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What are cash requirements and how do you manage them?

What are cash requirements and how do you manage them?

Temps de lecture : 4 minutes

To grow or simply to survive, a company needs cash flow. This is a crucial element in its financial health, as it can compromise its ability to pay suppliers and employees. So you need to act fast and find solutions to finance your cash flow needs. Let's take a look at what this means and how to deal with it.

What is a cash requirement? Definition

Also known as Working capital requirement (BF R), the cash requirement is the amount of cash a company needs to operate in the short term . It is linked to the time lag between the company's cash receipts (revenues) and cash disbursements (expenses). When expenses exceed revenues, the company needs cash. In other words, it must find sources of financing to cover its needs.

The need for cash can have structural causes :

  • Payment terms ;

  • Stocks ;

  • Investments ;

  • Etc.

Or cyclical :

  • Business downturn ;

  • Unpaid bills ;

  • Etc.

The need for cash can have negative consequences for the company's solvency and profitability and must therefore be managed with rigor and foresight.

What causes a need for cash?

The need for cash is an almost normal situation for any company. As we have seen, the causes can be structural or cyclical.

Here are the most common factors that can lead to a company's need for cash:

Payment terms

Payment terms are inherent in the way companies operate. With the exception of certain specific business sectors (such as catering and mass retailing), customer receivables are rarely settled immediately.

According to the article L441-10 of the French Commercial Code , payment terms ranging from 30 to 60 days from the date of delivery of the goods or services.

These delays create a gap in a company's cash flow. This can be a source of problems if it is poorly managed or badly anticipated. That's why it's vital to always draw up a cash flow statement in advance, to better anticipate the company's cash flow needs.

Low profitability or losses

If the company does not generate sufficient profits, or if it incurs losses, it risks not be able to cover its fixed and variable costs, such as rent, salaries, taxes and so on. She will then have to use external sources of financing to make up for its cash shortfall.

In the same vein, companies with a high degree of seasonality also experience a greater need for cash during empty periods.

Too much stock

If a company's inventory levels are too high in relation to its sales, it will increases storage and management costs, and reduces its reactivity to market changes. The harder it is to sell off inventory, the greater the need for cash. It must then reduce margins or sell off inventory.

Too high a cost

If the company supports expenses that are too high in relation to sales, it reduces its sales margin and its ability to self-finance its business. It must then borrowing or capital contributions to finance current needs.

A need for capital expenditure

If the company must make substantial capital expenditures to develop, modernize or comply with regulations, it has to mobilize a significant proportion of its available cash. This means disbursing funds when the benefits can only be reaped later. This creates a gap in the company's cash flow, which needs to be financed.

When does the need for cash increase?

As we have seen, the need for cash is a common occurrence in business life. It is, however, in a company's interest to calculate and assess its cash requirements on a regular basis. A High WCR not desirable because the company is at risk of default.

Here are just some of the situations that can lead to an increase in cash requirements:

Late or unpaid payments

They lead to a decrease in cash receipts and an increase in working capital requirements They can also generate additional costs related to :

  • Debt collection;

  • Late payment penalties ;

  • Interest on arrears ;

  • Legal proceedings.

Growth crisis

It translates into a strain on cash flow, because the company has to deal with additional needs in terms of working capital, investment and financing. It must also manage quality, competitive and regulatory risks. Growth problems can be triggered by an innovation, a market opportunity, or a merger or acquisition.

Suppliers who no longer grant payment terms

A high cash requirement means, among other things, that the company pays its suppliers before collecting its trade receivables. Also, if the company's suppliers no longer grant payment deadlines, or if they reduce them, the company needs to pay for its purchases more quickly. It must therefore have sufficient cash flow to meet deadlines and avoid penalties or supply disruptions.

How do you calculate cash requirements?

Remember that cash flow and working capital requirements are actually synonymous.

WCR is the difference between current assets (inventories, trade receivables, etc.) and current liabilities (trade payables, social security charges, etc.). It is calculated as follows

WCR = average inventory + average trade receivables - average trade payables

After this calculation, you can find a cash requirement of zero, positive or negative. A zero profit means that the company is just managing to generate enough cash to cover its expenses. A positive result means that the company has a cash shortfall which it will have to make up. If it's negative, it means that the company has a cash surplus that can be reused to invest, for example.

