3.3Working capital requirements & cash
The essentials in 30 seconds
- The WCR (Working Capital Requirement) = the money tied up by operations: inventories + trade receivables − trade payables.
- The WCR is financed by working capital (WC); cash results from it: Cash = WC − WCR.
- You can be profitable yet cashless: an exploding WCR (heavy stock, slow customers) can endanger the business.
Running mini-case — Rachid, victim of his growth
Rachid's sales take off: he stocks more, his trade receivables swell, but he pays suppliers and wages in cash. Profit rising… and the account dry at month end. His accountant shows him the culprit: the WCR has exploded. Rachid learns the sentence that saves: profit is not the money in the till.
Sequel of cases 3.1-3.2 — Rachid's growth jams on cash.
1. The money tied up by operations
The WCR (Working Capital Requirement) answers one simple question: does day-to-day activity consume or generate cash? It comes from the gaps of the operating cycle: paying before being paid.
Basic formula: WCR = inventories + trade receivables − trade payables. A positive WCR means operations tie up money (to finance); negative (rare, e.g. mass retail) means they generate cash. The WCR is financed by working capital (WC), and cash results: Cash = WC − WCR.
2. Profitable but cashless
You can be profitable yet bankrupt of cash if the WCR explodes: inventories too heavy, customers paying too late. This is "bankruptcy through growth": more sales, more stock and receivables to finance, but charges to pay at once.
Reducing the WCR is often more vital than raising turnover: collect faster, negotiate supplier terms, optimise inventories. Rachid does not lack customers — he lacks the money advanced to his cycle. Watch cash as much as the result: cash is king.
🔎 Concrete example — Bankruptcy through growth
The WCR paradox lived by Rachid.
Sales rising → more stock + more trade receivables to finance.
But suppliers and wages paid at once → the WCR explodes.
→ shortage of cash for payments, despite profits.Result: understanding why "profit is not the money in the till".
Reflex: act on receivables, stock and supplier terms.
Section vocabulary
- WCR
- Working Capital Requirement: money tied up by the operating cycle (inventories + trade receivables − trade payables).
Simple example: Rachid's WCR explodes when his sales take off without fast collection.
What it is not: the profit of the year, or the money available in the till.
Reflex: calculate your WCR before celebrating a sales rise.
- Working capital (WC)
- Excess of stable resources (equity, long-term debt) over durable uses; finances the WCR.
Simple example: Rachid's WC must cover the money tied up by his cycle.
What it is not: the cash of the month or the result of the year.
Reflex: check that WC covers the WCR, or cash dives.
- Net cash
- Money actually available: Cash = Working capital − WCR.
Simple example: a stable WC minus an exploding WCR = Rachid's dry account.
What it is not: the accounting profit shown on the income statement.
Reflex: read cash as much as the result, every month.
- Operating cycle
- Chain of purchases, stock, production, sales, collection — source of cash gaps.
Simple example: paying suppliers in cash and being paid at 60 days digs the need.
What it is not: a durable investment like a machine or premises.
Reflex: spot where, in your cycle, money sleeps longest.
- Payment terms
- Customer terms (time to be paid) and supplier terms (time to pay), directly driving the WCR.
Simple example: shortening customer terms and negotiating supplier terms cuts the WCR.
What it is not: administrative dates with no effect on cash.
Reflex: each day gained on collection frees cash.
In practice — Mastering the WCR and cash
- Calculate the WCR = inventories + trade receivables − trade payables (the money tied up by operations).
- Interpret its sign: positive (activity consumes cash to finance) or negative (it generates some).
- Locate working capital (stable resources minus durable uses) and deduce cash = WC − WCR.
- Identify levers to cut the WCR: accelerate collection, negotiate supplier terms, optimise inventories.
Ready-to-say script — explain the cash shortage in 1 min
"We are profitable, but our WCR has exploded: our sales tie up more stock and receivables while we pay in cash. Profit is not the money in the till. Priority: invoice faster, chase late payments and negotiate our supplier terms."
To say to your partner or banker, WCR calculation in front of you.
Copy-paste template — WCR and levers sheet
WCR SHEET — date: _______________
INVENTORIES: _______________ + TRADE RECEIVABLES: _______________
− TRADE PAYABLES: _______________ = WCR: _______________
WORKING CAPITAL (WC): _______________ → CASH = WC − WCR: _______________
LEVER 1 (collect faster): _______________
LEVER 2 (stock): _______________
LEVER 3 (supplier terms): _______________Small business / small budget
No tool needed: a simple inventories + receivables − payables table, updated monthly, is enough to see tension coming.
SME Algiers
Customers paying late and suppliers paid in cash: ask for deposits and chase early, before the WCR slips.
Trading / retail
Stock is the first reserve: hunt dormant lines, because stock is sleeping money.
Services / B2B
Little stock but heavy receivables: invoice on delivery and shorten granted terms to free cash.
✓ Best practices
- Watch cash as much as the result: cash is king.
- Cut the WCR: collect faster, optimise stock, negotiate terms.
- Anticipate the effect of strong growth on the WCR.
✗ Common pitfalls
- Confusing “being profitable” and “having money”.
- Letting stock and trade receivables swell without financing them.
- Neglecting the WCR for turnover growth alone.
Key takeaways
- The WCR is the money tied up by the operating cycle: inventories + receivables − trade payables.
- Positive WCR = activity consumes cash to finance; negative = it generates some.
- Working capital finances the WCR; Cash = WC − WCR.
- You can be profitable yet cashless: cutting the WCR is often vital.
48h challenge — apply tomorrow
Calculate your WCR (inventories + receivables − trade payables) and list 1 concrete lever to cut it (chase, deposit, dormant stock). Call or write about it within 48h.
- I can calculate the WCR and explain its sign.
- I know why a profitable business can run out of cash.
- I have launched 1 concrete action to cut my WCR.
Frequently asked questions
How can a profitable business go bankrupt?
Through the WCR and the result vs cash distinction. The result is accounting (revenues minus expenses, regardless of payment dates); cash is the money actually available. If customers pay at 60-90 days while suppliers and wages are paid in cash, the business permanently advances that money. In strong growth, the WCR explodes and can exceed resources: “bankruptcy through growth”.
How do you concretely cut your WCR?
By acting on its three parts: cut trade receivables (invoice fast, chase, ask deposits), optimise stock (no sleeping money), reasonably extend supplier terms. These levers often transform cash without one extra euro of turnover.
Rachid sells more than ever but his account is dry. What is the first explanation to test?