FRNG: 11 Corrected Exercises to master it in BTS MCO

Welcome to this article dedicated to FRNG exercises (overall net working capital). You will find here no less than 11 detailed corrected management exercises on the calculation of the global net working capital (frng) for Operational Management.

By the end of this article, you will know an expert in calculating overall net working capital.

Application: ElectroTech Company

States :

ElectroTech is a distributor of electrical equipment. Its policy is to maintain a positive Net Working Capital (NWC) to ensure the liquidity of the company in the short term.

Here are some key figures for the company for the year 2020:

– Fixed assets: €1
– Stock: €200
– Customer receivables: €300
– Supplier debts: €200
– Other debts: €100
– Equity: €1
– Long-term financial debts: €600

Work to do :

1. Calculate the Total Net Working Capital (TNWC) of the company ElectroTech for the year 2020.
2. Analyze the financial situation of the company in the short term.
3. Propose scenarios to improve the company's FRNG.
4. Assess the potential impact of these scenarios on the company's cash flow.
5. Provide final advice on these scenarios to company management.

Proposed correction:

1. The FRNG is calculated by subtracting long-term debts and short-term debts from all assets of the company. We obtain: (1 + 500 + 000) – (200 + 000) = €300.

2. With a positive FRNG of €200, the company ElectroTech has a sufficient safety margin to cover its short-term financing needs.

However, this margin could be reduced in the event of an increase in short-term debts or a reduction in receivables.

3. To improve the FRNG, ElectroTech could consider several scenarios: increase trade receivables by accelerating sales, reduce inventory to free up capital, reduce trade payables by negotiating better terms with them, or increase equity by attracting new investors.

4. These scenarios could improve the company's cash flow by increasing cash inflows and reducing cash outflows.

However, they could also present risks: increasing sales could put pressure on the company's production capacity, reducing inventory could make it more vulnerable to an unexpected increase in demand, reducing supplier debt could deteriorate relations with them, and increasing equity could dilute the control of current shareholders.

5. In conclusion, all these strategies have their advantages and disadvantages. ElectroTech should analyze them carefully and choose the ones that are most suitable for its specific situation.

Summary of Formulas Used:

Concept	Formulas
Global Net Working Capital (FRNG)	Fixed assets + Stock + Accounts receivable – Accounts payable – Other debts – Equity – Long-term financial debts
FRNG Improvement	Increase accounts receivable, reduce inventory, reduce accounts payable, increase equity

Application: Technobiz Company

States :

Technobiz is a company specializing in the sale of technological products such as computers, smartphones, tablets, etc. For the financial year 2022, the company plans to sell a new computer model. The company recently received a detailed financial report from its finance department and wants more information to make informed decisions.

The company plans to sell the new computer at a price of €1200 excluding VAT, and it purchases it from the manufacturer at a price of €800 excluding VAT. The company hopes to sell 10000 units in 2022. The VAT rate is 20%.

Work to do :

1. What is the total amount of forecast sales excluding and including VAT for the year 2022?
2. What is the total cost of forecast purchases excluding tax for the year 2022?
3. Calculate the forecast overall margin for the year 2022.
4. Calculate the margin rate and markup rate for the computer.
5. If the company decides to increase its selling price by 10%, how does this affect the margin and markup rates?

Proposed correction:

1. The total amount of forecast sales excluding VAT for the year 2022 is €12 (€000 x 000). The amount including VAT is €1200 (€10000 x 14).

2. The total cost of forecast purchases excluding tax for the year 2022 is €8 (€000 x 000).

3. The overall margin for the year 2022 is €4 (€000 – €000).

4. The margin rate is 50% ([€1200 – €800] ÷ €800 x 100) and the markup rate is 33,33% ([€1200 – €800] ÷ €1200 x 100).

5. If the selling price increases by 10%, the new selling price would be $1320. Therefore, the new margin would be $520 per computer, or a total of $5 for the year. The new margin rate would be 200% ([$000 – $65] ÷ $1320 x 800) and the markup rate would be 800% ([$100 – $39,39] ÷ $1320 x 800).

