Welcome to this article whose sole purpose is to help you progress with corrected exercises on how to calculate the FRNG of the Operational Management subject of the BTS MCO.
If you would like to first see or review the course on the same theme, I invite you to read my article Balance Sheet Analysis: The 4 Essential Points to Know.
The 11 corrected exercises on the functional balance sheet on this page mainly concern the calculation of overall net working capital and net cash.
In this section:
- Application: At Paul's
- Application: Supermarket Leclerc
- Application: Prestige Jewelry
- Application: House of Flowers
- Application: “Little Treats”
- Application: “Local Flavors” Supermarket
- Application: At the Little Basket
- Application: Francis & Co
- Application: “FashionStore”
- Application: Lock House
- Application: GoodFridge Company
Application: At Paul's
States :
Chez Paul is a bakery and pastry shop that tries to maintain healthy financial management.
Some financial information was taken from the company's latest balance sheet:
– Stable resources: €150
– Equity: €100
– Medium and long term debts: €50
– Fixed assets: €130
Work to do :
1. What is Total Net Working Capital (TNWC)?
2. How to calculate FRNG based on the data provided?
3. What is the FRNG of the company Chez Paul?
4. What does this measure mean for the company?
5. How can the company improve its FRNG?
Proposed correction:
1. The FRNG corresponds to the surplus of permanent capital (stable resources) in relation to total fixed assets. It represents the company's capacity to finance its working capital requirement. A positive FRNG means that the company has sufficient stable resources to finance its working capital requirement.
2. To calculate the FRNG, the following formula is used: FRNG = Stable resources (Equity + Medium and long-term debts) – Fixed assets.
3. The FRNG of the company Chez Paul is calculated as follows: FRNG = (€100 + €000) – €50 = €000.
4. This measure indicates that the company Chez Paul has €20 of stable resources to cover its short-term financing needs, after covering its fixed assets. This is a sign of good financial health.
5. Chez Paul's Company can improve its FRNG by increasing its stable resources (for example, by increasing its capital or by contracting more medium and long-term debts) or by reducing its fixed assets (for example, by selling some of its non-essential fixed assets).
Always be careful to monitor your company’s FRNG to ensure it remains financially healthy. A negative FRNG could indicate short-term liquidity problems.
Summary of Formulas Used:
| Concept | Formulas |
|---|---|
| Global Net Working Capital (FRNG) | FRNG = Stable resources (Equity + Medium and long term debts) – Fixed assets |
Application: Supermarket Leclerc
States :
Supermarket Leclerc, a retail company, wants to adjust its financial management. Its accountant provided the following information:
– Stocks of goods: €50
– Customer receivables: €25
– Active treasury: €15
– Supplier debts: €30
– Tax and social security debts: €10
– Short-term financial debts: €5
Work to do :
Question 1: What is the amount of working capital requirement (WCR) of Supermarket Leclerc?
Question 2: What is the amount of the overall net working capital (NRWC) of Supermarket Leclerc?
Question 3: What does the amount obtained for the FRNG mean?
Question 4: What is the financial situation of Supermarket Leclerc based on the FRNG?
Question 5: What are the consequences if Supermarket Leclerc’s FRNG is negative?
Proposed correction:
Question 1: The WCR is equal to (Stocks + Accounts receivable) – (Accounts payable + tax and social security debts). Here, the calculation would be (€50 + €000) – (€25 + €000) = €30
Question 2: The FRNG is equal to (Active Cash) – WCR. Here, the calculation would be €15 – €000 = -€35
Question 3: The amount obtained for the FRNG means that Supermarket Leclerc has a financing requirement of €20 to cover its WCR.
Question 4: The financial situation of Supermarket Leclerc is worrying. The company does not have sufficient short-term resources to cover its working capital needs.
