Welcome to this article dedicated to exercises on positive BFR (the need in funds positive). You will find here no less than 11 detailed corrected management exercises on the calculation of positive WCR for Operational Management.
By the end of this article, you will know an expert in calculating the need in funds.
In this section:
- Application: TechZoom
- Application: The Sweetness of Mary.
- Application: Homemade Bakery
- Application: The Eloquent Shoes
- Application: Lila's Delights
- Application: Distribution of the Luminous Mountains
- Application: MCO Finances SA
- Application: Company at Laurette
- Application: Pepper's Shop
- Application: TechnoPlus Company
- Application: TechnoGadgets Company
Application: TechZoom
States :
TechZoom is a computer hardware sales company. The company is looking to optimize its working capital and its working capital requirement (WCR). To better understand its situation, it decides to develop a financial diagnosis based on the year 2020. Here is the simplified presentation of its balance sheet as of 31/12/2020:
– Stocks: €25
– Customer receivables: €15
– Supplier debts: €20
– Tax and social debts: €5
Work to do :
1. Calculate TechZoom’s WCR as of 31/12/2020.
2. What does positive BFR represent for TechZoom company?
3. Propose a scenario in which TechZoom's BFR could increase significantly.
4. How can the company reduce its WCR?
5. What would be the advantages and disadvantages for TechZoom if its WCR became negative?
Proposed correction:
1. BFR = Current assets – Current liabilities = (Stocks + Customer receivables) – (Trade payables + Tax and social security payables)
= (€25 + €000) – (€15 + €000) = €20. TechZoom’s WCR as of 000/5/000 is therefore €15.
2. A positive WCR means that TechZoom must finance part of its working capital requirement with long-term resources. This is usually the case when it fails to synchronize its cash inflows and outflows.
3. TechZoom's WCR could increase significantly if, for example, the company decides to increase its inventory in anticipation of a demand increase. This action would result in an increase in WCR if the increase in demand is not as strong as expected and the company ends up with unsold inventory.
4. To reduce its WCR, TechZoom can negotiate longer payment terms with its suppliers, increase its inventory turnover rate or improve the collection of its customer receivables.
5. If TechZoom's WCR becomes negative, it means that the company is financed by its short-term debts. This is a risky situation because it relies on debts to finance its operations. However, it can also mean that the company is able to manage its cash flow cycle effectively and use its suppliers as a source of short-term financing.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| WCR = Current assets – Current liabilities | Calculation of working capital requirement |
| Current assets = Inventories + Accounts receivable | Calculation of all current assets that the company owns |
| Current liabilities = Supplier debts + Tax and social security debts | Calculation of all short-term debts that the company must repay |
Application: The Sweetness of Mary.
States :
Les Douceurs de Marie pastry shop is a small business that sells homemade pastries. Marie, the owner, presented the following balance sheet for the year 2020:
– Customer receivables: €15
– Raw material stocks: €10
– Supplier debts: €5
– Tax and social debts: €2
Work to do :
1. Calculate the Working Capital Requirement (WCR).
2. What is a positive BFR?
3. Interpret the BFR calculated for “Les Douceurs de Marie”.
4. How could Marie reduce her WCR?
5. What are the benefits of a positive BFR?
Proposed correction:
1. The WCR is calculated as follows: (Customer receivables + Raw material stocks) – (Trade payables + Tax and social security payables) = (€15 + €000) – (€10 + €000) = €5.
2. A positive WCR means that the company has more capital invested in the operating cycle (mainly inventories and receivables) than capital raised from its suppliers by credit. This is the financing requirement generated by the company's activity.
3. In the case of “Les Douceurs de Marie”, the WCR is €18. This means that Marie has €000 tied up in her operating cycle. This is money that is not available for other uses in the business.
4. To reduce its WCR, Marie could practice tighter management of its stocks and its trade receivables, for example by negotiating shorter payment terms with its customers or by reducing the volume of its stocks.