Summary of Formulas Used:

Sales excluding VAT	Selling price excluding VAT x Quantity sold
Sales including VAT	Sales excluding VAT x (1 + VAT rate)
Excl. VAT purchases	Purchase price excluding VAT x Quantity sold
Overall Margin	Sales excluding VAT – Purchases excluding VAT
Margin rate	(Sale price excluding VAT – Purchase price excluding VAT) ÷ Purchase price excluding VAT x 100
Brand taxes	(Sale price excluding VAT – Purchase price excluding VAT) ÷ Sale price excluding VAT x 100

Application: Elektra Vehicle Sales Company

States :

ELEKTRA is a company specializing in the sale of electric cars. In January 2021, it carried out the following operations:

– Purchase of 20 Tesla Model X vehicles for a total amount of €1 excluding VAT.
– Sale of 15 cars previously purchased for €1 excluding VAT.

For the company's accounting, the basis is the purchase cost excluding tax and the sale price excluding tax. The applicable VAT rate is 20%.

Work to do :

1. Calculate the purchase cost excluding tax per vehicle.
2. Calculate the sales price excluding tax per vehicle.
3. What is the gross margin made on each vehicle sold?
4. Calculate the margin rate of Elektra Company.
5. Calculate the markup rate of Elektra Company.

Proposed correction:

1. Purchase cost excluding tax per vehicle = Total amount of purchases ÷ Number of vehicles purchased = €1 / 500 = €000.

2. Sales price excluding tax per vehicle = Total sales amount ÷ Number of vehicles sold = €1 / 950 = €000.

3. Gross margin per vehicle = Selling price excluding tax per vehicle – Purchase cost excluding tax per vehicle = €130 – €000 = €75.

4. Margin rate = ((Selling price excluding tax – Purchase cost excluding tax) ÷ Purchase cost excluding tax) x 100 = ((€130 – €000) ÷ €75) x 000 = 75%.

5. Markup rate = ((Selling price excluding VAT – Purchase cost excluding VAT) ÷ Selling price excluding VAT) x 100 = ((€130 – €000) ÷ €75) x 000 = 130%.

Summary of Formulas Used:

Packages	Descriptions
Excl. VAT purchase cost/unit = Total excl. VAT purchase cost / quantity	To obtain the unit purchase cost excluding tax, divide the total purchase cost excluding tax by the total quantity purchased.
Selling price excluding VAT/unit = Total sales excluding VAT / quantity sold	To obtain the unit sales price excluding tax, divide the total sales excluding tax by the total quantity sold.
Gross margin/unit = Selling price excluding VAT/unit – Purchase cost excluding VAT/unit	To obtain the unit gross margin, the unit purchase cost excluding tax is deducted from the unit selling price excluding tax.
Margin rate = ((Selling price excluding VAT – Purchase cost excluding VAT) ÷ Purchase cost excluding VAT) x 100	To calculate the margin rate, subtract the pre-tax purchase cost from the pre-tax sale price, divide the result by the pre-tax purchase cost and multiply by 100 to obtain a percentage.
Markup rate = ((Selling price excluding VAT – Purchase cost excluding VAT) ÷ Selling price excluding VAT) x 100	To calculate the markup rate, subtract the pre-tax purchase cost from the pre-tax selling price, divide the result by the pre-tax selling price and multiply by 100 to obtain a percentage.

Application: Marie's Bakery

States :

Marie's Bakery is a small business that produces and sells breads and pastries. Marie wants to know her financial situation. She has the following information for the last month:

– Quantity of baguettes sold: 4000
– Purchase price excluding tax (PA HT) of a baguette: €0,20
– Retail price excluding tax (PV HT) of a baguette: €0,90

Work to do :

1. Calculate Marie's overall margin for the last month.
2. Calculate Marie's margin rate.
3. Calculate Mary's mark rate.
4. Suppose Mary wants to increase her overall margin by 10% next month. How many baguettes should she sell?
5. Suppose the purchase price of baguettes increases by 10%. How will this affect Marie's profit margin?

