You're probably wondering how to interpret your operating cash flow and WCR. These two indicators are of real importance in monitoring your financial management.
Operating cash flow represents the net cash flow from the Company's usual operations (excluding its investment and financing operations).
It is a company's real capacity to invest
= Gross Operating Profit +/- Change in WCR
The change in cash retention points, represented by the change in Working Capital Requirement (WCR), needs to be neutralised.
This change may be > 0 (increase in working capital) or < 0 (increase in working capital).
....................... Key indicator
Operating cash flow rate
= Operating cash flow / Turnoverx100
This is a company's
of a company to invest
ASSESSING THE LEVEL OF WORKING CAPITAL
1) Impact of an increase in activity on WCR
When a company grows, it automatically increases its WCR because it mobilises more cash:
With new customers, who will pay several weeks later, thereby increasing trade receivables.
In the storage of raw materials and finished goods. In order to increase production, the company buys and stocks more.
L’augmentation du BFR n’est donc pas un signe de mauvaise santé d’une entreprise. Cela peut avoir des origines diverses comme le besoin d’adaptation de l’entreprise à de nouveaux marchés, une modification des équilibres financiers ou encore un changement de stratégie, …
Cependant une augmentation significative du BFR nécessite toujours une surveillance accrue pour s’assurer de son financement et de sa maîtrise.
SOME GOOD PRACTICES
You need to be careful not to make hasty judgements, because although an increase in working capital requirements (WCR) often rhymes with financial difficulties, this is not always true. It all depends on the company's situation.
So you need to analyse your WCR, understand it and optimise it.
The first rule to be aware of is that it's best to avoid waiting until you have cash flow problems before dealing with WCR, because it's a process that often takes time and energy.
If you want to manage your working capital requirements properly, you need to pay attention to the following points:
Up-to-date accounts (particularly accounts receivable)
Good stock management, requiring rigorous logistical and industrial organisation
Management of customer receivables by limiting customer payment times (rapid processing of invoices, reminders, collection), etc.
Supplier management by negotiating payment terms as effectively as possible.
Choosing how to finance working capital requirements (bank overdraft, Dailly assignment, factoring).
In the event of an emergency: don't forget to make rapid and drastic cuts to the company's living expenses by targeting items that will make costs more variable: travel expenses, subcontracting costs, etc.
Reducing the company's cost of living is often difficult for the company director to achieve.
In other words, managers need to be careful not to get carried away by reassuring forecasts, which often prevent them from taking radical action. To get through this, they need to rely on the reality of the figures to put the situation on a sounder footing before they can think about resuming business.
Drawing up a financial forecast makes it possible to measure the expected change in working capital and set targets to offset any unfavourable trends.
You also need to know how to spread the risks by diversifying your partners at all levels:
Avoid large customers who, in the event of default, could jeopardise the business
Avoid single suppliers who could alter the balance of the business if they change their policy
Avoid having a single financial partner who can "cut off funds" in a matter of days.
In a business, and particularly in VSEs and SMEs, cash flow needs to be the focus of collective attention. It concerns all departments and all employees:
The sales department plays an important role in payment terms. In particular, it can influence its customers' payment terms,
The purchasing department can negotiate prices and payment terms with suppliers,
The administration department can optimise cash flow (setting up indicators, using discounting).
Logistics can focus on optimising stock rotation.
To implement effective cash management, management needs to raise awareness throughout the company by demonstrating its desire to make savings.
........... WCR performance indicatorsWorking capital turnover ratios provide a trend analysis of the proportion of funds drawn down from the balance sheet:
Trade receivables turnover ratio: trade receivables/sales including VAT × 365
Supplier credit turnover ratio: outstanding suppliers/purchases including VAT × 365
Inventory turnover ratio: inventories and work in progress/Sales × 365
Key indicator: WCR turnover ratio: WCR/sales × 365