5. A positive WCR can be beneficial for a company because it can facilitate cash flow management. On the other hand, it requires more financing, either through equity or borrowing.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| BFR = (Customer receivables + Raw material stocks) – (Trade payables + Tax and social security payables) | This formula is used to calculate the Working Capital Requirement (WCR). A positive result means that the company needs financing for its operating cycle. A negative result indicates that the company has sources of financing for its operating cycle. |
Application: Homemade Bakery
States :
Comme à la Maison bakery has been around for 3 years. The company recently conducted a financial study. Here are some data from this study:
– Current assets: €55
– Current liabilities: €40
Work to do :
1. What is the company’s working capital requirement?
2. How to interpret the BFR obtained?
3. Is it a good sign for the company to have a positive WCR? Why?
4. What risks can a company with a positive WCR incur?
5. Propose a strategy to reduce the BFR of this bakery.
Proposed correction:
1. The company's WCR is calculated by subtracting current liabilities from current assets: €55 – €000 = €40.
2. A WCR of €15 means that the bakery needs this amount to finance its operating cycle. In other words, the company must finance €000 with its own resources (equity or long-term debt).
3. A positive WCR means that the company has a working capital requirement. This means that the company must find financial resources to cover this requirement. This is not necessarily a bad sign because it can mean that the company is investing to develop its business. However, a WCR that is too high can endanger the company's cash flow.
4. A positive WCR means that the company must find sources of financing to cover this need. If the company fails to do so, it may encounter cash flow problems and have difficulty paying its suppliers or employees.
5. In order to reduce their working capital requirements, the bakery could, for example, negotiate longer payment terms with its suppliers.
Summary of Formulas Used:
| BUILD YOUR VIRTUAL TOUR | Meaning |
|---|---|
| BFR (Working capital requirement) = Current assets – Current liabilities | It represents the amount of resources needed to finance the company's operating cycle (purchases of raw materials, production, sale of products, etc.). |
Application: The Eloquent Shoes
Les Chaussures Eloquentes is a company that has been in existence for 10 years and specializes in selling high-quality shoes. The company's financial management decides to go through all the financial operations of the last year with a fine-tooth comb. The main objective is to identify financial problems and improve the management of the company to achieve greater profit.
States :
By analyzing the financial statements of the past year, the financial management of the company identified that the Working Capital Requirement (WCR) of the company is positive and quite high.
Here is some relevant financial information:
- Stocks of goods: €75
- Customer receivables: €50
- Supplier debts: €30
- Tax and social security debts: €15
- Average duration of receipt of customer payments: 60 days
- Average payment period to suppliers: 30 days
Work to do :
- Calculate the BFR of Eloquent Shoes.
- Estimate the impact of an improvement in the average duration of receipt of customer payments on the WCR.
- Deduce the influence of an extension of the average payment period to suppliers on the WCR.
- Assess whether the company should consider renegotiating payment terms with creditors to improve its WCR.
- Carry out an overall analysis of the company's financial situation using the data provided and based mainly on the WCR.
Proposed correction:
- The WCR is calculated by taking the sum of Inventories + Receivables – Debts. Therefore, WCR = (€75 + €000) – (€50 + €000) = €30 – €000 = €15.
- A decrease in the average duration of receipt of customer payments could reduce the amount of receivables and therefore reduce the WCR. The exact calculation will depend on the average daily amount of receivables.
- Extending the average payment period to suppliers would increase the amount of debts, which would also decrease the WCR. The exact calculation will depend on the average daily amount of supplier debts.
- Renegotiating payment terms with creditors could help improve working capital if it actually extends payment terms. This would allow the company to have more cash available in the short term.
- Looking at the company's positive WCR, it is clear that the company has a short financial cycle. This is a sign that there are more cash outflows than inflows. The company could therefore improve its cash management. It would also be beneficial to reduce the inventory turnover time to decrease the cash outflow.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| BFR = Stocks + Receivables – Debts | The WCR formula is used to calculate the company's short-term financial needs. A positive WCR means that the company needs financing to meet its short-term obligations. |
Application: Lila's Delights
States :
Les Délices de Lila is a company specializing in the sale of regional delicacies. You have been the financial manager of this company since the beginning of your career. Here are the financial data for the current year: Current assets (inventories + receivables) = €20, Current liabilities (short-term debts) = €000.
Work to do :
1) Calculate the working capital requirement of Les Délices de Lila.
2) Specify whether the BFR of Les Délices de Lila is greater than 0, equal to 0 or less than 0.