Proposed correction:

1. The unit margin is calculated by subtracting the purchase price excluding tax (PAHT) from the sale price excluding tax (PVHT). Thus, the unit margin is €0,90 – €0,20 = €0,70. Then, to obtain the overall margin, we multiply the unit margin by the quantity sold, i.e. €0,70 x 4000 = €2800. Therefore, Marie's overall margin for last month is €2800.

2. The margin rate is calculated by subtracting the HT PA from the HT PV, then dividing the result by the HT PA then multiplying by 100 to obtain a percentage. Thus, the margin rate is ((€0,90 – €0,20) ÷ €0,20) x 100 = 350%. Therefore, Marie achieves a margin rate of 350%.

3. The markup rate is calculated by subtracting the HT PA from the HT PV, then dividing the result by the HT PV then multiplying by 100 to obtain a percentage. Thus, the markup rate is ((€0,90 – €0,20) ÷ €0,90) x 100 = 77,8%. Therefore, Marie achieves a markup rate of 77,8%.

4. To increase her overall margin by 10%, Mary needs to increase the number of baguettes she sells. If her current overall margin is €2800, she would like it to be €2800 x 1,10 = €3080. Since her margin per baguette is €0,70, she would need to sell €3080 ÷ €0,70 = 4400 baguettes. So, to increase her overall margin by 10%, Mary would need to sell 4400 baguettes.

5. If the purchase price of baguettes increases by 10%, the new AP HT would be €0,20 x €1,10 = €0,22. Using the margin rate formula again, we get ((€0,90 – €0,22) ÷ €0,22) x 100 = 309%. So, if the purchase price of baguettes increases by 10%, Marie's margin rate would be 309%, a decrease from the initial margin rate of 350%.

Summary of Formulas Used:

Packages	Explanations
Overall margin = Unit margin x quantity sold	The overall margin is determined by multiplying the margin generated on each unit by the total number of units sold.
Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100	The margin rate gives us the percentage of profit made in relation to the purchase price excluding taxes.
Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100	The markup rate allows us to know the percentage of profit compared to the sales price excluding tax.

Application: FRNG at Budding Enterprises

States :

Budding Enterprises, an online service provider, is preparing its budgets for the upcoming fiscal year. Management wants to develop a solid financial plan to ensure stable and healthy growth, and to do so, it seeks your operational management expertise to help establish its overall net working capital.

After a careful analysis of the company's financial statements, you have collected the following data:

– Short term debts amount to €8000
– Trade receivables are estimated at €10
– The stocks are valued at €12
– Long-term debts are €15
– The company’s cash flow is €7000.

Work to do :

1. Define the Net Working Capital (NWC).
2. Calculate the FRNG of Budding Enterprises.
3. Explain how the FRNG influences a company's activity.
4. Explain what a negative FRNG means.
5. Outline what steps Budding Enterprises can take to improve its FRNG if needed.

Proposed correction:

1. Net Working Capital (NWC) is a financial indicator that measures a company's ability to finance its current activities. It is the difference between its current assets (inventories, receivables and cash) and its short-term debts.

2. Budding Enterprises' FRNG is calculated as follows:

FRNG = Current assets – Short term liabilities
FRNG = (Inventories + Accounts Receivable + Cash) – Short-term Debts
FRNG = (€12 + €000 + €10) – €000
FRNG = €29 – €000
FRNG = €21

3. The FRNG influences a company's activity by showing whether it has sufficient current resources to cover its short-term debts.

A high FRNG means that the company is well capitalized, which can reassure creditors and shareholders, increase the company's market credit, etc.

4. A negative FRNG means that the company does not have enough current assets to cover its short-term liabilities.

This may suggest that the company is undercapitalized or has liquidity problems, signaling a potential financial risk to creditors and investors.

5. Budding Enterprises can take several steps to improve its FRNG if necessary. These may include increasing its sales and therefore its trade receivables, optimizing inventory management, attracting more capital through means such as increasing its shareholding, issuing shares or obtaining long-term loans, and minimizing short-term debt as much as possible.