Question 5: If the FRNG is negative, it means that the company does not have enough funds to cover its short-term needs. It will either have to obtain external financing or sell assets to cover this deficit.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| BFR = (Stocks + Customer receivables) – (Supplier debts + tax and social security debts) | This formula is used to calculate the working capital requirement, which is the money needed to finance the company's current activities. |
| FRNG = Active cash flow – WCR | This formula is used to calculate the overall net working capital. This is the excess of stable resources over stable jobs available to the company. It measures the safety margin available to the company to meet its short-term financing needs. |
Application: Prestige Jewelry
States :
"Bijoux Prestige" is a company that specializes in the sale of high-end jewelry. Their financial history has always been complicated, particularly because of their liquidity which is often under pressure. As part of the analysis of their liquidity, you are required to calculate the Net Working Capital (NWC) of Bijoux Prestige. For this analysis, you have the following information for the previous year:
– Fixed assets: €150
– Stock: €80
– Receivables: €50
– Short-term debts: €120
– Permanent capital: €200
Work to do :
1. Calculate the FRNG of Bijoux Prestige.
2. What interpretation do you make of the FRNG obtained?
3. What actions can the company consider if its FRNG is negative?
4. What could a negative FRNG mean for a company like Bijoux Prestige?
5. How does inventory affect FRNG and what actions can the company consider to improve its FRNG?
Proposed correction:
1. FRNG is calculated by taking the difference between permanent capital and fixed assets. Therefore FRNG = Permanent capital – Fixed assets = €200 – €000 = €150.
2. Bijoux Prestige's FRNG is positive, which means that the company is able to finance its short-term needs (current assets) with stable resources (permanent capital).
3. If the FRNG is negative, it means that the company does not have enough funds to cover its short-term needs. The company may seek to increase its permanent capital by seeking more investment or increasing its reserves, or it may seek to reduce its current assets by minimizing inventories or improving the collection of receivables.
4. A negative FRNG for Bijoux Prestige could mean that the company is having difficulty managing its cash flows and may have trouble meeting its short-term obligations. This could lead it to make strategic decisions to improve its cash position.
5. Inventory is a significant part of a company's current assets. High inventory means that more resources are tied up in goods that have not yet been sold, which can reduce FRNG. Bijoux Prestige may seek to improve its FRNG by reducing its inventory, either by increasing sales or improving its inventory management.
Summary of Formulas Used:
| Indicator | Formulas |
|---|---|
| Global Net Working Capital (GNWC) | Permanent Capital – Fixed Assets |
Application: House of Flowers
States :
The “Maison des Fleurs” is a florist located in the heart of the city. In order to manage its business optimally, this company is particularly concerned with its net working capital requirement (NWC). At the end of June, it has the following financial information:
– Stock of goods: €8
– Customers (accounts receivable): €12
– Suppliers (trade payables): €7
– Tax and social debts: €2
– Availability (cash and bank): €6
Work to do :
1- How is the working capital requirement calculated?
2- What is the working capital requirement of Maison des Fleurs?
3- What does this mean for La Maison des Fleurs?
4- What are the solutions to reduce the need for working capital?
5- How can these solutions be implemented in concrete terms?
Proposed correction:
1- The Net Working Capital Requirement (NRCR) is calculated as follows: NRCR = (Stocks + Receivables) – Debts.
2- The working capital requirement of the Maison des Fleurs is therefore: (€8 + €000) – (€12 + €000) = €7 – €000 = €2.
3- A positive working capital requirement means that the company must finance part of its operating cycle with stable resources (permanent capital). In other words, this company needs a surplus of €11 to cover its current operating expenses.
4- Solutions to reduce working capital requirements may include: reducing inventories, accelerating the collection of customer receivables or delaying the payment of supplier debts.
5- These solutions can be implemented in different ways. Reducing inventory can mean improving inventory management, for example by using a more efficient inventory management method or negotiating better terms with suppliers. Speeding up receivables collection can include actions such as improving invoicing processes, offering discounts for prompt payment, or outsourcing receivables collection.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| FRNG = (Stocks + Receivables) – Debts | Calculation of Net Working Capital (NWC) |
Application: “Little Treats”
States :
Les Petites Gourmandises is a small company that specializes in the production of artisanal macarons. The CFO wants to monitor the evolution of the company's cash flow management in order to anticipate potential liquidity or solvency problems. To do this, he needs to determine the FRNG (Net Working Capital). You have been asked to help him with this task.
