Welcome to this article whose sole purpose is to help you progress with these 11 corrected exercises on FRNG BFR TN from 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, working capital requirement, net cash and the interpretation of results.
In this section:
- Application: Technovator Company
- Application: The Golden Bread Bakery
- Application: TechnoShop Company
- Application: Leclerc Entrepreneur
- Application: Financial Management at Slick Motors
- Application: SuperResraurant Company
- Application: ChallengeTech Company
- Application: Aquafin Company
- Application: GearsTech Company
- Application: ABC Company
- Application: French-speaking travel agency TourNow
Application: Technovator Company
States :
Technovator is a company specializing in the development of new technologies. It is recognized for its ability to innovate and offer highly technological solutions. You are the financial manager of the company and your role is to analyze and evaluate the financial position of the company. Here is the financial information of the company at the end of 2020:
– Permanent resources: €150
– Fixed assets: €90
– Current assets: €60
– Short-term debts: €25
Work to do :
1. Calculate the Net Working Capital (NWC).
2. Calculate the Working Capital Requirement (WCR).
3. Calculate Net Cash (TN).
4. Interpret the company's Net Cash Flow.
5. What is the risk of negative Net Cash Flow and how can a company manage it?
Proposed correction:
1. FRNG = Permanent resources – Fixed assets = €150 – €000 = €90
The Net Working Capital indicates that Technovator has €60 to cover its working capital needs.
2. BFR = Current assets – Short-term debts = €60 – €000 = €25
The Working Capital Requirement of Technovator Company is €35.
3. TN = FRNG – BFR = €60 – €000 = €35
The Net Cash of Technovator Company is €25.
4. Positive Net Cash Flow of €25 indicates that the company has excess funds after covering its working capital needs. This means that the company is in good financial health and can use these additional funds to invest in growth opportunities or to repay its debts.
5. A negative net cash position means that the company does not have enough cash to cover its short-term financial obligations. This is a sign of financial difficulties and can lead to serious problems such as the inability to pay suppliers or employees. To manage this risk, a company may seek to reduce costs, increase revenue, sell some of its assets or seek additional financing.
Summary of Formulas Used:
| Terminology | Formulas |
|---|---|
| Global Net Working Capital (FRNG) | (Permanent resources) – (Fixed assets) |
| Working Capital Requirement (WCR) | (Current assets) – (Short-term liabilities) |
| Net Cash (TN) | (FRNG) – (BFR) |
Application: The Golden Bread Bakery
States :
Boulangerie "Au pain Doré", a bakery established in Montpellier, had a turnover of €200,000 in 2021. VAT was 20%. Here are other financial details:
– The commercial margin made is €80,000.
– The operating result is €30,000.
– The company has permanent capital (stable resources) worth €50,000.
– Net fixed assets are worth €20,000.
– The company’s working capital requirement (WCR) is €15,000.
Work to do :
1. Calculate the Net Working Capital (NWC).
2. Calculate Net Cash (TN).
3. Determine whether the financial situation of the company according to the FRNG and the TN is healthy.
4. What is the interpretation of the operating result of €30,000 for the company?
5. How can the company improve its FRNG and TN?
Proposed correction:
1.
Net Working Capital (NWC) is determined by the difference between permanent capital and net fixed assets. In this case, NWC = Permanent Capital – Net Fixed Assets = €50,000 – €20,000 = €30,000.
2.
Net Cash Flow (NCF) is obtained by subtracting the WCR from the NCF. Therefore, NCF = NCF – WCR = €30,000 – €15,000 = €15,000.
3.
The company's financial situation is healthy because the TN is positive and the FRNG is higher than the WCR. Indeed, if the TN is positive, it means that there is a sufficient financial safety margin to meet the company's current obligations. Furthermore, a FRNG higher than the WCR indicates that stable resources finance not only fixed assets but also part of the operating cycle.
4.
A positive operating result, as is the case here with €30,000, indicates that the company is profitable in its core business. This means that the revenue generated from the sale of bread and other bakery products exceeds the direct and indirect costs associated with their production and sale.
5.
The company can improve its FRNG and TN by increasing its permanent capital (e.g., by increasing its capital or borrowing long-term) and/or by decreasing its net fixed assets and its WCR. For example, more efficient management of inventories and trade receivables can help reduce WCR.