Summary of Formulas Used:

Formulas	Description
FRNG = Current assets – Short term liabilities	This formula is used to calculate the Net Working Capital

Application: BioZen Store

States :

You work as a financial management advisor for the BioZen store, a chain of organic food stores located in several cities in France. Your task is to analyze the financial structure of the company and guide the owner to improve the financial management of the store.

Here is an excerpt from the company's simplified balance sheet for the year 2020:

• Fixed Assets: €350
• Current assets: €175
• Stable Resources (Equity + long-term debts): €400
• Current Liabilities (Short-term debts): €130

Work to do :

1. Calculate the working capital requirement (WCR).
2. Calculate the general net working capital (GNWC).
3. Calculate the amount of Cash.
4. What is the financial situation of the company in terms of liquidity?
5. If BioZen wants to improve its financial situation, what means could it consider?

Proposed correction:

1. BFR = Current Assets – Current Liabilities = €175 – €000,00 = €130.

2. FRNG = Stable Resources – Fixed Assets = €400 – €000,00 = €350.

3. Cash = FRNG – WCR = €50 – €000,00 = €45.

4. The company's financial situation is precarious in terms of liquidity. Indeed, with a cash position of €5, the company has low financial reserves to deal with unforeseen events.

5. To improve its financial situation, BioZen could increase its stable resources by increasing its equity (capital increase, incorporation of reserves) or by long-term debt.

Then, it could reduce its working capital requirement by optimizing the management of its current assets (stocks, customer receivables) and its current liabilities (supplier debts, tax and social security debts).

Summary of Formulas Used:

Concept	Formulas
Working capital requirement (WCR)	BFR = Current Assets – Current Liabilities
General Net Working Capital (GNWC)	FRNG = Stable Resources – Fixed Assets
Treasury	Treasury = FRNG – BFR

Application: OptimaPlus Company

States :

OptimaPlus, a company specializing in the retail trade of household appliances, is considering expanding its business by adding a range of state-of-the-art televisions to its assortment. The company's financial director asks you to analyze some financial data before making a decision.

– Purchase price excluding tax (PA HT) of a television: €400
– Estimated quantity of televisions for sale: 600
– VAT rate: 20%
– Expected sale price excluding tax (PV HT): €600

Work to do :

1. Calculate the total purchase cost (total excluding VAT) of the televisions.
2. Calculate the total cost of VAT to be added.
3. Calculate the total amount of sales envisaged (total PV excluding VAT) of the televisions.
4. Calculate the expected overall margin.
5. Calculate the expected margin rate and markup rate.

Proposed correction:

1. The total purchase cost (total HT PA) of televisions corresponds to the multiplication of the unit purchase cost by the estimated quantity to be sold. Total HT PA = HT PA x quantity = €400 x 600 = €240

2. The total cost of VAT is calculated by multiplying the total purchase cost by the VAT rate: total cost of VAT = total VAT excluding VAT x VAT rate = €240 x 000% = €20

3. The total amount of sales envisaged (total PV HT) corresponds to the multiplication of the unit sales price by the estimated quantity to be sold: Total PV HT = PV HT x quantity = €600 x 600 = €360

4. The expected overall margin is calculated by subtracting the total purchase cost from the total sales amount envisaged: Overall margin = Total PV HT – Total PA HT = €360 – €000 = €240

5. The expected margin rate is calculated using the following formula: margin rate = ((PV HT – PA HT) ÷ PA HT) x 100 = ((€600 – €400) ÷ €400) x 100 = 50%
The markup rate is calculated as follows: markup rate = ((PV HT – PA HT) ÷ PV HT) x 100 = ((€600 – €400) ÷ €600) x 100 = 33,3%

Summary of Formulas Used:

Formulas	Explanation
Total HT PA = HT PA x quantity	For the calculation of the total purchase cost excluding tax
VAT = Total VAT excl. VAT x VAT rate	For the calculation of the total cost of VAT
Total PV HT = PV HT x quantity	For the calculation of the total amount of sales excluding tax envisaged
Overall margin = total PV excluding tax – total PA excluding tax	For the calculation of the overall margin
Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100	For the calculation of the margin rate
Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100	For the calculation of the mark rate

Application: TechnoWorld Company Financial Management

States :

TechnoWorld is a company that specializes in selling electronic gadgets. TechnoWorld's CFO stated that the company expects a financing requirement of €150 for the following year. He also indicated that the company already has €000 in reserves. Therefore, it is planned to finance the rest by using a bank loan. The interest rate of the loan is 75%.