3) Explain what the BFR of Délices de Lila means based on the result obtained in question 2.
4) How important is BFR for a company like Les Délices de Lila?
5) What should the company do if its WCR is constantly positive?
Proposed correction:
1) BFR of Les Délices de Lila = Current Assets – Current Liabilities = €20 – €000 = €10.
2) The BFR of Les Délices de Lila is greater than 0 (it is positive).
3) A positive WCR means that the company has more short-term resources blocked in inventories and receivables (Current Assets) than it has short-term debts (Current Liabilities). In other words, Les Délices de Lila has working capital to invest to finance its operating cycle: it needs more resources to finance its current assets than its current liabilities can provide.
4) WCR is crucial for Les Délices de Lila because it gives it an idea of its short-term liquidity. It is an indication of the amount of money the company needs to cover its operational costs. A WCR that is too high could mean that the company has too much money tied up in inventory and receivables, which could be detrimental to the company's cash flow.
5) If Les Délices de Lila's WCR is constantly positive, the company must look for ways to reduce its WCR by optimizing the management of its inventories and receivables or by increasing its working capital through short-term financing sources.
Summary of Formulas Used:
| Packages | Explanations |
|---|---|
| BFR = Current Assets – Current Liabilities | This is the formula for calculating the Working Capital Requirement (WCR). Current Assets represent the accumulation of inventories and receivables, while Current Liabilities represent the accumulation of the company's short-term debts. |
Application: Distribution of the Luminous Mountains
States :
La Distribution des Monts Lumineux is a company specializing in the sale of products for outdoor activities.
It reported the following financial data for the year 2020:
– Stock of goods: €8
– Customer receivables: €5
– Supplier debts: €3
Work to do :
1) What is a positive BFR?
2) How is the BFR calculated?
3) Calculate the working capital requirement of the company Distribution des Monts Lumineux for the year 2020.
4) What does a positive BFR mean for the financial management of the company?
5) What would be the consequences if the BFR becomes negative?
Proposed correction:
1) A positive working capital requirement means that the company has more resources committed in the short term to its operating cycle (inventories and receivables) than it has debts of the same nature (trade payables).
2) The working capital requirement (WCR) is calculated as follows:
BFR = Stock + Receivables – Debts
3) The company's working capital requirement for the year 2020 is therefore:
WCR = €8 + €000 – €5 = €000
4) A positive BFR indicates that the company needs additional financing to maintain its operations in the short term. That is, the company uses capital to finance inventories and accounts receivable that are not financed by accounts payable (trade payables).
5) If the working capital ratio becomes negative, it may mean that the company is financing its inventories and receivables through its debts. This can be favorable since it reduces the need for short-term financing. However, it may also indicate poor inventory management, cash flow management problems or late payment to suppliers.
Summary of Formulas Used:
| Formula Name | Formulas |
|---|---|
| BFR calculation | BFR = Stock + Receivables – Debts |
Application: MCO Finances SA
States :
MCO Finances SA is a company specializing in microcredit. It is engaged in a phase of rapid growth and seeks to optimize its financial situation.
Here is some relevant information:
– Working Capital Requirement (WCR) for year N: €500.
– WCR for year N-1: €400.
– Stock for year N: €250.
– Receivables for year N: €300.
– Debts for year N: €150.
– Turnover excluding tax for year N: €1, with a margin of 200%.
– Customer payments are made on average in 45 days, supplier payments in 60 days, and stock rotation is made on average in 30 days.
Work to do :
1. Explain what a positive BFR means for MCO Finances SA.
2. Calculate the amount of the increase in WCR between year N and year N-1.
3. Determine the inventory turnover rate for year N.
4. Estimate the gross margin on turnover for year N.
5. Analyze the situation of MCO Finances SA with regard to its payment conditions.
Proposed correction:
1. A positive WCR means that MCO Finances SA finances a certain portion of its current assets (inventories and receivables) through equity and medium- and long-term debts. This implies that the company blocks cash for a certain period before completing its operating cycle. It is important for MCO Finances SA to manage this WCR well so as not to find itself in financial difficulty.
