By definition, working capital requirement (WCR), directly related to the operating cycle, represents the amount that a company must finance to cover the need resulting from cash flow differences. These correspond to cash outflows (expenses) and receipts (revenues) related to its activity.

It is the balance of the balance sheet accounts, i.e. the customer, supplier and inventory items. Calculated at the balance sheet date, financial analysis breaks down the WCR into two components:

Operating WCR = accounts receivable + inventories - accounts payable and taxes,
Non-operating working capital = balance of other current assets and liabilities.

BFR= BFRE + BFRHE

Working capital requirement

Differences between EARPF and EARLF

The BFRE corresponds to the financing necessary for the operation (current activity of the company). It is made up of inventories, trade receivables and financing linked to supplier debts, i.e. :

a structural part related to the payment terms of customers and suppliers,
a cyclical component determined by the level of activity or any change in revenues which results in a change in the BFRE.

WCR= inventories + trade receivables - operating liabilities

Operating working capital requirement

Whereas the WCRHE takes into account the resources made available to the company without a direct link to normal operations such as :

current assets such as :
- other receivables,
- prepaid expenses.

Resources from :
- other liabilities,
- deferred income.

WCRHE= non-operating receivables - non-operating liabilities

Non-operating working capital requirement

Impact of WCR on the financial health of a company

The financial analysis of the company's balance sheet is done by the working capital, the working capital requirement and the net cash. The WCR is an indicator of the financial health of a company:

If the WCR is greater than 0, we say that the operating cycle absorbs the cash,
If the WCR is less than 0, it is said to generate cash,
If the WCR is zero (= 0), we say that there is stability.

In summary, an exploding WCR is a sign of poor health that can very quickly lead to irreparable cash flow problems for a company if financing is not found.