We therefore give you the following simplified financial information:
– Net fixed assets: €25
– Stocks: €10
– Receivables: €15
– Debts over one year: €20
– Debts due within one year: €10
Work to do :
1. What is FRNG?
2. How is the FRNG calculated?
3. Calculate the total fixed assets.
4. Calculate the total working capital requirement (WCR).
5. Finally, determine the FRNG.
Proposed correction:
1. Net Working Capital (NWC) is a measure of the company's financial capacity to finance its operating cycle. It is the difference between stable resources (medium and long-term resources) and stable uses (fixed assets).
2. The formula for calculating the FRNG is: Stable resources – Stable uses. Stable resources correspond to all permanent capital (composed of equity and debts of more than one year). As for stable uses, they consist of fixed assets.
3. Total fixed assets are €25000.
4. The total working capital requirement (WCR) is calculated by doing: Inventories + Receivables – Debts within one year = €10 + €000 – €15 = €000.
5. The FRNG is then calculated as follows: (Permanent capital – Fixed assets) = (Debts due in more than one year + Equity – Fixed assets) = (€20 + (€000 + €25) – €000) = €15.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| FRNG = Stable Resources – Stable Jobs | General formula for calculating FRNG |
| BFR = Stocks + Receivables – Debts within one year | Formula for calculating Working Capital Requirement |
| Total Fixed Assets = sum of fixed assets | Formula for calculating fixed assets |
Note: These forms are simplified for educational purposes.
Application: “Local Flavors” Supermarket
States :
The supermarket "Les Saveurs du Terroir" is a local business that mainly sells local products. To optimize its management, the supermarket is interested in its Net Working Capital (NRCC).
The following information was obtained from the company's financial statement for the current year:
– Fixed assets: €150
– Current assets: €50
– Current liabilities: €30
– Permanent resources: €200
Work to do :
1. What is the formula for calculating Net Working Capital (NWC)?
2. Calculate the FRNG of the supermarket “Les Saveurs du Terroir” using the information provided.
3. What are the components of the FRNG?
4. Interpret the result obtained when calculating the FRNG.
5. Based on the FRNG, what advice would you give to improve the financial management of the company?
Proposed correction:
1. Net Working Capital corresponds to the stable resources generated by the company which it has available to finance its durable assets. The formula is “NRC = Permanent resources – Fixed assets”.
2. The FRNG of the “Les Saveurs du Terroir” supermarket is therefore calculated as follows: FRNG = €200 – €000 = €150.
3. The FRNG is composed of two parts: permanent resources, which include equity and long-term debt, and fixed assets, which include non-current assets such as land, buildings, equipment, etc.
4. A positive FRNG, as is the case here, means that the company has enough resources to cover its long-term needs. A negative FRNG would indicate that the company does not have enough resources to cover its non-current assets, which may be a sign of financial difficulties.
5. With a positive FRNG, the supermarket “Les Saveurs du Terroir” is doing well financially. However, the manager may seek to increase it further to secure the company against possible market fluctuations or to plan future expansions. It is advisable to invest thoughtfully so as not to compromise the liquidity of the company.
Summary of Formulas Used:
| Notions | Packages |
|---|---|
| Global Net Working Capital | FRNG = Permanent resources – Fixed assets |
Application: At the Little Basket
States :
The company "Au Petit Panier" is a small supermarket chain that is looking to improve their financial management. In this context, they need to calculate their Net Working Capital (NWC) to assess their ability to cover their short-term debts.
The company manager has provided you with the following financial information for the current year:
– Fixed assets: €280
– Current assets – Stocks: €65
– Current assets – Receivables: €90
– Availability: €20
– Financial debts: €220
– Operating debts: €95
– Various debts: €40
– Provisions for risks: €30
– Capital: €250
– Reserves: €20
– Investment grants: €30
Work to do :
1. Calculate the net assets (NA) of the company.
2. Calculate the company's current liabilities (CL).
3. Calculate the company's Net Working Capital (NWC).
4. Analyze the results obtained, does the company have sufficient FRNG to cover short-term needs?
5. Suggest possible improvements to optimize the company's FRNG.
Proposed correction:
1. Net Assets (NA) are calculated by adding fixed assets (€280), inventories (€000), receivables (€65) and cash (€000). This gives a Net Assets of €90.