2. The increase in WCR between year N and year N-1 is: WCR(N) – WCR(N-1) or €500 – €000 = €400.
3. The inventory turnover rate is calculated as: (Inventories ÷ Net sales) x 365. Which gives (€250 ÷ €000) x 1 = 200 days. This is significantly higher than the average period of 000 days announced, indicating that the company is having difficulty selling its inventory.
4. The gross margin on turnover is calculated by: (Margin ÷ Turnover excluding tax) x 100. That is (25% x €1) ÷ €200 x 000 = 1%.
5. In terms of its payment terms, MCO Finances SA appears to manage its deadlines effectively. In fact, the company manages to get paid by its customers before even paying its suppliers (45 days compared to 60 days). This allows it to preserve its cash flow.
Summary of Formulas Used:
| Description | Formulas |
|---|---|
| Increase in BFR | BFR(N) – BFR(N-1) |
| Inventory turnover rate | (Stocks ÷ Net sales) x 365 |
| Gross margin on turnover (in %) | (Margin ÷ HT turnover) x 100 |
Application: Company at Laurette
States :
The company Chez Laurette is a small family bakery located in the Paris region. It consists of fixed and current assets, as well as short and long-term debts. The company wishes to improve its operational management, particularly its financial management.
Here is the information on the financial situation of the company:
– Stock: €6
– Customer receivables: €10
– Supplier debts: €8
– Tax and social debts: €2
Work to do :
1. Calculate the Working Capital Requirement (WCR) of the company Chez Laurette.
2. What does a positive BFR mean?
3. What are the consequences of a positive WCR for the company?
4. What levers can the company use to reduce its WCR?
5. How can reducing the WCR contribute to improving the company's financial situation?
Proposed correction:
1. WCR is calculated by subtracting current liabilities from the company's current assets. In the case of Chez Laurette, this gives WCR = (Stock + Accounts receivable) – (Accounts payable + Tax and social security liabilities) = (€6 + €500) – (€10 + €000) = €8 – €200 = €2
2. A positive WCR means that the company has a short-term financing requirement, i.e. it must finance part of its operating cycle with long-term financial resources such as equity or long-term loans.
3. The consequences of a positive BFR for the company are mainly a risk of cash flow tensions. If the company is not able to finance its operating cycle properly, it could encounter difficulties in paying its short-term debts, which could lead to solvency problems.
4. To reduce its WCR, the company can seek to reduce its stocks and accelerate the turnover of its customer receivables, for example by offering discounts for early payments. It can also seek to extend the payment period of its suppliers.
5. Reducing the WCR contributes to improving the company's financial situation because it reduces the need for short-term capital and therefore the risks of cash flow tensions. It also frees up capital that can be reinvested in company development projects.
Summary of Formulas Used:
| Indicator | Formulas |
|---|---|
| Working capital requirement (WCR) | (Stock + Customer receivables) – (Supplier debts + Tax and social security debts) |
Application: Pepper's Shop
States :
The company Boutique Pepper's is a company selling rare spices. At the end of the 2021 financial year, the company's balance sheet shows the following items:
– Stock: €35
– Receivables: €90
– Permanent capital: €210
– Fixed assets: €100
– Short-term debts: €50
Work to do :
1. Calculate the company's WCR.
2. Calculate the company's FRNG.
3. Is the BFR financed by the FRNG? Explain the result.
4. What does a positive WCR mean?
5. Explain the consequences of a consistently positive WCR for the company.
Proposed correction:
1. WCR = Stock + Receivables – Debts = €35 + €000 – €90 = €000. The company’s WCR is therefore €50.
2. The FRNG = Permanent Capital – Fixed Assets = €210 – €000 = €100. The company’s FRNG is therefore €000.
3. Yes, the BFR is financed by the FRNG. Indeed, FRNG (€110) > BFR (€000), this indicates that short-term needs are financed by stable resources and there is even a surplus to finance part of the current assets.
4. A positive WCR means that the company has more resources committed to the operating cycle (in inventory and receivables) than short-term debts. This means that part of the company's short-term needs are financed by stable sources of financing: permanent capital.
