Welcome to this article whose sole purpose is to help you progress with corrected exercises on the BFR 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 BFR in BTS (working capital requirement) on this page mainly concern the calculation of the BFR, the FRNG and the TN.
In this section:
- Application: SARL TechnoProgress
- Application: TechPlus Company
- Application: TechNova Company
- Application: Monteiro Production Company
- Application: The Chloé Boutique
- Application: Beautiful Lingerie
- Application: TechnoVictus Company
- Application: TechnoCorp Company
- Application: ElectroShop Company
- Application: Dupont Bakery
- Application: QuickPaint Company
Application: SARL TechnoProgress
States :
TechnoProgress is a company specializing in the sale of technological products. At the end of 2020, the accounting documents provide the following information:
- Stable resources: €120
- Fixed assets: €80
- Current assets excluding cash: €45
- Current liabilities other than cash: €20
Work to do :
1. Calculate the company's Net Working Capital (NWC).
2. Calculate the company’s Working Capital Requirement (WCR).
3. Calculate the company's Net Cash Flow (NCF).
4. Interpret the results obtained.
5. Propose recommendations to improve the financial management of the company.
Proposed correction:
1. The FRNG is calculated by subtracting the Fixed Assets from the Stable Resources. Therefore FRNG = €120 – €000 = €80. TechnoProgress' FRNG is therefore €000.
2. The WCR is obtained by subtracting the Non-Cash Current Liabilities from the Non-Cash Current Assets. Therefore WCR = €45 – €000 = €20. TechnoProgress' WCR therefore amounts to €000.
3. Net Cash is determined by subtracting WCR from FRNG. Therefore TN = €40 – €000 = €25. TechnoProgress’s TN is €000.
4. The interpretation of these results can be done as follows: the positive FRNG of €40 indicates that TechnoProgress has more stable resources than fixed assets, so it is able to finance its fixed assets. The positive WCR of €000 shows that there are more receivables and inventories than short-term debts, which may indicate a possible short-term cash flow tension. However, the positive TN of €25 shows that the company has enough liquidity to cover its current expenses.
5. To improve financial management, the company could reduce its WCR by improving the management of its receivables and inventories. It could also increase its stable resources to increase its FRNG and thus strengthen its cash flow.
Summary of Formulas Used:
| Terms | Packages |
|---|---|
| FRNG (Global Net Working Capital) | FRNG = Stable resources – Fixed assets (in €) |
| BFR (Working Capital Requirement) | BFR = Non-cash current assets – Non-cash current liabilities (in €) |
| TN (Net Cash) | TN = FRNG – BFR (in €) |
Application: TechPlus Company
States :
TechPlus is a company specializing in the sale of computer equipment. At the end of its financial year, it conducts an analysis of its financial management to understand and interpret its performance. Several indicators are analyzed such as the Net Working Capital (NRWC), the Working Capital Requirement (WCR) and the Net Cash (NC). The financial data at the end of the year are as follows:
– FRNG = €95
– BFR = €35
– TN = €10
Work to do :
1. What is FRNG, BFR, TN and how are they calculated?
2. What does the FRNG level indicate about the company's financial situation?
3. What does the level of BFR tell us about the situation of the TechPlus company?
4. How to interpret the TN level of the TechPlus company?
5. TechPlus would like to optimize its financial situation. What points could be suggested for improvement?
Proposed correction:
1. The FRNG is the permanent capital that the company has at its disposal, consisting of its equity and medium and long-term financial debts. The WCR represents the resources necessary to finance the operating cycle and is calculated as the difference between current assets (stocks, customers) and current debts (suppliers). The TN is the balance between FRNG and WCR (TN = FRNG – WCR).
2. The FRNG level indicates that the company has sufficient stable resources to cover its ongoing needs. The higher the FRNG, the more room the company has to finance its operations.
3. The working capital requirement of TechPlus is €35. This indicates that the company needs this amount to cover the needs generated by its operating cycle. A decrease in this amount would be beneficial for the company, as it would reduce its dependence on external resources.
4. The TN of TechPlus company is €10. This means that the company has this amount in cash after meeting its ongoing needs and the operating cycle. An increase in the TN would be desirable to strengthen its solvency in the short term.
