AND he Working Capital Requirement (or Working Capital Needs - NCC) is not an easy concept to understand. However, it is very useful in the case of a business plan. Certainly, before validating a financing request, the banker will want to know your interim working capital requirement (as well as your financing plan). We always include the working capital requirement calculation in our business plan templates .
When talking about the Working Capital Requirement, we are talking about the gap between treasury income and expenses. It is a key notion to understand the working capital requirement. Simply put, the working capital requirement is the amount you must keep in cash to pay your expenses while waiting to receive cash receipts from your customers (your accounts receivable).
To better understand, let's see the example of a company with working capital needs. Let's say you are a product seller. Your customers pay you 30 days after delivery. However, their suppliers demand that they be paid immediately. So if you sell your products right after you receive them, you should, in theory, wait 30 days before you can pay your suppliers. Only this is not possible (they demand immediate payment). It must then have a treasury reserve to cover this gap. This reserve is your working capital requirement.
A high working capital requirement makes a company more sensitive to the unexpected. Indeed, a company that requires a high working capital is a company that depends to a great extent on the willingness (or the possibilities) of its clients to meet their commitments. Therefore, if clients suspend their payments, this company will not be able to cover its expenses and will have to raise money externally.
Do not confuse the Working Capital Requirement with Working Capital . Working capital is what allows you to pay your expenses in the short term.
Here's how we help you easily understand and calculate your working capital requirement.
THE WORKING CAPITAL REQUIREMENT EXPLAINED IN DETAIL
To calculate the working capital requirement we focus on short-term items . Long-term items such as investments and capital contributions, bank loans, and fundraising should not be part of the calculation of the working capital requirement to begin with.
To understand the Working Capital Requirement, you must look at accounts receivable or credit claims (money owed to you). Generally, there are accounts receivable from the customer; but you may also have accounts receivable from the State, such as VAT receivable (when you pay VAT on purchases, you can get that money back the following month).
To understand the Working Capital Requirement, you also need to look at debt (the money you owe).These can be debts with your suppliers or with the State, when you have not yet paid the taxes for the previous year, for example. There are also social debts: employer contributions that must be paid one month after paying the salaries of their employees.
To understand the Working Capital Requirement you have to look at inventories. Effectively, stocks are merchandise that have already been paid for but that you have not yet sold.
CALCULATE AND INTERPRET THE WORKING CAPITAL REQUIREMENT
To calculate the Working Capital Requirement it is necessary to have the accounting balance. Most of the elements that will be used to calculate the working capital requirement, as can be seen in the image above, appear directly on the balance sheet. You have already understood, a working capital requirement is calculated for an instant T (in this case, at the end of the year). You can find the details of the calculations in our sample financial plan.
A Positive Working Capital Requirement means that the company must finance that requirement. There is a need for financing. It is necessary, in this sense, to get money to finance the company (either thanks to the shareholders or the bank).
A Negative Working Capital Requirement means that the company "benefits" from cash mismatches. This is often the case for companies with cash-paying customers who get generous payment terms from their suppliers. In the case of a real estate financing plan, to the extent that residents pay their rents at the end of the month and expenses are paid later, we will often have a negative working capital requirement.
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