5. If the WCR is always positive, it may mean that the company is facing cash flow problems, as the company must constantly finance its inventories and receivables. This increases the financial risk for the company, especially if it does not have enough cash to cover these needs. It may have to resort to expensive loans to cover these needs, which increases its financing cost and reduces its profitability. The company must therefore manage its WCR effectively to ensure its financial stability.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| BFR = Stock + Receivables – Debts | Working Capital Requirement (WCR) is calculated by subtracting the company's liabilities from current assets that can be easily converted into cash. |
| FRNG = Permanent Capital – Fixed Assets | The FRNG (Net Working Capital) is calculated by subtracting fixed assets from the company's permanent capital. |
Application: TechnoPlus Company
States :
TechnoPlus is a company specializing in the production and sale of electronic equipment. It recently carried out its financial analysis and now wants to better manage its working capital requirement (WCR). After doing its calculations, TechnoPlus discovers that it has a positive WCR.
As of December 31, 2020, the following items were noted in TechnoPlus's accounting:
– Stocks of goods: €80
– Customers (receivables): €50
– Suppliers (debts): €40
Work to do :
1. Calculate the working capital requirement of the TechnoPlus company.
2. Interpret the positive BFR of the TechnoPlus company.
3. What is the impact of a longer payment period granted to customers on the WCR?
4. What is the impact of a longer payment period granted by suppliers on the WCR?
5. What strategies could TechnoPlus implement to reduce its WCR?
Proposed correction:
1. Working Capital Requirement (WCR) is calculated by subtracting operating liabilities (Suppliers) from current operating assets (Inventories + Customers). Therefore, WCR = (Inventories + Customers) – Suppliers = (€80 + €000) – €50 = €000.
2. A positive WCR means that the company finances part of its operating cycle with stable resources (equity and long-term debt). This may be due to a generous customer credit policy, too large inventories or insufficient management of supplier credits.
3. A longer payment period granted to customers increases the WCR. Indeed, the company must finance a greater part of its customer receivables with its own resources.
4. A longer payment term granted by suppliers reduces the WCR. Indeed, the longer the payment term, the less the company needs to finance its supplier debts with its own resources.
5. To reduce its WCR, TechnoPlus could implement several strategies: reduce its stock, for example by improving its stock management; reduce its customer receivables, by tightening its customer credit policy; and finally increase its supplier debts, for example by negotiating better payment terms with its suppliers.
Summary of Formulas Used:
| Concept | Formulas |
|---|---|
| Working capital requirement (WCR) | BFR = (Stocks + Customers) – Suppliers |
Application: TechnoGadgets Company
States :
TechnoGadgets is a small business specializing in the distribution of electronic gadgets. You are the Chief Financial Officer of the company. Here are the details of the company's current assets and short-term liabilities for the current year:
– Stocks: €75
– Customer receivables: €50
– Bank: €25
– Supplier debts: €35
– Tax and social debts: €15
Work to do :
1. Calculate the company’s Working Capital Requirement (WCR).
2. Interpret the result obtained.
3. How can TechnoGadgets reduce its WCR?
4. What would be the consequences if the company's working capital requirement decreases?
5. What strategies can the company adopt if it has a positive WCR?
Proposed correction:
1. The WCR is calculated by subtracting short-term debts from the company's current assets. Here, this gives: WCR = (75 + 000 + 50) – (000 + 25) = €000.
2. The company TechnoGadgets has a positive WCR of €100, this means that the company finances part of its operating cycle (storage, production, distribution) with its own funds. This may imply that the company has insufficient cash management.
3. TechnoGadgets can reduce its WCR by improving its inventory management, speeding up the collection of customer receivables or negotiating more favorable credit terms with its suppliers.
4. If the company's WCR decreases, it means that TechnoGadgets requires less funding to run its operating cycle. This can lead to an improvement in its cash flow and profitability, but the company should be careful not to reduce its WCR too much at the risk of endangering its operational activity.
5. If the company has a positive WCR, it can adopt different strategies to manage it. For example, it can seek to increase its sources of short-term financing, such as obtaining more credit from its suppliers, or it can seek to improve its operational efficiency to generate more cash revenue.
Summary of Formulas Used:
| Concept | Formulas |
|---|---|
| BFR (Working Capital Requirement) | BFR = current assets – short-term debts |
| Positive WCR | If BFR > 0, company using its own funds to finance part of the company's operating cycle. |