common of all WCR scenarios. It can be found in a wide range of sectors, especially B2B.

A positive WCR thus concerns all companies where payment is not made in cash.

How to optimize working capital with factoring and BNPL?

Here are two alternative and innovative techniques for optimizing your WCR.

Affacturage

Factoring consists of a company's assign customer receivables to a third-party company in return for a commission . Let's take the example of company A, which has purchased goods from company B. Unable to wait the stipulated payment period, company A assigns its receivable to a factor F (the factoring company). Unable to meet the 30-day payment deadline, company A assigns its receivables to factor F, who pays the amount due less factoring costs. It is then up to the factor to take collection action with Company B.

Factoring optimizes a company's cash flow by is designed to avoid timing differences between cash receipts and disbursements. The company has the resources to operate. So it doesn't need to go into debt. On the other hand, factoring does generate costs. That's why it's a practice that should be used sparingly.

Through its fractional or deferred payment offer, Hero is a low-cost factoring solution. These are a payment platform dedicated to B2B companies. Acting as a factor, it settles your accounts receivable as soon as the sale has been validated (i.e., the day after the transaction) and arranges for the customer to reimburse it, thus keeping your working capital at an optimum level, since you have the liquidity to ensure the normal running of your business. What's more, you no longer have to worry about debt collection.

Buy now pay later (BNPL)

Le BNPL allows a company to offer its customers the possibility of ordering now and paying later . Such an option enables you to attract more customers, since you open up access to your services to customers who don't have sufficient means to buy cash.

Hero also offers the BNPL principle. Thanks to its deferred payment function, you can shop and pay later. In this way, your working capital will remain optimized, since you have the cash to operate while you collect your customers. immediately pays the supplier the full amount of your invoice.

Conversely, you can also offer this functionality to your customers. They can pay after 30 or 60 days from delivery date. On your side, the platform pays you immediately. This optimizes your working capital, since you always have the cash and resources you need to operate.

In conclusion, although this is a common scenario in the corporate world, positive WCR can be a source of disadvantage if it is too high. That's why it's so important to optimize it, thanks to Hero's factoring and BNPL solutions.

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• How to finance and optimize working capital requirements?

• Negative WCR: what is it and how can it be managed?

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