2. Current Liabilities (CL) are calculated by adding together financial debts (€220), operating debts (€000), miscellaneous debts (€95) and provisions for risks (€000). This gives a Current Liabilities of €40.
3. The Net Working Capital (NWC) is calculated by subtracting the Current Liabilities (€385) from the Net Assets (€000), so the NWC is €455.
4. With a FRNG of €70, the company has financial margin to cover its short-term needs.
5. To optimize FRNG, the company could seek to reduce its debts or increase its assets by implementing strategies to increase sales or improve inventory management.
Summary of Formulas Used:
| Concept | Formulas |
|---|---|
| Net Assets | Fixed assets + Current assets – Current shares – Cash |
| Current liabilities | Financial debts + Operating debts + Miscellaneous debts + Provisions for risks |
| Global Net Working Capital | Net Assets – Current Liabilities |
Application: Francis & Co
States :
Francis & Co is a company specializing in the manufacture and sale of luxury watches. For its previous financial year, the company recorded the following financial data:
– Current assets: €25
– Short-term debts: €10
– Stocks: €15
Work to do :
1. What is FRNG and how is it calculated in a company?
2. Calculate the FRNG of Francis & Co.
3. How important is the FRNG for Francis & Co?
4. If Francis & Co's stocks decrease to €10, what will be the impact on the FRNG?
5. What steps can the company take to improve its FRNG?
Proposed correction:
1. Net Working Capital (NWC) is the portion of stable capital (equity + financial debts of more than one year) that finances the operating cycle. It is calculated as follows: NWC = Current assets (excluding cash) – Short-term debts.
2. To calculate the FRNG of Francis & Co, we use the FRNG formula:
FRNG = Current assets – Short term liabilities
= €25 – €000
£15
3. The FRNG is important for Francis & Co because it gives an idea of the company's ability to cover its short-term financing needs. A positive FRNG indicates that the company has sufficient resources to finance its operating cycle.
4. If Francis & Co's inventory decreases to €10, current assets would also decrease, reducing the company's FRNG.
FRNG = Current assets – Short term liabilities
= (€25 – €000) – €5
£10
5. To improve its FRNG, Francis & Co could seek to increase its current assets (for example, by increasing its sales or reducing its collection periods from customers) or to reduce its short-term debts (for example, by negotiating more favourable payment terms with its suppliers).
Summary of Formulas Used:
| Formula Used | Explanation |
|---|---|
| FRNG = Current assets – Short term liabilities | This formula is used to calculate the Net Working Capital (NWC). It represents the excess medium-long term financing available to finance the operating cycle. |
Application: “FashionStore”
States :
FashionStore is a company that primarily sells women's fashion clothing. The company is currently completing its financial statement and needs help understanding and calculating its Net Working Capital (NWC).
Here is some information needed to perform the calculation:
– Fixed assets: €45
– Current assets (excluding cash): €15
– Debts over one year: €20
– Debts due within one year (excluding cash): €10
Work to do :
1. Define the concept of Net Working Capital (NWC)
2. Calculate the amount of equity and debts payable after more than one year used to finance the company's fixed assets.
3. Understand the factors influencing FRNG
4. Calculate FashionStore’s Net Working Capital using the data provided
5. Interpret the result of the calculation. Does FashionStore have a healthy financial situation?
Proposed correction:
1. Net Working Capital (NWC) is an indicator of the company's financial balance. It measures the company's ability to finance its long-term needs using stable resources. It is calculated by subtracting stable jobs (fixed assets) from stable resources (equity + debts over one year).
2. The amount of equity and debts payable in more than one year used to finance the company's fixed assets is €45, because these resources are generally used to finance fixed assets.
3. The FRNG can be influenced by several factors. These include the increase or decrease in fixed assets, equity or long-term debt, the company's financing strategy, etc.