TechnoWorld's average overall margin is 35% on all products. The applicable VAT rate is 20%. The company sells 10 products per year on average. The average unit purchase price excluding VAT of a product is €000.

Work to do :

1. How much financing is needed in addition to the reserve to meet the company's needs?
2. What is the total cost of the loan at the end of the year?
3. What is the amount of the overall margin in euros generated by the company each year?
4. What is the company's markup rate?
5. In the event that the company could not obtain the loan, how many additional units would it have to sell to cover the financing gap (assuming that the VAT rate and the overall margin remain constant)?

Proposed correction:

1. The amount of financing required is obtained by subtracting the reserve from the company's financing requirement. This gives: €150 – €000 = €75.

2. The total cost of the loan at the end of the year is calculated by multiplying the loan amount by the interest rate. This gives: €75 x 000% = €5.

3. The amount of the overall margin in euros is calculated by multiplying the unit margin by the quantity sold. The unit margin is obtained by multiplying the purchase price excluding tax by the margin rate. This gives: (35% x €100) x €10 = €000.

4. The markup rate is calculated by dividing the margin amount by the sales price excluding tax and multiplying by 100. This gives: (€350 ÷ (€000 x 100)) x 10 = 000%.

5. If the company cannot obtain the loan, it should sell an additional quantity of products to cover the financing gap.

The number of additional units is given by dividing the loan amount by the unit margin amount. This gives: €75 ÷ (000% x €35) = 100 units (rounded up to the next unit).

Summary of Formulas Used:

Formulas	Description
Funding required = Need – Reserve	This formula is used to calculate the amount needed in addition to the reserve to cover the company's financing needs.
Cost of loan = Loan amount x Interest rate	This formula is used to calculate the total cost of the loan at the end of the year.
Overall margin = Unit margin x Quantity sold	This formula is used to calculate the total amount of margin set up by the company.
Brand rate = ((Sales price excluding tax – Purchase price excluding tax) ÷ Sales price excluding tax) x 100	This formula is used to calculate the company's markup rate.
Additional Quantity = Loan Amount ÷ Unit Margin	This formula is used to calculate the additional quantity the company would have to sell to cover the financing gap if it cannot obtain the loan.

Application: TechSolutions Company

States :

TechSolutions, a technology company, has had an interesting financial year. CFO Gerard is asking for your help in analyzing some financial data. Here is some information about TechSolutions' financial situation:

– Equity: €150
– Medium and long-term financial debts: €80
– Fixed assets: €200
– Stocks: €60
– Customer receivables: €40
– Supplier debts: €30

Work to do :

1. Calculate the Net Working Capital (NWC).
2. Calculate the Working Capital Requirement (WCR).
3. Determine the company's cash flow.
4. Analyze the company's situation taking into account the previous calculations.
5. Propose measures to improve the financial situation of the company.

Proposed correction:

1. The FRNG is calculated by: Equity + Medium and long-term financial debts – Fixed assets, i.e. €150 + €000 – €80 = €000.

2. The WCR is calculated as follows: Stocks + Customer receivables – Supplier payables, i.e. €60 + €000 – €40 = €000.

3. The Treasury (TFR) is obtained by taking FRNG – BFR or €30 – €000 = -€70.

4. Analysis of financial information reveals that the company is in financial difficulty. This situation is illustrated by negative cash flow, which means that the company has more resource requirements to finance its current activity (WCR) than available resources (FRNG).

5. To improve the financial situation of the company, different measures could be considered. For example, the company could seek to increase its equity by looking for new investors.

The company could also try to reduce its working capital requirement by reducing its stocks or improving the recovery of its customer receivables.

