The Working Capital Requirement (WCR)

WCR is the balance between the portion of current assets and the portion of current liabilities which are directly and exclusively associated with the operating cycle

[purchasing - wip storage - production - finished goods storage - sales - collection]

It represents the funds necessary to run the daily operations.

WCR increases with the firm's sales even if :

same inventory turnover
same collection period
same suppliers' credit terms

A firm in a period of growth should expect an increase of its WCR

As a consequence :

the induced investment should be considered as an integral part of the firm's CAPEX program in any new production investment project

If :

WC represents the funds available after we have financed the long term assets, to work in the operating cycle of the company

and if :

WCR measure the funds necessary to finance this operating cycle,

the Balance Sheet can be viewed as a dialogue between WC and WCR.

WC says : how much I bring to the operating cycle ?

WCR answers : how much I need for the operating cycle ?

The difference between WC & WCR is the Net Cash Position (NCP).

NET CASH POSITION = WC - WCR

Finally, the WCR change with the seasonal activity of the business.

 

Sources :

Understanding Financial Statements, 1999, Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University.

Interpreting and using Financial Statements, 1999, Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University

Corporate Finance Course, Bernard Jaquier, Professor in Economics & Finance, Lausanne, Switzerland, 2024