How can we reduce it?

A high, positive cash requirement means that the company has a strong significant cash flow mismatch . It therefore owes him emprunter or find another source of financing. Otherwise, the company risks defaulting. That's why it's so important to keep it at an acceptable level.

There are several methods and tricks you can use to reduce your company's cash flow requirements:

Optimize inventory management

This makes it possible to reduce storage costs, limit the risk of breakage or overstocking, and free up capital . You can use methods such as

  • Just in time;

  • Le kanban ;

  • Ordering point ;

  • Etc.

Getting paid quickly

The faster you collect your trade receivables, the smaller the gap in your cash flow.

You can implement actions such as :

  • Ask for a deposit when ordering, offer fast and secure payment methods;

  • Offer discounts or benefits for cash payments;

  • Impose penalties or interest on arrears ;

  • Regularly follow up late customers;

  • Etc.

You can also negotiate longer payment terms with your suppliers. You'll avoid cash flow mismatches, because you'll have collected your customer receivables before you have to pay your suppliers.

Get help from experts

You can call on external service providers, such as :

  • A chartered accountant who can advise you on the tax, legal and financial aspects of your business;

  • A financial advisor, who can help you find the financing sources best suited to your needs;

  • A credit insurance broker, that can protect you against the risk of non-payment;

  • A factor who can advance you the amount of your customer invoices;

  • Etc.

Forecasting with cash flow software

Cash management software can help you optimize your cash management by enabling you to identify potential needs or surpluses, and adapt your decisions accordingly. It also enables you to :

  • Enter and centralize data relating to receipts and disbursements ;

  • Draw up a projected budget and cash flow plan ;

  • Analyze variances between forecasts and actuals ;

  • Simulate different scenarios and measure their impact on cash flow;

  • Editing reports and dashboards ;

  • Etc.

How can we anticipate it?

Here are some tips to help you anticipate your cash flow needs:

  • Draw up a precise budget forecast . This is a document that enables you to plan your company's future expenses and income over a given period, usually one year.

  • Analyze business seasonality . It's all about understanding the seasonal variations in your business, which can have a significant impact on your cash flow, particularly in terms of revenues and expenses.

  • Monitor your working capital requirements month by month . This is the amount of financial resources required to run the company's operating cycle.

How to finance your cash requirements?

The many financial resources available include :

Assignment of receivables

This operation involves transfer customer receivables to a third party (bank, factoring company, etc.) in exchange for a cash advance.

MCNE (Mobilization of foreign receivables)

This is a short-term financing of export receivables This method is reserved for a certain type of company. This method is reserved for a certain type of company.

Commercial discounting

This operation involves assign commercial paper to its bank (bills of exchange, promissory bills, etc.) issued by customers.

Overdraft facility

It's a exceptional authorisation granted by the bank, which allows you to be in debit for a short period (a few days a month). The amount of the advance is determined by the bank according to the company's operating needs.


It's a special form of assignment of receivables This involves entering into a contract with a specialized company (the factor) to finance receivables and insure against the risk of non-payment.

Use our Hero payment solution

Each of the financial solutions listed above has its own financial cost. As a payment solution specifically designed for VSEs and SMEs, Hero offers practical, flexible and affordable features.

Thanks to its deferred payment function, you can obtain more comfortable payment terms with your suppliers That's because we pay your suppliers immediately, but offer you the option of repaying much later. The result? You can wait to collect your receivables before settling your debts.

Request a customized quote

Alternatively, you can pay your invoices in 3 or 4 instalments, while the platform pays your suppliers immediately. In this way, you can limit your cash flow requirements.

In short, anticipating and managing cash requirements is essential to ensure a company's long-term survival. Reacting proactively by anticipating critical periods and implementing appropriate financial strategies is crucial. Effective management of cash requirement is a fundamental pillar of a company's financial health.

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Écrit par

Valentin Orru

Head of growth