4. FashionStore’s Net Working Capital is calculated as follows:
FRNG = Stable Resources (Equity + Debts over one year) – Stable Uses (Fixed Assets)
=> FRNG = (€45 + €000) – €20
=> FRNG = €20
5. With a FRNG of €20, FashionStore has a rather healthy financing situation. Indeed, the positive value indicates that the company has enough stable financial resources to cover its long-term needs.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| FRNG = Stable Resources (Equity + Debts over one year) – Stable Uses (Fixed Assets) | This formula is used to calculate Net Working Capital. It gives an indication of the company's ability to finance its long-term needs with stable resources. |
Application: Lock House
States :
The company "Maison de la Serrure" is an SME specializing in the manufacture and wholesale sale of locks. During the last financial year, the company recorded the following amounts:
– Total Short Term Assets: €15
– Total Stock: €5
We ask to study the financial situation of the company by calculating its Net Working Capital (NTCC).
Work to do :
1. What is Total Net Working Capital (TNWC)?
2. What is the formula for calculating FRNG?
3. Calculate the FRNG of the company “Maison de la Serrure” using the data from the statement.
4. Interpret the result.
5. Why is it useful for a company to calculate its FRNG?
Proposed correction:
1. Net Working Capital (NWC) is a financial management concept that measures a company's ability to finance its operating cycle (i.e. its current activity) using its stable resources.
2. FRNG is calculated by taking the difference between current assets and inventories. Formula: FRNG = Total Current Assets – Total Inventories.
3. From the data in the statement, the company's FRNG is calculated as follows: FRNG = €15 – €000 = €5
4. The result (€10) means that the company has €000 of stable resources to finance its operating cycle, i.e. to cover its short-term needs related to its current activity.
5. It is useful for a company to calculate its FRNG because it allows it to know if it has enough stable resources to finance its operating cycle. A positive FRNG is a good sign because it means that the company can easily cover its short-term needs, while a negative FRNG indicates a potentially risky financial situation.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| FRNG = Total Current Assets – Total Inventories | Allows you to calculate the Net Working Capital (NWC) |
Application: GoodFridge Company
States :
GoodFridge, a well-known appliance retailer, would like to estimate its net working capital (NWC) based on its balance sheets for the current year. Its current assets consist of inventories, trade receivables, and short-term investments. Its current liabilities include trade payables, tax liabilities, and social security liabilities.
Here is the information you have:
– Stocks: €25
– Customer receivables: €20
– Short-term investment: €10
– Supplier debts: €15
– Tax debts: €5
– Social debts: €7
The company also has €30 in equity.
Work to do :
1. Calculate GoodFridge's current assets.
2. Calculate GoodFridge's current liabilities.
3. Calculate the FRNG of GoodFridge.
4. Interpret the result: what is the financial state of the company?
5. If the company uses its short-term investment to repay its supplier debt, what will be the impact on the FRNG?
Proposed correction:
1. Current assets are the sum of items that can be transformed into cash within a short period of time. For GoodFridge, these are inventories, trade receivables, and short-term investments. Therefore, current assets = €25 + €000 + €20 = €000.
2. Current liabilities represent the company's short-term debts. Here, this includes trade payables, tax payables, and social security payables. Therefore, current liabilities = €15 + €000 + €5 = €000.
3. FRNG is calculated by subtracting current liabilities from current assets. Therefore, GoodFridge's FRNG = €55 – €000 = €27.
4. A positive FRNG means that the company has sufficient working capital to cover its short-term liabilities. In other words, GoodFridge is a solvent company in the short term.
5. If the company uses its short-term investment to repay its trade payables, its current assets will decrease by €10 (new current assets = €000) and its current liabilities will also decrease by €45 (new current liabilities = €000). The new FRNG is therefore €15. The company still remains solvent, but with a larger margin.
Summary of Formulas Used:
| Current assets | Inventories + Accounts receivable + Short-term investments |
| Current liabilities | Supplier debts + Tax debts + Social debts |
| FRNG | Current assets – Current liabilities |