Summary of Formulas Used:

Concept	Formulas
FRNG (Global Net Working Capital)	Equity + Medium and long-term financial debts – Fixed assets
BFR (Working Capital Requirement)	Inventories + Customer receivables – Supplier debts
TFR (Treasury)	FRNG – BFR

Application: Bakery Pastry Delice

States :

Boulangerie Pâtisserie Delice is a craft business known in its locality for its quality of service and authentic products. The management decided to review its financial management strategy based on precise calculations. It looked at the operational management of the March operations, which mainly concern the sale of baguettes and croissants.

The costs are as follows:
– Unit purchase price excluding tax of the baguette: €0,50
– Unit selling price excluding tax of the baguette: €1,00
– Quantity of baguettes sold: 5000

– Unit purchase price excluding tax of the croissant: €0,30
– Unit selling price excluding tax of the croissant: €0,60
– Quantity of croissants sold: 3000

Work to do :

1- Calculate the overall margin on the baguette.
2- Calculate the margin rate on the baguette.
3- Calculate the overall margin on the croissant.
4- Calculate the margin rate on the croissant.
5- Compare and analyze the results.

Proposed correction:

1- Overall margin on the baguette = Unit margin x quantity sold = (€1 – €0,50) x 5000 = €2500

2- Margin rate on the baguette = ((PV HT – PA HT) ÷ PA HT) x 100) = ((1 € – 0,50 €) ÷ 0,50 €) x 100 = 100%

3- Overall margin on the croissant = Unit margin x quantity sold = (€0,60 – €0,30) x 3000 = €900

4- Margin rate on the croissant = ((PV HT – PA HT) ÷ PA HT) x 100) = ((0,60 € – 0,30 €) ÷ 0,30 €) x 100 = 100%

5- The results show that the company makes a 100% margin on each product sold. However, it makes a higher overall margin on baguettes due to higher sales volumes.

Summary of Formulas Used:

concepts	Packages
Overall margin	Unit margin x Quantity sold
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100)

Application: TechRUS Electronics Company

States :

TechRUS company is a company that sells electronic products. On January 1, 2020, the following data was recorded:

– Purchase Price Excluding Tax (PA HT) of a camera: €150
– Transport costs related to the purchase of these products: €1
– Storage costs for products: €500
– Expected retail price (excluding VAT) of the camera: €250
– Quantity of cameras purchased: 200 units
– Quantity of cameras sold: 180 units

The VAT rate is 20%.

Work to do :

1. Calculate the unit purchase cost of the camera.
2. Calculate the total cost of purchasing the cameras.
3. Calculate the amount of VAT on the sale price.
4. Calculate the overall margin made on the sale of cameras.
5. Calculate the margin rate obtained on this sale.

Proposed correction:

1. Unit purchase cost = (PA excluding VAT + Transport costs + Storage costs) ÷ Quantity purchased = (€150 + €1 + €000) ÷ 500 = €200

2. Total purchase cost = Unit purchase cost x Quantity purchased = €157,5 x 200 = €31
3. VAT on PV = PV excluding VAT x VAT rate = €250 x 20% = €50

4. Overall margin = (Sales price excluding VAT – Unit purchase cost) x Quantity sold = (€250 – €157,5) x 180 = €16

5. Margin rate = ((PV HT – PA HT) ÷ PA HT) x 100 = ((250 € – 150 €) ÷ 150 €) x 100 = 66,67%

Summary of Formulas Used:

Formulas	Explanation
Unit purchase cost = (PA HT + Transport costs + Storage costs) ÷ Quantity purchased	This formula is used to calculate the unit purchase cost of products.
Total purchase cost = Unit purchase cost x Quantity purchased	This formula is used to calculate the total cost of purchasing products.
VAT on PV = PV excluding VAT x VAT rate	This formula is used to calculate the amount of VAT on the sale price.
Overall margin = (Sales price excluding VAT – Unit purchase cost) x Quantity sold	This formula is used to calculate the overall margin made on the sale of products.
Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100	This formula is used to calculate the margin rate achieved on the sale of products.