Summary of Formulas Used:
| Formulas | Explanation |
|---|---|
| FRNG = Permanent Capital – Net Fixed Assets | Net Working Capital (NWC) measures the excess of permanent capital over fixed assets, i.e. the company's durable assets. |
| TN = FRNG – BFR | Net Cash Flow (NCF) measures the excess of the Working Capital Requirement (WCRR) over the Working Capital Requirement (WCRR), which gives an indication of the company's immediate liquidity. |
Application: TechnoShop Company
States :
TechnoShop is a company specializing in the sale of technological devices. Recently established, it is in the process of financial stabilization and wishes to understand and improve its financial situation. The company's financial data for the year 2021 are as follows:
– Net Working Capital (NRCC): €28
– Working capital requirement (WCR): €18
– Fixed assets: €30
– Short-term debts: €12
Work to do :
1. Calculate the company's Net Cash Flow (NCF).
2. What does the Global Net Working Capital (GNWC) represent?
3. What is the company's solvency level?
4. What does the Working Capital Requirement (WCR) represent?
5. How can the company increase its Net Cash Flow?
Proposed correction:
1. Net Cash Flow (NCF) is calculated by subtracting Working Capital Requirement (WCR) from Total Net Working Capital (TNWC). Therefore, NCF = TNWC – TWC = €28 – €000 = €18
2. Net Working Capital (NWC) represents the company's long-term financial resources after financing its fixed assets. It is calculated by subtracting all fixed assets from fixed assets.
3. The company's solvency level is assessed by the ratio FRNG / Short-term debts. Here, the ratio is €28 / €000 = 12. This means that the company has more than enough to meet its short-term debts.
4. Working Capital Requirement (WCR) is the company's financing requirement due to the gap between disbursements (purchases, expenses) and short-term receipts.
5. To increase its Net Cash, the company can increase its FRNG (for example by seeking new long-term financing or by selling non-strategic assets), or decrease its WCR (for example by increasing the efficiency of inventory and customer receivables management).
Summary of Formulas Used:
| Indicator | Formulas |
|---|---|
| Global Net Working Capital (FRNG) | FRNG = Stable resources – Fixed assets |
| Net Cash (TN) | TN = FRNG – BFR |
| Solvency | Solvency = FRNG / Short-term debts |
| Working Capital Requirement (WCR) | WCR = Current assets – Current liabilities |
Application: Leclerc Entrepreneur
States :
Entrepreneur Leclerc is a company specializing in the production of automatic coffee machines, located in France. Following a detailed analysis of the accounting documents of the current year, the following information was collected:
– Net Working Capital (NRCC): €350
– Working capital requirement (WCR): €180
In addition, the company took out a bank loan that generated interest of €10. The interest rate is 000%.
Work to do :
1. Calculate Net Cash Flow (NCF)
2. What is the company's ability to repay its loan?
3. What do these numbers mean for the financial health of the company?
4. What would be the impacts of an increase in the WCR?
5. If the FRNG decreases by 20%, what would be the effects on the company's total bill, particularly in terms of cash flow?
Proposed correction:
1. Net Cash Flow (NCF) is calculated by subtracting the WCR from the NCF. Therefore, NCF = NCF – WCR = €350 – €000 = €180
2. The company's ability to repay its loan is calculated by dividing the interest by the interest rate: Loan = Interest ÷ Interest rate = €10 ÷ 000% = €5 which is lower than the FRNG. The company therefore has the ability to repay its loan.
3. These figures imply that Entrepreneur Leclerc is in a good financial state since its cash flow is positive and it is able to repay its debts.
4. If the BFR increases, it means that current assets decrease or current liabilities increase, which could decrease financial health. This could therefore lead to a decrease in the TN that we have calculated.
5. If the FRNG decreases by 20%, this means that the capital available to cover the short-term needs of the company is also reduced, which could potentially lead to a decrease in the TN and therefore a tighter financial situation.
Summary of the formulas used:
| Formulas used | Explanations |
|---|---|
| TN = FRNG – BFR | Calculation of Net Cash Flow |
| Loan = Interest ÷ Interest Rate | Calculation of loan repayment capacity |
Application: Financial Management at Slick Motors
States :
Slick Motors is a company that manufactures and sells innovative electric bikes. The company has experienced rapid growth in terms of revenue and profitability over the past few years. However, they are facing concerns regarding their financial management, especially regarding Net Working Capital (NWC), Working Capital Requirement (WCR), and Net Cash Flow (NCF).
