How to finance working capital?

What are WCR and FR? 

WCR, Working Capital Requirement

How to calculate WCR?

WCR is the amount of cash a company has available to pay its debts and other expenses related to its business. To determine the WCR, several factors come into play:

• Current assets: inventories and accounts receivable ; 
• Current liabilities; trade payables and other tax and social security liabilities. 

The company must therefore have its balance sheet available to calculate the WCR. In concrete terms, the WCR is the difference between the company's current assets and liabilities. There are two calculation formulas: a simplified formula and a more complex formula. Here are the two formulas:

• Inventories + receivables - non-financial liabilities
• Operating uses - operating resources or current assets - current liabilities

How to interpret the value of the WCR? 

The result of the WCR calculations can be positive, negative or zero.

If the result is positive, it usually means that the company pays its suppliers before the collection of trade receivables. This is the case for most companies. 

If the result is negative, it means that the receivables are collected before the payment to the suppliers. This case is less frequent. 

Finally, the WCR can also be zero. In this case, it means that the company is in balance. The resources make it possible to compensate for the cash shortfall, but they do not generate a financial surplus.

The Working Capital Fund (WCF)

What is working capital? 

The Working Capital Fund (WCF) represents, in accounting, the medium and long term resources that a company can use to pay its operating expenses before receiving payment from its customers. 

In other words, the RF refers to the funds available to a company to finance its production activities and long-term investments. Turnover and resources used to finance fixed assets are not taken into account. The resources represented by the RF are often made available to the company by partners or investors. These resources can also be referred to as Permanent Capital.

How to calculate the RF?

The Working Capital can therefore be easily calculated by taking the difference between the amount of Permanent Capital and the amount of Fixed Assets. The calculation of the WC is quite simple, but it is necessary to identify the durable uses and the stable resources. Here are the two commonly used formulas:

• FR = Permanent capital - Fixed assets

• i.e. FR = Stable resources - Permanent uses

What is the link between WCR and RF?

Working capital is used to verify the consistency between the investment policy and the financing policy. It therefore makes it possible to measure the financial balance between resources and needs. To ensure the solvency of the company, the working capital must be positive or zero.

Ifthe working capital is greater than zero, then it represents a long-term resource surplus. This surplus can be used to finance the company's operating needs, in other words, the working capital requirement (WCR). WCR and WCR are closely linked.

Working capital can thus be used as a spare wheel or financial safety margin intended to finance short-term investments as well as working capital requirements if they are positive and in case of need (WCR). The difference between the two is the net cash position. Obviously, the WCR should ideally be positive and greater than the WCR.

Why does a company need to finance working capital?

When should a company finance working capital? 

When working capital is positive, it is necessary to finance it. This means that operating expenses exceed operating resources and you no longer have the resources to finance the day-to-day operations of your business.

In the case of the creation of a SaaS or an application, the impact on the WCR is even more marked. At the launch of your business, you will pay fees to the various service providers involved in setting up the online service. On the other hand, you will only receive revenues when the first subscriptions to your mobile application are activated. To maintain the activity of your company, it is essential to compensate for this imbalance by financing the working capital. 

The smaller the company, the faster this "air gap" will be felt. 

What is the best solution to control your WCR?  

Managing and controlling working capital is essential to maintaining a healthy e-commerce business. Three main elements have a direct impact on WCR:

• The time required to collect from customers
• Supplier payment terms 
• Inventory management (stock rotation)

You can directly control WCR by negotiating the best possible terms and conditions of payment with your suppliers or service providers. The more you can negotiate terms with your suppliers and get your customers paid quickly, the lower your WCR will be. Your negotiating power is therefore a weapon that you need to work on.

As a reminder, a positive WCR should not be considered as an abnormal or very risky situation since most companies are in this case.

How to finance working capital? 

When a company's working capital is less than its WCR, the company is obliged to find another short-term financing solution. Here are the different ways to finance growth in France.

Factoring

Perhaps you have already heard of factoring? Factoring is a traditional method of transferring a receivable to a specialist called a factor or simply a factoring company. The factor will take care of collecting the debt or guaranteeing its amount. This method is considered archaic and has various disadvantages. For example, the company must keep a certain amount of cash in reserve as a guarantee for the factor.

Line of credit

A line of credit is an agreement given by a bank to a client who requests it, to borrow and draw funds from a bank account at any time. This amount is obviously capped and available for a period of time previously determined by the bank. 

The revolving credit 

The revolving credit also called permanent credit or reconstitutable credit is in fact a revolving credit. It is a consumer credit that is characterized by a great freedom of use and repayment. Indeed, once the credit is granted, you are free to use it whenever you want. On the other hand, the interest rates are generally quite high compared to a classic consumer loan.

Flexible Revenue Based Financing with Karmen 

Revenue Based Financing is a new solution for financing solution financing solution based on the company's future revenues. In concrete terms, if your sales fall during a given month, your royalties will be reduced. Conversely, if your sales increase the following month, the amounts to be donated will increase by the same amount.

With Revenue Based Financing, no personal guarantees are required and we adapt to your needs. We analyse your ability to increase your income sufficiently to cover loan payments and operating expenses. 

At Karmen, the financing process takes 48 hours from application to receipt of funds in the beneficiaries' bank account. We finance digital businesses. Instead of waiting for online or subscription revenues to be collected month after month, Karmen releases the annual value of these revenues, right from the start. Karmen's solution gives digital businesses access to instant growth capital, within 48 hours, to finance their growth expenses (customer acquisition, marketing, recruitment, technology and more). 

For start-ups, we are often their first source of growth capital to help them accelerate before raising funds. 

For venture-backed companies, we provide an additional source of non-dilutive, founder-friendly capital to help entrepreneurs achieve their growth objectives, while retaining ownership of their company. 

Obviously, the Working Capital Requirement is an essential indicator to understand the financial situation of a company. It is important to calculate it regularly and to follow its evolution to anticipate any cash flow problem. Controlling the WCR is possible by adjusting the different lead times and optimizing inventory management. On the other hand, if the WCR is positive and the RF cannot be used to compensate for it, it is necessary to resort to financing. For this purpose, Revenue Based Financing seems to be the method that offers the most advantages today, in terms of prerequisites, deadlines and adaptation.