Key Indicators

The working capital, the working capital requirement, and the cash flow requirement: three (3) parameters to closely monitor for sound financial management.

1. Working Capital: Long-term financing indicator

The working capital aims to show how the durable capital (also known as "permanent") available to the company has financed the assets.

Definition

The permanent capital shown on the liability side of the balance sheet (source of funds for the company) is composed of:

  • Equity (share capital, reserves, associated current accounts);
  • Long-term debts (long-term loans to finance investments).

The assets shown on the asset side of the balance sheet (company's assets) include:

  • Tangible assets: buildings, workshops, equipment...;
  • Intangible assets: patents, licenses...

How to calculate it?

WORKING CAPITAL = PERMANENT CAPITAL - FIXED ASSETS

Interpretation of the calculation:

  • If permanent capital exceeds the fixed assets, the working capital is positive.

This means that long-term financing exceeds the company's investment needs and can partially finance current operations.

  • Otherwise, the working capital is negative.

2. Working Capital Requirement or WCR

This is the key indicator of your company's short-term financing.

Definition

The working capital requirement is the difference between the elements of current operations (stocks and accounts receivable) and trade payables (or accounts payable).
It represents the need for funds for the company to operate in the short term:

WORKING CAPITAL REQUIREMENT = STOCKS + ACCOUNTS RECEIVABLE - DEBTS

  • Compare your company's working capital requirement (WCR) to the previously calculated working capital.
  • You will either find a surplus or a cash requirement.

3. Cash Flow Requirement

CASH FLOW REQUIREMENT = WORKING CAPITAL REQUIREMENT - WORKING CAPITAL

  • If the working capital exceeds the working capital requirement, the company's cash flow is positive.
  • In this case, it is advisable to invest the cash surplus.
  • If the working capital does not cover the company's current operating needs, it will be necessary to finance this cash requirement (e.g., through short-term bank debts).