Here is the company's simplified balance sheet for the year 2020 (the amounts are in euros):
– Fixed assets: €300
– Stocks: €120
– Customer receivables: €80
– Active treasury: €50
– Total assets: €550
– Capital: €200
– Reserves: €50
– Loans from credit institutions: €100
– Suppliers: €120
– Cash flow liabilities: €80
– Total liabilities: €550
Work to do :
1. Calculate the FRNG.
2. Calculate the BFR.
3. Calculate the TN.
4. Interpret the results obtained.
5. Provide data to improve the financial management of the company.
Proposed correction:
1. FRNG is calculated by subtracting total fixed liabilities (Capital + Reserves + Borrowings) from total fixed assets. Therefore, FRNG = €300 – (€000 + €200 + €000) = -€50.
2. WCR is calculated by subtracting operating liabilities (Suppliers) from operating assets (Inventories + Accounts receivable). Therefore, WCR = (€120 + €000) – €80 = €000.
3. The TN is calculated by subtracting the BFR from the FRNG. Therefore, TN = -€50 – €000 = -€80.
4. A negative FRNG shows that the company finances a portion of its stable assets with operating debts. A positive WCR shows that the company must finance a portion of its current assets with its stable resources. Finally, a negative TN reveals that the company used its cash to finance its working capital requirement.
5. To improve financial management, the company could seek to reduce its inventories and improve its receivables management. These actions would help reduce the need for working capital. In addition, the company could seek to increase its stable resources by increasing its capital or taking out long-term loans.
Summary of Formulas Used:
| FRNG | = | Fixed assets – Stable liabilities |
| BFR | = | Operating assets – Operating liabilities |
| TN | = | FRNG – BFR |
Application: SuperResraurant Company
States :
The company SuperRestaurant, specialized in the sale of fast food, is expanding. To have a better visibility on their financial situation, they decided to analyze their Net Working Capital (NTWC), their Working Capital Requirement (WCR) and their Net Cash (NC).
Here are some of their recent financial data:
– Fixed assets: €150
– Stock: €30
– Customer debt: €45
– Share capital: €70
– Reserves: €80
– Long-term financial debts: €40
– Supplier debts: €20
– Tax and social debts: €15
Work to do :
1. Calculate the FRNG.
2. Calculate the BFR.
3. Calculate the TN.
4. Interpret the results obtained.
5. Propose improvement actions based on the results.
Proposed correction:
1. The FRNG is calculated using the following formula: (Capital + Reserves) – Fixed assets. In this case, for SuperRestaurant, this gives (€70 + €000) – €80 = €000.
2. The WCR is calculated using the formula: Stock + Customer receivables – Supplier payables – Tax and social security payables. For SuperRestaurant, this gives €30 + €000 – €45 – €000 = €20.
3. Net cash (NC) is the difference between the FRNG and the WCR, i.e.: €0 – €40 = -€000.
4. SuperRestaurant has a FRNG of €0, which means that it invests all its capital and reserves in its fixed assets. Its WCR is positive, which means that it finances part of its current needs with debt. Its TN is negative, indicating insufficient liquidity to cover its needs, which may indicate a solvency risk.
5. SuperRestaurant should seek to improve its cash management, by reducing its inventory or renegotiating payment terms with its customers or suppliers. It could also seek to increase its capital to strengthen its FRNG.
Summary of Formulas Used:
| Terms | Packages |
|---|---|
| FRNG | (Capital + Reserves) – Fixed assets |
| BFR | Stock + Customer receivables – Supplier payables – Tax and social security payables |
| TN | FRNG – BFR |
Application: ChallengeTech Company
States :
ChallengeTech, a company specializing in the sale of IT products, provides you with some of its financial data for the year 2021.
– Its overall net working capital (WWC) is €65.
– Its working capital requirement (WCR) is €45.
– Its current assets are valued at €95.
– His short-term debts amount to €58.
Work to do :
1. Calculate the net cash flow (NCF) of ChallengeTech Company and interpret the result.
2. Evaluate and interpret the solvency level of the company ChallengeTech.
3. If the company's working capital requirement increased by €10, what would be the impact on net cash flow?
4. What advice would you give to the company to improve its financial management?
5. What does the FRNG represent and what is its role?
Proposed correction:
1. Net cash (NC) is calculated by the formula: NC = FRNG – BFR. Therefore, NC = €65 – €000 = €45. ChallengeTech therefore has excess net cash, which indicates good financial health in the short term.
2. Solvency is determined by the ratio of current assets to short-term liabilities. That is, Solvency = Current assets ÷ Short-term liabilities = €95 ÷ €000 = 58. This indicates that the company can meet its short-term liabilities more than once with its current assets. It therefore has good solvency.