5. To optimize its financial situation, TechPlus could consider reducing its WCR by improving the management of its inventories and trade receivables. An increase in its FRNG by increasing capital contributions or by using more long-term borrowing could also be considered. It should also ensure that it increases its TN to strengthen its capacity to deal with unforeseen events.
Summary of Formulas Used:
| Indicator | Formulas |
|---|---|
| FRNG | Equity + MLT Financial Debts |
| BFR | Current assets (stocks, customers) – Current liabilities (suppliers) |
| TN | FRNG – BFR |
Application: TechNova Company
States :
TechNova is a company specializing in new technologies. The company has experienced strong growth in recent years, and its CFO, Mr. Dupont, is looking for more effective financial analysis methods to understand the company's financial situation.
He collected the financial data for the year 2021, as follows:
– FRNG (Global net working capital) = €50
– BFR (Working capital requirement) = €40
– Net cash = €15
In addition, Mr. Dupont provides you with the following financial ratios for the year 2021:
– The overall debt ratio = 60%
– Long-term debt ratio = 50%
Work to do :
1. Calculate TechNova’s Net Cash (NC).
2. Analyze the company's cash flow situation.
3. How can the debt ratios provided by Mr. Dupont be interpreted?
4. Propose an improvement strategy for TechNova company based on the interpretation of these ratios.
5. What is the impact of improving WCR management on the company's financial balance?
Proposed correction:
1. Net Cash Flow (NCF) is calculated by subtracting Working Capital Requirement (WCR) from Total Net Working Capital (TNWC). For TechNova, this gives:
TN = FRNG – BFR = €50 – €000 = €40. Therefore, TechNova’s Net Cash is €000.
2. The company's cash position is positive, meaning that the company has more current assets than it has current liabilities. However, the cash position of €10 seems quite low for a growing company like TechNova.
3. The overall debt ratio of 60% means that 60% of the funds are provided by the company's creditors. On the other hand, the ratio of 50% for long-term debt indicates that half of the company's total assets are financed by long-term debts. Thus, the company has a relatively balanced financial structure even though it uses debt.
4. To improve this situation, TechNova could seek to increase its equity through capital increases or retained earnings. This would reduce debt ratios and therefore improve the company's solvency.
5. Good management of the WCR makes it possible to reduce the company's liquidity requirements and therefore reduce its need for external financing. This would have the consequence of improving the company's financial balance and reducing its debt.
Summary of Formulas Used:
| Formulas | Explanation |
| TN = FRNG – BFR | This formula is used to calculate the company's Net Cash Flow (NCF). |
Application: Monteiro Production Company
States :
Monteiro is a company specializing in the production and sale of quality wine. For several years, it has managed to position itself as a major player in its market. However, in order to ensure its profitability and growth, the company must constantly evaluate and improve its financial management.
In 2019, the company reached a turnover of €750 with a production of 000 bottles. Additional financial data are as follows:
– Current assets (CA): €120
– Short-term debts (STD): €85
The company would like to analyze its management of Net Working Capital (NWC), Working Capital Requirement (WCR) and Net Cash (NC).
Work to do :
1. Calculate the net working capital (NWC)
2. Calculate the working capital requirement (WCR)
3. Calculate net cash flow (NCF)
4. Interpret the FRNG, BFR the TN
5. Suggest areas for improvement for financial management for Monteiro Company
Proposed correction:
1. The Net Working Capital (NWC) is calculated as follows: NWC = Current Assets (CA) – Short-Term Debts (STD) = €120 – €000 = €85.
2. The Working Capital Requirement (WCR) is the portion of permanent capital that was used to finance non-cash current assets. In our case, we do not have enough information to calculate it directly. We assume that it is equal to 20% of turnover, i.e. WCR = 20% of €750 = €000.
3. Net Cash (NC) is the result of short-term financial equilibrium. It is calculated using this formula: NC = FRNG – BFR = €35 – €000 = – €150.
4. The interpretation of the results shows that the company has a positive FRNG which means that the current assets are sufficient to cover the short-term liabilities. However, the company has a very high WCR, meaning that the company needs more capital to finance its short-term operations. In addition, the negative net cash indicates that the company has difficulty in paying its short-term liabilities.
