How can the BFR vary according to the sectors of activity?

Have you ever wondered how WCR can influence your day-to-day strategic decisions? Depending on your sector of activity, the necessary financing requirement can vary considerably, putting more or less pressure on your cash flow. For example, in the catering sector, where payments are often made in cash, WCR is reduced, allowing for more flexible management of resources. But in sectors such as construction, with longer payment terms and large inventories, it becomes a real challenge to manage.

Understanding these variations not only allows you to better finance your business but also to optimize your operating cycles to avoid any gap between disbursements and receipts. In this article, we reveal the keys to managing the WCR according to the type of activity , in order to improve the financial situation of your company and your cash flow management.

Role of BFR in cash management

The WCR is closely linked to the financial health of a company, and more particularly to its cash flow. Indeed, it represents the short-term financing requirement necessary to ensure the company’s operating cycle: from the purchase of raw materials to the recovery of customer receivables .

A high WCR means that the company needs a significant amount of funds to finance its current activity. This can lead to cash flow tensions, particularly in periods of rapid growth or in the event of unforeseen events. Conversely, a low or even negative WCR indicates that the company has excess cash, which allows it to finance other projects or deal with economic difficulties. Read our article on the risks associated with an excessively negative WCR.

High WCR sectors: industries with high inventory turnover

Some industries, particularly those with high inventory turnover, have positive WCR. This is due to the costs associated with purchasing goods or raw materials in large quantities, payment terms, and maintaining large inventories. Here are some examples of industries.

Distribution and retail sector

The distribution and retail sector is one of the most affected by a high WCR. Due to the need to maintain a large inventory of products to meet consumer demand, companies in this sector must finance their inventories, often before they have even made sales. In addition, sales or promotional periods can lead to a temporary increase in inventories, which further amplifies cash flow needs. For these companies, optimal inventory management and effective monitoring of trade receivables are essential to maintain a balance between WCR and available cash.

Automotive and industrial equipment sector

The automotive and industrial equipment sectors are also high WCR sectors, mainly due to the management of spare parts, raw materials and components needed to manufacture vehicles or machines. These industries have long production cycles, which means managing large inventories of materials and finished goods. Companies must also manage relationships with their suppliers and customers, often with extended payment terms. High WCR in these sectors can make companies vulnerable to economic fluctuations and liquidity problems.

The impact of inventory management on WCR

The higher the inventory, the higher the WCR will be, because the company must finance its goods before they are sold. Effective inventory management involves minimizing excess while ensuring that products are available to meet demand. Companies that master this management can reduce their WCR and therefore improve their cash flow. On the other hand, excessive inventory can lead to the immobilization of funds, while stockouts can harm sales.

Low WCR sectors: services and high value-added companies

Conversely, some sectors naturally have negative WCR, mainly due to the nature of their activities and their low reliance on inventories. In these sectors, the focus is on intellectual or technological services, which means that companies have less need to finance raw materials or physical assets. Cash management is therefore more fluid, as companies can focus on managing receivables and operating expenses without having to tie up funds in large inventories.

Professional services sector

Professional services firms, such as those specializing in consulting, information technology (IT) or marketing, have a relatively low WCR because they do not require physical inventory. Their main current asset is their skills and know-how. They typically invoice their services on a monthly basis or at the end of the project, which allows for simpler and more predictable cash flow management.

Technology and Startup Sector

The business models of these companies often rely on digital products or services that do not require physical inventory. Revenue is generated from subscriptions or direct online sales, which helps limit cash requirements. In addition, startups often operate with a lean and flexible structure, which further reduces their working capital requirements.

Why do service sectors have a reduced WCR?

Service sectors typically have a low WCR because they do not have to invest heavily in inventory or physical assets. They rely on human, intellectual or digital resources, which allows them to reduce their operating capital requirements. In these sectors, receivables management becomes a key issue, but companies can operate with less financial pressure. The ability to invoice customers quickly, sometimes before the service has even been fully delivered, helps maintain a stable cash flow and reduces the need for external financing.

Food and agri-food sectors: a working capital requirement between low and high

The food and agri-food sector has an interesting particularity: it juggles between high WCRs, linked to the management of perishable stocks and seasonality, and lower needs, thanks to short production cycles and solid partnerships with suppliers.

Inventory management in the food industry: a logistical challenge

The perishable nature of products, combined with large volumes and temperature constraints, makes inventory control essential. The challenges are multiple:

• Minimize losses,

• Optimize production and distribution times,

• Control storage costs, particularly those related to the cold chain.

Businesses must strike a balance between having enough inventory to meet demand and having too much inventory that generates unnecessary costs.

Influence of seasonality on the WCR in this sector

Some products are subject to variations in production and consumption throughout the year, which directly impacts inventory and cash management. For example, agricultural products may be produced in large quantities at certain times of the year and must be stored or processed before sale. This can lead to a peak in working capital requirements during harvest periods, followed by quieter periods when WCR decreases. Flexible and predictive inventory and financial management is therefore essential for these companies.

The role of suppliers and customers in WCR management

Payment terms with suppliers and settlement terms with customers can have a direct impact on the liquidity of companies. For example, negotiations on longer payment terms with suppliers or shorter ones with customers can help to better balance the WCR. On the other hand, strong relationships with business partners can help to better manage production and supply cycles, thus reducing pressure on cash flow.

Optimizing your WCR: the challenges for companies

Optimizing your working capital not only frees up cash, but also strengthens your company’s competitiveness and flexibility in the face of economic fluctuations. Here are the main challenges associated with optimizing your working capital, as well as the solutions you can implement to reduce this need and improve cash flow management. Learn more about how a working capital reduction plan can be integrated into a business growth strategy.

The consequences of a high BFR

A BFR can generate:

• Cash flow difficulties, particularly during periods of rapid growth or in the event of unforeseen events.

• A limitation of investment capacity: a significant portion of cash being absorbed by financing the WCR, the company may have fewer means to invest in new projects.

• An increase in the cost of financing: to finance a high WCR, the company may be required to resort to bank loans, which increases its financial costs.

A drop in profitability by reducing its margins.

Solutions to improve your WCR

There are several levers that companies can use to improve their working capital and thus strengthen their cash flow.

1. Inventory management : This involves implementing efficient processes to minimize surpluses while meeting market needs. Computerized management tools, as well as techniques such as “just-in-time” (JIT), help reduce storage costs and improve product rotation.

2. Acceleration of debt collection : by reducing customer payment times, the company can obtain cash more quickly and thus limit the use of external financing. Rapid sending of invoices, setting up systematic reminders or using debt collection services… These solutions make it possible to better manage this part of the WCR.

3. Negotiating payment terms : This strategy allows the company to retain more cash for a certain period of time, without affecting its commercial relationships. If well negotiated, these terms can provide financial room to maneuver, thus strengthening cash flow while maintaining a good relationship with commercial partners.

Don’t wait any longer to optimize your WCR: contact GESTION CREDIT EXPERT, your debt collection agency , to facilitate your process and improve your cash flow management.