Optimizing your working capital requirement (WCR) is a priority for business managers. This indicator is used to quantify the minimum level of cash your company needs to finance its activity.

The need for working capital must imperatively be controlled. But what concrete actions can we take to improve it?

What is working capital requirement?

The working capital requirement indicates your company’s financing needs to cover its operating cycle. Indeed, a company generates a turnover, which it uses in part to cover disbursements and the payment of its fixed charges (salaries, rent, subscriptions, etc.).

However, there are often time lags between the receipts and disbursements of a company depending on its sector of activity:

• Customer / supplier payment terms
• Product storage time
• Production time.

The WCR thus represents the cash needed in the short term to limit, and ideally eliminate, this existing gap. It is therefore in this perspective that it is interesting for a company to optimize its WCR.

Why know your Base Financing Rate?

Knowing your BFR means knowing your available cash. Without it, the company will not be able to: cover its operating expenses in time, buy its raw materials or any other element necessary for the sale of finished products. In short, without cash, the company will not be able to create wealth. It is therefore essential for the sustainability of a company to know and optimize its need for working capital. For this, we can rely on the functional balance sheet of the company

How is the working capital requirement calculated?

A good optimization of the BFR implies first of all knowing how to calculate the latter. All companies calculate their working capital requirement in the same way: you must add the receivables to the value of the sale of your stocks (balance sheet assets in the short term), then subtract the debts that you have to pay (balance sheet liabilities in short term). By simplifying:

BFR = stock + receivables – debts

Negative working capital requirement

If your company’s BFR is negative, you have sufficient financing resources to continue your activity. This means that your operating cycle is working well and your business is in good financial health. In other words, this implies that you pay your suppliers after having been paid by your customers, and optimizing your BFR is not necessarily your first necessity.

Positive working capital requirement

If the calculation of your BFR shows a positive result, this shows a short-term need for financing. Your inventory and your trade receivables are greater than your debts, that is, your payments from your suppliers before being paid by your customers.

Such a result does not necessarily imply serious consequences, it serves precisely to alert you to the functioning of your company and its activity. Sometimes the consequences can be more harmful, for example it can lead you to resort to expensive loans or bank overdrafts that are difficult to fill.

To avoid running this kind of risk, there are several ways to optimize your working capital requirement.

What levers for action to improve working capital requirements?

Three main axes can be optimized in order to improve your Working capital Requirements,

1. The stock
2. Trade receivables
3. Supplier debt

1. Inventory Optimization

The more your company has a large stock, the more your WCR will be impacted. To limit this impact, optimal inventory management will be necessary. Here are some interesting ways to achieve better management of your stocks according to your activity and thus optimize your need for working capital:

• Use the just-in-time work method to produce according to demand and reduce your volume of dormant stock and your storage cost;
• Carry out regular inventories so as not to overproduce or overbuy products or raw materials;
• Reduce delivery and supply times
• Propose commercial operations to sell off your unsold stock it is often wiser to reduce your margin temporarily rather than increase your WCR.

2. Reduce your trade receivables

With regard to receivables, specific invoicing processes or other financial solutions can be put in place to optimize your working capital requirement.

Reduce payment terms

First, you can establish clear and precise general conditions of sale concerning the payment terms of your customers. Then you can find out about the creditworthiness of your customers and select the best ones. A deposit can also be requested when ordering to be able to finance part of your supplier debts. Finally, setting up a follow-up of customer invoices will prevent errors and omissions.

Mobilize receivables

Factoring contract, mobilization Daily, discount of trade bills or discount of documentary credits can be possible financial solutions to mobilize your receivables, with or without recourse, and thus optimize your WCR.

3. Increase your supplier debts

Whether it is a supplier, tax, social or other debt, it can be interesting for a company’s working capital requirement to increase it.

Optimize debts

It is often possible for a company to negotiate a longer payment term with its suppliers to maintain sufficient leeway in order to be able to carry out operations that will generate value. For this, it is quite possible to refuse payment in advance or to choose suppliers offering reasonable and reliable delivery times.

The action on other debts can also make it possible to optimize its WCR:

• Choose the simplified VAT regime
• Favor the real regime in the event of a VAT credit
• Pay payroll taxes on a quarterly rather than monthly basis