What is WCR?
The WCR means Working Capital Requirement. The WCR makes it possible to calculate the resources necessary for a company to finance its daily activity. The company must be able to finance its inventories and its customer receivables while paying its suppliers. The cash flow gap between expenses and revenues can create a financing need.
Calculate the WCR
There are 2 different ways to calculate a company’s working capital requirement:
- WCR = stock + customer receivables – supplier debts
- WCR = Current assets – current liabilities
It is also possible to calculate the WCR in days of turnover using the following formula:
- WCR in days = (total WCR / annual turnover excluding tax) x 360
How to analyze the WCR?
The working capital requirement can have three distinct results:
A positive BFR
The company which has a WCR greater than 0 has financing needs. This can come from too much stock, from customers who do not pay quickly enough… These different causes push the company to find additional financing.
A negative WCR
Conversely, stock is well managed, customers pay on time, the company pays its suppliers late. The company has enough resources to finance its jobs and build its net cash flow.
A WCR equal to 0
When the WCR is equal to 0 the company has enough resources to cover jobs but it has no financial surplus.
Calculate the ratios linked to the WCR
Other ratios make it possible to analyze separately the different elements which will impact the WCR. The objective of these ratios is to analyze the cause of a positive WCR in order to implement corrective actions.
Stock turnover
The inventory turnover time allows you to know the average storage duration of a product, between the moment the product is purchased and then resold.
Inventory turnover time = (average stock / production cost) x 360
Customer regulations
The customer payment time is between 0 and 90 days and depends on the company’s sector of activity.
Customer payment deadline = (customer receivables / turnover including tax) x 360
Supplier regulations
The payment period for suppliers is also between 30 to 90 days, it is a period which is negotiated directly with the suppliers.
Supplier payment deadline = (supplier debts/purchases including tax) x 360