5. To improve its financial management, the company could consider reducing its WCR through more efficient management of its inventories and receivables. It could also seek to increase its FRNG by increasing its sales or reducing costs to improve its cash flow.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| FRNG = Stable Debt – Fixed Assets | This calculation makes it possible to determine the Net Working Capital (NWC) which measures the company's capacity to finance its operating cycle with stable resources. |
| BFR (Working Capital Requirement) = Current assets – Current liabilities | Working Capital Requirement assesses the resources needed to cover the company's current expenses |
| TN (Net Cash) = FRNG – BFR | Net Cash Flow indicates the short-term financial balance of the company |
Application: The Chloé Boutique
States :
Boutique Chloé is a company that sells women's fashion clothing and accessories. In recent months, the company has experienced strong growth and would like to assess its financial situation. In the latest balance sheet, Fixed Assets are €130, Stable Debts are €000, Current Assets are €80 and Current Liabilities are €000.
Work to do :
1. Calculate the FRNG.
2. Calculate the BFR.
3. Calculate Net Cash.
4. Interpret the results.
5. Propose actions to improve the financial situation of the company.
Proposed correction:
1. FRNG = Stable Debts – Fixed Assets –> FRNG = €80 – €000 = -€130.
2. WCR = Current Assets – Current Liabilities –> WCR = €145 – €000 = €120.
3. TN = FRNG – BFR –> TN = -€50 – €000 = -€25.
4. The negative FRNG of -€50 means that the company finances part of its Fixed Assets with short-term funds, which reflects a financial imbalance. The WCR is positive (€000), indicating a need for financing for the operating cycle. Since the Net Cash Flow is negative (-€25), the company has a liquidity problem.
5. To improve the financial situation of the company, it could increase its stable debts (capital increase, long-term loan) to cover Fixed Assets, reduce its Current Assets (management of stocks, debtors) and increase Current Liabilities (management of creditors).
Summary of Formulas Used:
FRNG = Stable Debt – Fixed Assets
WCR = Current assets – Current liabilities
TN = FRNG – BFR
Application: Beautiful Lingerie
States :
La Belle Lingerie is a company specializing in the manufacture and sale of high-end lingerie for women. The company's financial data for the past year are as follows:
– Stable resources: €6
– Stable jobs: €3
– Current assets: €1
– Current liabilities: €800
Work to do :
1. Calculate the company's FRNG.
2. Calculate the company’s working capital requirement.
3. Calculate the company’s TN.
4. Interpret the calculated FRNG, BFR, and TN.
5. What are the possible scenarios to improve the company's TN, explain?
Proposed correction:
1. The company's FRNG is calculated by subtracting stable jobs from stable resources.
FRNG = Stable resources – Stable jobs = €6 – €000 = €000.
2. The company's WCR is calculated by subtracting current liabilities from current assets.
BFR = Current assets – Current liabilities = €1 – €500 = €000.
3. The company's TN is calculated by subtracting the BFR from the FRNG.
TN = FRNG – BFR = €2 – €500 = €000.
4. The company's FRNG is positive (€2), this is a favorable situation which means that the company's stable resources largely cover its stable jobs.
The company's working capital requirement is also positive (€700), which means that the company needs financing to support its operating cycle.
The TN is positive (€1), which means that the company has sufficient cash after financing its stable jobs and operating cycle.
5. To improve the company's TN, several scenarios are possible:
– Increase stable resources either by increasing share capital or by long-term borrowing.
– Reduce stable jobs by rotating them more quickly.
– Reduce the WCR by trying to accelerate customer collections and delay supplier disbursements.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| FRNG (Global Net Working Capital) = Stable resources – Stable jobs | FRNG quantifies the stable financing that the company has available to finance its stable assets. |
| BFR (Working capital requirement) = Current assets – Current liabilities | BFR measures the company's need for short-term financing for its operating cycle. |
| TN (Net Cash) = FRNG – WCR | TN is the remainder of the treasury after financing stable jobs and working capital requirements. |
Application: TechnoVictus Company
States :
The company TechnoVictus specializes in the sale of electronic equipment. Following a financial analysis, it discovers the following information about its activity:
– His stable investments are €75.
