What is WCR?

What is WCR?

This accounting and financial indicator measures the difference in cash flow between a company's cash receipts and cash disbursements. Cash receipts correspond to cash inflows, while cash outflows correspond to cash outflows. The WCR therefore represents the short-term financing needs of a company. 

This indicator is useful for a number of people within a company, including, for example, the Chief Financial Officer (CFO), accountants and company finance managers. 

For example, within the business cycle of a company there are : 

1. The purchase of raw materials,
2. Manufacturing,
3. The stock,
4. Sales & delivery,
5. Then the payment. 

The time between the purchase and sale of products will create a gap in the company's cash flow. In finance, a certain amount of money will be needed to compensate for this gap in the cash flow.

The method for calculating WCR 

In order to highlight the differences in payment deadlines between customer receipts and payments made, the WCR must be calculated. But how do you calculate WCR? 

It is necessary to analyse the operating WCR, which is linked to the company's current activity, or the non-operating WCR, which is linked to exceptional events. It is therefore necessary to determine the receivables from customers, the value of the company's stocks and the debts to suppliers at a given time. The calculation of the WCR is therefore done in the following way: 

WCR = Inventories in progress + Trade accounts receivable - Trade accounts payable - Tax and social security liabilities - WCR = Uses - Resources 

Let's take an example to better understand this calculation. On 02/05/2022, the company Matelas Français has accounts receivable of 300, stocks of goods of 20 and accounts payable of 45.

BFR = 20 + 300 - 45 = 275. 

Here,Matelas Français has a balance sheet financing requirement of 275 .

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Which companies are affected by WCR? 

Companies that are concerned by WCR financing are those for which the latter is positive. In concrete terms, this means that operating assets exceed operating liabilities and that there are no longer enough resources to finance the company's core activities. 

In concrete terms, for a SaaS or a mobile application, the BFR will be very marked. This is due to the high costs involved in setting up a certain online service on your platform or site. In this particular example, revenues are received from the first subscriptions, and therefore the imbalance will have to be addressed through WCR financing. The companies concerned by working capital financing are particularly those for which the 'air gap' will be felt quickly.

What is the difference between FR and WCR? 

The Working Capital Fund (WC F) represents the medium and long term resources that a company can use to pay its operating expenses before receiving payment from customers. It is therefore the funds available to the company to finance its production activities for long-term investments. The RF is also referred to as Permanent Capital. It makes it possible to verify a certain coherence between the investment policy and the financing policy. It is calculated as the difference between the amount of Permanent Capital and the amount of Fixed Assets. 

A key metric

How to interpret the value of the WCR?

Financial ratios in relation to working capital

There are financial ratios related to Working Capital Requirement (WCR):

• Days Sales Outstanding (DSO) is related to the collection of receivables. It is the average collection or payment time that a company has between the date of issue of an invoice from a customer, and its collection, within a time limit or delay. It is a ratio that also represents the financial health of a company;
• The Days Payables Outstanding (DPO), also known as the supplier credit period, is the number of days between the time the supplier invoices a company and the time it pays the company. It is a ratio that also contributes to the estimation of the working capital needs of companies. 

Financing of working capital

Why finance working capital at the start of the business? 

A good management of its working capital can guarantee a good state on its cash flow. It is therefore important, from the start of its activity, to estimate its initial working capital requirement, in order to integrate it into the financing plan. It is necessary, when starting an activity, to be able to cover the time gaps between the expenses and the receipts of the young company.

How to finance working capital?

There are various solutions for financing working capital requirements. Firstly, there are :

• Factoring, by transferring trade receivables to a factoring company.
• Leasing, to finance without making a down payment.
• Stock financing, i.e. bank loans, in return for a guarantee.  
• Revenue Based Financing, developed at Karmen.  

Our advice for controlling working capital

It is essential to maintain good working capital management to ensure the health of the business. In particular, it is important to monitor : 

• The time it takes to collect from its customers
• Supplier payment terms
• Stock management 

You can control your WCR by negotiating your deadlines with your suppliers and getting your customers paid quickly, so as to prevent a high WCR as much as possible. However, you should not overlook the fact that a positive WCR is not alarming either, as many companies have a positive WCR. 

How can Karmen help you finance working capital?

At Karmen, we democratize non-dilutive financing through revenue-based financing. In concrete terms, we set up a financing scheme based on the company's future revenues. In this case, if your sales drop during a certain month, your royalties will be reduced.

With RBF, no personal guarantees are required. Karmen analyzes the company's ability to increase revenues sufficiently to cover loan payments and operating expenses. The financing process with Karmen takes just 48 hours, and we finance businesses (SaaS, for example).

The Working Capital Requirement is an essential indicator for understanding the financial situation of a company. It is a key indicator that must be calculated regularly to follow the evolution of its cash flow. It is possible to control the WCR by adjusting supplier deadlines or through stock management. When it is necessary to call on financing, Revenue Based Financing is an advantageous method on various fronts, such as deadlines and prerequisites.