Easily finance and optimize working capital requirements

According to a european commission report In fact, 50% of new businesses don't last more than 5 years. This is due to the difficulty of finding an effective method of financing their Working Capital Requirement (WCR). Representing a company's financial health, WCR is a key indicator that all company directors must monitor closely.

How to calculate and interpret it? We tell you all about it in this article.

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

BFR or Besoin en fonds de roulement is an acronym commonly used in financial vocabulary.

Definition of WCR

WCR refers to the amount the company needs to cover a cash flow gap resulting from a mismatch between expenses and revenues.

In the course of its operations, the company must incur expenses to build up its stock, create its offer, advertise, etc. All these costs represent its profitability. Together, these costs represent its cost price . These are the preliminary expenses that the company must incur before it can collect any revenue. When it sells its products, it will be able to collect the cost price and its margin.

Now, there may be a time lag between the disbursement of these expenses and the receipt of these revenues . Customer receivables are generally not settled immediately. Similarly, goods can remain in stock for a relatively long period. WCR therefore corresponds to permanent cash flow mismatch between company cash outflows and inflows.

How is it calculated?

Calculating WCR is important right from the start. It involves one of the key elements of a business plan . A miscalculation can jeopardize a fledgling company.

When the company is operating at full capacity, it is still necessary to calculate WCR, since it is used to assess a company's financial health . Working capital needs to be calculated periodically, then compared and analyzed. Too much working capital sends out the wrong signal about the organization's financial health.

Here is the formula to calculate your WCR:

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

The calculation of WCR therefore involves the following elements:

• Average inventory levels . In other words, it's the minimum amount of stock the company needs to operate.

• Average outstanding trade receivables . This is the amount of customer invoices awaiting payment.

• Average outstanding trade payables . This is the amount of invoices you still have to pay to your suppliers.

The result can be :

• Nul

• Positive

• Negative

If positive, i.e. greater than 0, the company's uses exceed its resources. It must therefore finance this gap by nature short-term via its working capital or short-term debts.

If the result is zero 0, the company's resources are equal to its uses. It therefore no need for financing but does not have no surplus either financial.

If WCR is negative or less than 0, which is the best-case scenario. The company's uses are therefore lower than its resources. The company's generates financial surplus which will boost its net cash position. Concrete example of calculation

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

Let's take a company X with the following characteristics:

• Sales excluding VAT: 400,000 euros

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

• Purchases represent 35% of sales excluding VAT: 140,000 euros

• Customer payment terms: 45% after 30 days and 55% after 60%.

• Supplier payment terms: 25% of the company's suppliers are paid within 30 days and 75% within 60 days.

• Finished goods inventory: 10 days' sales excluding VAT

• Raw materials inventories: 1 month's purchases excluding VAT

Here's how we calculate the WCR of company X :

1. Finished goods inventories :

400,000 euros x 10/365 = 10,959 euros

1. Raw materials inventories :

140 000 euros x 1/12 = 11 666 euros

1. The amount of trade receivables :

45% x 30 days = 13.5 days

55% x 60 days = 33 days

46.5 days' sales incl. VAT

480,000 euros x 46.5/365 days = 61,150.68 euros

1. Supplier credit amount :

25% x 30 days = 7.5 days

75% x 60 days = 45 days

52.5 days of purchases (incl. VAT)

140,000 euros x 52.5/365 days = 20,136.98 euros

So WCR = (10,959 + 11,666 + 61,150.68) - 20,136.98 = 63,639.27 euros.
This means that the company needs 63,639.27 euros of working capital to finance its activity.

How is WCR financed?

If you have calculated your WCR and it turns out to be positive, then it has to be financed . In this case, you have several alternatives: Use the partners' current account

These are sums advanced by company associates . Generally granted on a short-term basis, these sums are repaid to the associates at a fixed rate of interest. Current account contributions are repayable at any time.

Bank overdraft

As a short-term financing method, it can be a good solution for covering small financial needs. It involves an authorization given by the bank that allows the company to withdraw a sum greater than the balance of its account. The company's account is therefore debited according to a ceiling and duration defined in a contract signed with the bank.

Factoring

Factoring is a financial technique whereby a company assigns its customer receivables to a third party called a factor . The latter then verifies the finances of the requesting company and its customer, then advance payment of the claim from the company (less a commission). The factor then initiates collection procedures to recover the debt from the customer.