3. If the WCR increased by €10, this would mean that the company would need more cash to meet its short-term obligations. Thus, the Net Cash would deteriorate from €000 to €20 (€000 – €10).
4. To improve its financial management, the company could seek to reduce its WCR by improving its inventory management, speeding up customer collections or delaying supplier payments. It could also seek to increase its working capital by increasing its permanent capital (long-term borrowing, capital increase).
5. The FRNG represents the sustainable financial resource (equity + long-term debt) that finances part of the current assets. It plays a key role in financing the company's current activity.
Summary of Formulas Used:
| Spas | Formulas |
|---|---|
| TN (Net Cash) | FRNG – BFR |
| Solvency | Current assets ÷ Current liabilities |
Application: Aquafin Company
States :
Aquafin is a company specializing in the marketing of bottled water. Its managers want to improve their financial management and need your expertise to analyze certain aspects. The financial data for the previous year are as follows:
Net Working Capital (NWC): €8000
Working Capital Requirement (WCR): €5000
Net Cash (NC): €1000
Work to do :
1. What is the company's cash position?
2. How can we interpret the level of Working Capital Requirement (WCR) of the company?
3. Aquafin is considering increasing its FRNG to €9, what do you think?
4. What advice would you give to improve the company's cash flow situation?
5. What is the Working Capital Coverage Ratio and how can it be used to analyze the financial situation of Aquafin?
Proposed correction:
1. The company's cash position is calculated as follows: FRNG – BFR = TN. Therefore, €8000 – €5000 = €3000. The company's net cash is therefore €3000, not €1000. This situation shows that the company has more stable financial resources (FRNG) than working capital requirements, so it has a certain margin of safety.
2. The company's WCR is €5000. This means that the company needs €5000 to cover the payment gaps between the cash inflows and outflows from its current business. If this need is covered by the FRNG, it is a good thing because it means that the company can cope with the cash flow gaps inherent in its business.
3. If Aquafin increases its FRNG to €9000, this could further improve its financial flexibility and cash flow. It could also enable the company to cope with a possible increase in its activity requiring more funds.
4. To improve the cash flow situation, the company could:
- increase the FRNG by increasing its equity (by capital increase, for example) or by reducing its fixed assets.
-or reduce its WCR by optimizing the operating cycle, for example by negotiating longer payment terms with its suppliers or by reducing its customers' payment terms.
5. The WCR Coverage Ratio measures the number of times the FRNG covers the WCR. It is calculated as follows: FRNG ÷ WCR. For Aquafin, it is therefore €8000 ÷ €5000 = 1,6. This means that its FRNG covers 1,6 times its WCR, which is rather reassuring for the company's creditors. The higher this ratio, the more room the company has to cope with cash flow gaps related to its activity.
Summary of Formulas Used:
| Concept | Formulas |
|---|---|
| Net Cash (TN) | FRNG – BFR |
| Working Capital Coverage Ratio | FRNG ÷ BFR |
Application: GearsTech Company
States :
GearsTech Company, which specializes in the production and sale of technological components, has approached you as a financial management expert to help interpret certain data. The documents provided present the following information:
– FRNG (Net Working Capital) for the current year: €59
– BFR (Working Capital Requirement) for the current year: €38
– Net cash flow (NC) from the previous year: €15
In addition, the manager informs you that the FRNG planned for the following year is €64 and that his objective is to increase the Net Cash by at least 000% in the next financial year.
Work to do :
1- Calculate the net cash flow for the current year.
2- What does this indicate about the financial situation of the company?
3- What would be the Working Capital Requirement necessary to achieve the manager's objective for the TN of the following year (increase of at least 10%)?
4- Is it possible for the company to achieve this objective with the FRNG planned for the following year?
5- What adjustments can be proposed to the manager to achieve his objective?
Proposed correction:
1- Net Cash (NC) is calculated using the formula NC = FRNG – BFR. In this case, NC = €59 – €000 = €38.
2- In financial management, a positive balance indicates good liquidity. Indeed, GearsTech generates enough liquidity to cover its short-term financing requirement (WCR).
3- To obtain a 10% increase in net cash, we would need TN = €21 x 000 = €1,10. Then, by taking the formula for calculating TN and isolating the WCR, we obtain WCR = FRNG – TN. Which gives the necessary WCR = €23 – €100 = €64.
