Behind the scenes of business management, turnover is often the star. However, the real key to the survival of a structure is hidden in a more discreet but crucial indicator: the Working Capital Requirement (WCR).
What is the BFR?
If we stick to the technical definition, the WCR is defined as the difference between operating assets and operating liabilities considered in the broad sense. But concretely, what are we talking about? The structural cash flow gap generated by the company’s current activity (operations). Clearly, it results from inevitable discrepancies between disbursements and collections of flows linked to the company’s activity.
Daily operations: a matter of discrepancies
In real business life, financial flows are never perfectly synchronized. Examples of these temporal frictions are legion during an activity cycle:
- Customers rarely pay in cash; they pay in advance or with a delay.
- Suppliers are not always paid at the time of delivery.
- Salaries are paid at the end of the month, while social security contributions are due on the 15th of the following month.
- VATfor its part, is paid at the end of the following month, etc.
For the machine to continue running despite these delays, the entrepreneur must provide funds. This is the case when it is necessary to build up stocks, purchase raw materials or assume the cost of intellectual services.
A double cursor indicator
The WCR can be positive or negative, and fluctuates constantly depending on two key variables:
- The entrepreneur may grant payment deadlines to customers $rightarrow$ these deadlines constitute a “customer debt”.
- The entrepreneur can request payment deadlines from his suppliers $rightarrow$ these deadlines constitute a “supplier debt”.
What to remember: Finally, the BFR represents the funds essential for the proper functioning and daily security of the company.
The bigger the company, the more important the WCR can be
It’s an almost universal rule that often surprises: the more a company develops, the more its WCR tends to inflate. This is true for almost all activities. Negative WCRs are rare, as we see for example in mass distribution, where the customer pays immediately at the cash register but the supplier is paid with a delay.
In the majority of cases, the growth of the company increases the WCR. It is therefore absolutely necessary to monitor its development so as not to find yourself short of cash.
At the start of the company, the WCR should be considered as an investment. It will therefore be imperative to cover it with permanent capital (in the initial financing plan), that is to say, with equity, subsidies or medium or long-term debt.
The master formula of the BFR
To precisely assess this need, the simplified expression of the BFR is based on the following formula:
$$BFR = text{Inventories (1)} + text{Customer receivables (2)} – text{Supplies payables (3)}$$
To succeed in your calculation, the devil hides in the details and tax subtleties:
- (1) Stocks are to be calculated in Excluding taxes (HT) : this includes stocks of raw materials, products in progress and finished products which must be permanently available to carry out the activity under normal conditions.
- (2) “Customer debts” will also be taken into account All Taxes Included (TTC). Be careful not to confuse invoicing (issuance of the invoice) with customer payment. To calculate it, it will be necessary to average the invoices to customers not yet paid.
- (3) “Supplier debts” will also be taken into account in VAT included in the same way. To calculate them, it will be necessary to average the invoices to suppliers, based on payment deadlines.
⚠️ Attention : This way of calculating is valid when creation of a company. During a recoveryfor example, the calculations will have to be entirely excluding tax. The VAT difference is taken into account in the company’s tax debts.
Sectoral specificities: each activity has its own rules
1. Calculate your WCR in service activities
In this case, there are generally no stocks. However, if there is no physical stock, intellectual services are provided. These benefits require funds to be advanced and must therefore be taken into account.
- It will simply be necessary to replace the term “stocks” with “work in progress”.
- Calculation method: It will be necessary to use the cost of a day of work as a basis, including all current charges (including remuneration), and then estimate the average number of days of work necessary before invoicing.
2. Calculate your WCR in the micro-enterprise (particularly self-employed)
⚠️ Pay attention to specific accounting rules: “customer receivables” must be taken into account excluding taxwhile the “stocks” will be in VAT included. “Supplier debts” remain the same.
Concrete example of application
Consider the case of a manufacturing company. Its turnover (CA) excluding tax is 550,000 euroseither 657,800 euros including tax.
How the activity works:
- Purchases : 30% of turnover excluding tax is purchases, i.e. 165,000 euros (197,340 euros including tax).
- Customer deadlines: 40% of customers pay within 30 days and 60% within 60 days.
- Supplier deadlines: 30% of suppliers are paid within 60 days and 70% within 30 days.
- Finished product stocks: 10 days of turnover excluding tax.
- Raw material stocks: 2 months of purchases excluding tax.
Calculating the WCR step by step:
| Operating station | Detail of the calculation of deadlines / volumes | Financial calculation (in euros) | Net income |
| Customer receivables | $(40% times 30 text{d}) + (60% times 60 text{d}) = 48 text{ days}$ | $657,800 times frac{48}{365}$ | €86,505 including tax |
| Finished product stocks | 10 days of turnover excluding tax | $550,000 times frac{10}{365}$ | €15,068 excluding tax |
| Raw material stocks | 2 months of purchases excluding tax | $165,000 times frac{2}{12}$ | €27,500 excluding tax |
| Supplier credit | $(30% times 60 text{d}) + (70% times 30 text{d}) = 39 text{ days}$ | $197,340 times frac{39}{365}$ | €21,085 including tax |
The financial verdict:
$$BFR = (86,505 + 15,068 + 27,500) – 21,085 = 107,988 text{ euros}$$
💡 A word from the expert: Optimizing WCR is a formidable performance lever. To preserve your cash flow, the best thing is to have your customers pay as quickly as possible and to increase supplier payment terms… in order to reduce the WCR as much as possible.