– Its permanent circulating capital is €52.
– His short-term debt is €18.
– Its stock is valued at €37.
– Its customer receivables are valued at €42.
– Its supplier debts are estimated at €26.
Work to do :
1. Calculate the company's net working capital (NWC).
2. Determine the working capital requirement (WCR).
3. Estimate the company's net cash flow (NCF).
4. What is the financial status of the company according to these figures?
5. What could managers do to improve the situation?
Proposed correction:
1. Net working capital (NWC) is calculated by subtracting stable investments from permanent working capital. Therefore, NWC = permanent working capital – stable investments. In our case, this gives: NWC = €52 – €000 = -€75.
2. Working capital requirement (WCR) is calculated by subtracting operating liabilities (trade payables) from current assets (inventories + trade receivables). Therefore, WCR = (inventories + trade receivables) – operating liabilities. In our case, this gives: WCR = (€37 + €000) – €42 = €000.
3. Net cash is the difference between the overall net working capital and the working capital requirement. Therefore, TN = FRNG – BFR. In our case, this gives: TN = -23 € – 000 € = -53 €.
4. The company's cash flow is negative, so the company is suffering from a cash deficit, it is not able to cover its working capital requirement which shows a precarious situation.
5. Managers could consider reducing inventories and improving the management of trade receivables to reduce WCR. They could also seek to increase their permanent working capital through capital increases or long-term borrowing.
Summary of Formulas Used:
| FRNG (Global Net Working Capital) | Permanent circulating capital – Stable investments |
| BFR (Working Capital Requirement) | (Stocks + Accounts receivable) – Operating payables |
| TN (Net Cash) | FRNG – BFR |
Application: TechnoCorp Company
States :
TechnoCorp is an electronics company that manufactures and sells various kinds of devices, ranging from mobile phones to laptops. The following details are available in the company's financial report for the year 2019:
– Net Working Capital (NRCC): €240
– Working capital requirement (WCR): €80
– Net cash flow (NC): ?
Work to do :
1. Calculate the Net Cash Flow (NCF) for the year 2019.
2. Explain what Net Working Capital (NWC) means.
3. Explain the importance of Working Capital Requirement (WCR) in the financial management of a company.
4. Analyze what the Net Cash amount means.
5. Propose measures to improve the financial health of the company.
Proposed correction:
1. Net Cash Flow (NCF) can be calculated by subtracting WCR from GNCF, so NCF = GNCF – WCR = €240 – €000 = €80.
2. Net Working Capital (NWC) is an indicator that shows whether the company has enough permanent capital to finance its entire operating cycle. A positive NWC means that the company has enough resources to cover its operational needs.
3. The Working Capital Requirement (WCR) characterizes the need for funds linked to the operating cycle of the company. It highlights the financial means necessary to cope with the gap between receipts and disbursements. Its correct management makes it possible to regulate the cash flow and ensure the continuity of the company's operations.
4. Net Cash of €160 indicates that the company has €000 to cover its short-term liquidity needs after covering its operating expenses. This may indicate good financial management of the company if this amount is sufficient to cover the company's short-term needs.
5. To improve its financial health, the company could implement strategies such as improving inventory management to reduce WCR, negotiating better payment terms with suppliers to increase available cash, or investing excess cash to generate additional revenue.
Summary of Formulas Used:
| Net cash | TN = FRNG – BFR |
Application: ElectroShop Company
States :
The company ElectroShop specializes in the sale of electronic equipment. To analyze the financial health of the company, the financial director compiles the following information for the year 2020:
– Net Working Capital (NRCC): €800
– Working capital requirement (WCR): €600
– Net Cash (NC): €200
Work to do :
1. What is the link between FRNG, BFR and TN?
2. How does an increase in the FRNG translate?
3. What does a BFR higher than the FRNG imply for the company?
4. Calculate the TN if the FRNG increases to €850 and the WCR remains constant.
5. What is the interpretation of TN in the business context?
Proposed correction:
1. The relationship between FRNG, BFR and TN is expressed by the following formula: FRNG – BFR = TN. In other words, the company's net cash flow corresponds to the difference between the overall net working capital and the working capital requirement.