4- Given that the WCR required to achieve the objective is higher than the WCR for the current year and lower than the FRNG planned for the following year, the company would be able to achieve its objective.
5- To achieve this cash flow in the following year, the manager could consider strategies to reduce the company's WCR. For example, he could negotiate longer payment terms with suppliers or improve inventory rotation to reduce the number of days of inventory.
Summary of Formulas Used:
| Formulas | Description |
|---|---|
| TN = FRNG – BFR | This formula is used to calculate Net Cash. |
| FRNG (next year) – new TN = BFR required | This formula is used to determine the working capital requirement needed to achieve a defined net cash flow target. |
Application: ABC Company
States :
ABC Company specializes in the manufacturing and distribution of high-end electronic products. The company has experienced constant growth as a result of innovation and the constant evolution of market demands. The company's financial results for the year 2021 are as follows:
– Overall net working capital (FRNG): €275
– Working capital requirement (WCR): €125
– Net cash flow (TN): €75
Work to do :
1. What is the company's financial situation?
2. What are the consequences if the BFR exceeds the FRNG?
3. How can the net cash position be improved?
4. What would be the impact of an increase in WCR on net cash?
5. How can the company maintain a FRNG higher than its WCR?
Proposed correction:
1. The financial balance of the company is determined by the difference between the net working capital (NTWC) and the working capital requirement (WCR). In this case, the NTWC (€275) is greater than the WCR (€000), which indicates that ABC Company has enough short-term funds to cover its operating capital requirements. Thus, the company has a positive net cash position (TN = NTWC – WCR) of €125.
2. If the BFR exceeds the FRNG, it means that the company needs more funds in the short term to support its business operations. As a result, the company's net cash would be negative, which could lead to liquidity difficulties and make the company unable to meet its short-term financial commitments.
3. To improve the net cash position, the company could increase its FRNG through an increase in long-term financing (long-term borrowing or increase in equity) or by decreasing its WCR by improving the efficiency of its inventory management, trade receivables and trade payables.
4. An increase in the WCR would have a negative impact on net cash. Indeed, if the WCR increases faster than the FRNG, net cash will decrease, which could lead to liquidity problems.
5. To maintain a FRNG higher than its WCR, the company can increase its long-term financing or reduce its working capital requirement. Effective management of WCR requires optimal management of inventories, customer receivables and supplier payables.
Summary of Formulas Used:
| Concept | Formulas |
|---|---|
| Net Cash (TN) | TN = (FRNG – BFR) |
Summary of Formulas Used:
| FRNG | Net Working Capital = Stable Resources (equity + medium/long term financial debts) – Fixed Assets |
| BFR | Working Capital Requirement = Current Assets – Short Term Debts |
| TN | Net Cash = FRNG – WCR |
| Interpretation | Interpretation based on the different elements obtained and the given context |
Application: French-speaking travel agency TourNow
States :
TourNow is a renowned French-speaking travel agency. At the end of the financial year 2020, the company's financial statements are:
– Equity: €200,
– Medium/long term financial debts: €50,
– Fixed assets: €120,
– Current assets: €80,
– Short-term debts: €40.
Work to do :
1. Calculate the Net Working Capital (NWC).
2. Calculate the Working Capital Requirement (WCR).
3. Calculate Net Cash (TN).
4. Interpret the results of the calculations.
5. What actions could the company take to improve its cash flow?
Proposed correction:
1. The Net Working Capital (NWC) is calculated as follows: NWC = Fixed Resources – Fixed Assets. For our case: NWC = (€200 + €000) – €50 = €000.
2. The Working Capital Requirement (WCR) is calculated by subtracting Short-Term Debts from Current Assets. For our case: WCR = €80 – €000 = €40.
3. Net Cash Flow (NCF) is obtained by subtracting the WCR from the NCF. So for our case, we have: NCF = €130 – €000 = €40.
4. Positive FRNG indicates that the company has enough capital to finance its fixed assets. A positive BFR indicates that part of the stable resources is used to finance the operating cycle. Finally, a positive TN means that the company has a safety margin to finance its future needs.
5. To improve its cash flow, the company could consider increasing its equity, for example by seeking investors, reducing its current assets (stocks for example) or reducing its fixed assets.
Summary of Formulas Used:
| FRNG | Net Working Capital = Fixed Resources – Fixed Assets |
| BFR | Working Capital Requirement = Current Assets – Short Term Debts |
| TN | Net Cash = FRNG – WCR |
| Interpretation | Interpretation based on the different elements obtained and the given context |