The advantage for the requesting company is that it can quickly access the cash it needs to finance its working capital without having to wait for the statutory payment period (30 or 60 days).

Factoring is therefore a solution for financing a company's working capital. However, it has costs that can be substantial depending on the factoring organization chosen.

To avoid these high costs, you can also use Hero . Our payment solution offers a kind of factoring by proposing payment in instalments . In concrete terms, the platform pays your bills for you . Then.., you can pay your debt in 3 or 4 instalments .

Delaying payment to suppliers

Negotiate better payment terms with your suppliers is also a solution for financing your WCR. In this case, it's a matter of playing with the rhythm of cash receipts and disbursements to avoid ending up with negative cash flow. Here again, Hero is the solution for you. We pay your suppliers on the due date stipulated in the contract, and you can repay us much later.

Bank financing

Debt is one of the solutions for financing your working capital. If you need to finance a large amount of working capital, you can, for example, resort to professional cash-flow mortgage.

Operating credits

Operating credits are a short-term loan granted by a bank to cover temporary cash shortages . They enable the company to finance current expenses such as salaries or rent while it collects its invoiced receivables.

Venture capital

Also known as venture capital venture capital consists of funds contributed by investors to the capital of a young unlisted innovative company . Investors acquire shares in the company and become partners. This is a way for investors to financially support the development of these innovative companies, while hoping to realize a capital gain when the shares are sold.

Venture capital certainly helps benefit from liquidity to finance its WCR. However, it opens up your company's capital to third parties. This dilutive effect is its main drawback.

Moreover, this is not necessarily the right solution for financing working capital, but rather for developing a business.

With Hero, you can finance your working capital with the option of deferred or fractional payments. The advantage is you remain in control of your business This is in contrast to venture capital, where you lose part of your shares. How to finance working capital at the start of a business When an entrepreneur is about to set up a new business, he or she calculates financial forecasts using the following methods drawing up an initial financing plan . This is the document he'll have to rely on to find the capital he needs to launch his business.

For example, when a company is set up, its working capital requirement is mainly covered by shareholders' equity and debt .

Instead of going into debt, you can also pay your operating expenses with Hero by paying your suppliers after the contractual deadline. The platform advances payment of your invoices on your behalf. It is then up to you to reimburse it between 30 and 60 days later.

Hero also offers fractional payment. This means you can pay your bills in 3 or 4 instalments.

How to optimize working capital?

As we have seen, WCR is a particularly important factor in any company. Controlling and optimizing it means preserve the company's financial health . This can be achieved in the following ways:

Negotiate optimum payment terms with suppliers

The more time you have to pay your supplier invoices, the better you can optimize your cash flow. You can do this by use the order volume argument . Alternatively, you can pay later with solutions like Hero .

Maintain minimum payment terms with your customers

One of the levers of efficiency in this context is to encourage cash payment . For example, you can offer a discount to encourage your customers to pay your invoices more quickly. Alternatively, you can collect payments immediately with solutions like Hero .

Reduce inventory turnaround times

This means keep a minimum stock and order stock during tight inventory periods. In this case, replenishment lead times can be longer. You need to keep a close eye on stock levels to avoid stock-outs.

Protecting yourself against non-payment

It's one thing to optimize your payment times, but you also need to ensure that your customers are able to pay you when the time comes. This requires a real policy to be put in place in order to protect against non-payment To achieve this, you need to be better informed about the creditworthiness of your potential customers, better assess customer risk, set up an efficient invoicing system and an appropriate contractual policy.

In conclusion, WCR is a key business indicator. Monitoring and optimizing it are the keys to ensuring the financial health of your business, and thus its longevity. With Hero, you can optimize financing your working capital thanks to its deferred and fractional payment features.

Other articles on the same subject:

• Small business financing: how to finance your small business?

• Reverse factoring: what is it?

• Business cash loans: optimize your cash flow

• Revenue based financing: what exactly is it?

• Alternative financing: everything you need to know from A to Z

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

• Positive WCR: what is it and how can it be optimized?

• Alternative financing: everything you need to know from A to Z

• 2024 business loan rates (and how to negotiate)