Cash flow at the start of a business: not to be underestimated

Setting up your own business, even as a micro-entrepreneur, never comes without costs. When starting up a business, it's all about cash flow. It's a factor not to be underestimated. Setting up a business without first assessing short- and medium-term expenses is a mistake that can quickly lead to failure.

Working capital requirements

The working capital requirement is the amount of cash a company needs, on a permanent basis, to finance its current expenses. In fact, before receiving revenues from sales or services, the merchant or craftsman must constantly advance funds to buy merchandise, furniture, tools, a vehicle...

WCR is the cash shortfall arising from the company's current operations.

To build up stock, set up premises and purchase equipment, the project owner needs a certain amount of money. This initial cash flow should not be underestimated, or you may soon find yourself unable to pay all the necessary expenses. There's always a time lag between setting up a business and starting to cash in. Even if a bank loan is obtained, it never covers the working capital. Initial expenses (deposits, rents, salaries, insurance, equipment, etc.) will be covered by the entrepreneur's personal contribution.

The majority of companies will have a working capital requirement greater than zero throughout their lifetime. These are companies that stock merchandise or raw materials and pay their suppliers in cash, or those that pay their invoices in 30 days while their customers pay in 60 days.

On the other hand, companies that receive payments on account or in advance, or those, such as supermarkets, that benefit from long payment terms and whose customers pay in cash, have a WCR of less than zero. This is referred to as working capital resources.

How can you forecast your WCR?

Lack of cash flow is a frequent cause of business failure, especially in the first year. Indeed, it's sometimes difficult to know how the business is going to develop and whether revenues will be sufficient.

This is why estimating working capital requirements is an essential step in setting up a business, and subsequently, working capital enables the company manager to verify its viability. A number of calculations need to be made to determine working capital requirements.

Three factors need to be taken into account:

  • payment terms negotiated with suppliers (supplier debts/purchases incl. VAT) x 360 days,
  • payment terms granted to customers (accounts receivable/sales including VAT) x 360 days,
  • inventory turnover time (average stock / production or manufacturing cost) x 360 days. The result determines the number of days the product remains in stock.

WCR equals inventory + receivables - operating liabilities. This formula is simplified. There is a more detailed calculation: WCR = uses (inventories in progress, trade receivables, other receivables, prepaid expenses) - resources (trade payables, tax and social security liabilities, other liabilities). Of course, it's easier to calculate WCR when you already have accounting data.

When starting up or taking over a business, WCR must be included in the initial financing plan, as it is part of the company's immediate needs. It is therefore calculated as follows Initial WCR = starting inventory + invoices payable in cash + VAT advances.

When the company has no inventory, as is the case with service providers, it only advances current expenses called work-in-progress. In this case, WCR is calculated as follows: Initial WCR = work in progress + average outstanding trade receivables - average outstanding advance payments.

As customer receivables are not yet known at the start of the business, you'll need to estimate the cost of a day's work, the amount of current expenses, the amount of remuneration and the number of days needed to complete the job.

How do you manage your cash flow?

The capital remaining in the company on an ongoing basis to ensure the operating cycle provides a safety margin in the event of unforeseen circumstances, such as an unpaid invoice. The greater the working capital, the greater the company's financial autonomy.

For good working capital management, you need to pay attention to the following points:

Today, there is a whole range of onlinecash management tools for tracking financial movements in real time, and visualizing cash flow at a glance. In addition, the automation of certain operations, such as the management of expense claims, reduces errors, and enables the company manager to get rid of a large number of time-consuming tasks.