How to calculate the working capital requirement: step by step
There are two different ways to calculate the WCR, but before applying the formula, you need to calculate the following:
Calculate your cash flow, that is, the current cash your company has in cash.
Calculate the value of your inventory, or the total value of your inventory over a specific period, usually a year. Be sure to include all stored goods and their corresponding value.
Calculate your accounts receivable: Accounts receivable are, in essence, the payments you have yet to receive from your customers, usually because payment of an invoice has been deferred. The next step is therefore to add up the accounts receivable.
Calculate your accounts payable: this is the opposite of accounts receivable, and represents the outstanding payments to your suppliers for deferred payment of their invoices, as well as the deferred payment of taxes and social contributions. Add the value of all your accounts payable.
Apply the WCR formula: using the values obtained above, apply the WCR formula:
WCR = (Cash Inventory Value + Accounts Receivable) - Accounts Payable - Tax and Social Security Debts
From a purely accounting point of view, the WCR formula is even simpler:
WCR = (Current Assets - Current Liabilities)
where current assets represent the assets and rights of the company that are expected to be converted into cash, consumed or liquidated within one year or less, or within the company's normal operating cycle, if this is greater than one year. Current liabilities include all obligations that are due in less than one year.
Once you have completed these steps, you will obtain the value of your WCR.