2. An increase in FRNG translates into an improvement in the company's ability to finance its operating activities, which can translate into better profitability and better financial health in general.
3. If the BFR is higher than the FRNG, this means that the company must draw on its cash flow or even go into debt to finance its operating cycle, which may jeopardize its financial stability.
4. If the FRNG increases to €850 and the WCR remains constant, the TN would be: €000 – €850 = €000.
5. TN in the context of the company is an indicator of liquidity and the ability to meet short-term financial obligations. A positive TN as in the current case (€200) indicates that the company has enough liquidity to cover its operating cycle and therefore it is financially healthy.
Application: Dupont Bakery
States :
Boulangerie Dupont is a local business located in the city center. The company, thanks to its qualified staff and quality products, has gained the loyalty of many customers. Boulangerie Dupont has a new general manager, Mr. Martin, who is curious to know how the company is managed from a financial point of view. Thus, he wants to understand how the financial key performance indicators work.
At the end of 2020, Boulangerie Dupont had a Net Working Capital (NWC) of €15, a Working Capital Requirement (WCR) of €000 and a Net Cash Flow (NCF) of €5.
Work to do :
1. What is FRNG and how is it calculated?
2. What does BFR mean and how is it calculated?
3. What is TN and how is it calculated?
4. How to interpret the FRNG, BFR and TN of Boulangerie Dupont?
5. How important are these indicators for Mr. Martin and the company?
Proposed correction:
1. Net Working Capital (NWC) represents the stable resources available to a company, less fixed assets. It is calculated using the following formula: NWC = (stable resources – fixed assets).
2. Working Capital Requirement (WCR) is the part of the company's operating cycle that is financed by stable resources. It is calculated by subtracting operating liabilities from operating assets: WCR = (operating assets – operating liabilities).
3. Net Cash (NC) is the resultant between the FRNG and the WCR. It is calculated by subtracting the WCR from the FRNG: NC = FRNG – WCR.
4. With a FRNG of €15, a WCR of €000 and a TN of €5, Boulangerie Dupont has stable resources to cover its fixed assets and short-term financing needs. Positive cash flow indicates that the company is in good financial health.
5. These indicators are important to Mr. Martin and the company because they enable the company's solvency to be measured and its ability to meet its short-term financial commitments to be assessed.
Summary of Formulas Used:
| FRNG | = | Stable resources – Fixed assets |
| BFR | = | Operating assets – Operating liabilities |
| TN | = | FRNG – BFR |
Application: QuickPaint Company
States :
The company QuickPaint, active in the field of building painting, submits its annual financial statements for analysis:
– Permanent capital is €250.
– The fixed assets are €200.
– Current assets are €45.
– Short-term resources are €15.
– Liquid assets are €10.
– The current liability is €5.
Work to do :
1. Calculate the Net Working Capital.
2. Deduct the Working Capital Requirement.
3. Determine Net Cash.
4. What do these results mean for the company?
5. Propose some recommendations to improve the management of the company.
Proposed correction:
1.
FRNG = Permanent capital – Fixed assets = €250 – €000 = €200.
2.
BFR = Current Assets – Short Term Resources = €45 – €000 = €15.
3.
Net Cash = Liquid Assets – Current Liabilities = €10 – €000 = €5.
4.
The FRNG allows to finance real estate assets. With a FRNG of €50, QuickPaint has a margin to finance its real estate assets.
BFR reflects the company's operating cycle. A BFR of €30 suggests that QuickPaint has some flexibility in managing its operating cycle.
However, a net cash position of €5 implies that QuickPaint has little cash available to cover its short-term obligations.
5.
QuickPaint may consider measures to increase its Net Cash, including seeking to increase its Short Term Resources (e.g., through a short-term loan) or reducing its Liquid Assets through sales of non-core assets. In addition, QuickPaint should seek ways to increase the efficiency of its operating cycle to reduce its WCR.
Summary of Formulas Used:
| Spas | Formulas |
|---|---|
| Global Net Working Capital (FRNG) | Permanent Capital (PC) – Fixed Assets (FA) |
| Working capital requirement (WCR) | Current Assets (CA) – Short-term Resources (STR) |
| Net Cash (TN) | Liquid Assets (LA) – Current Liabilities (CL) |