Optimization of the company's cash flow

ASSETS
Need in Working Capital Cash
Cash Fund (surplus)
LIABILITIES
Working Capital Cash
Cash Fund (deficit)
It follows "the fundamental relationship of cash":
CASH = WORKING CAPITAL - NEEDS IN WORKING CAPITAL FUND.
The Working Capital Fund and the working capital needs are most often positive. It may be that one or the other, or
both, are negative. Negative working capital is a need that must be financed. Negative working capital needs
compose resources for the company. If the financing needs of the operation are greater than the Working Capital
Fund, the cash flow is negative. Therefore, the fundamental relationship to write:
1.2 - THE REFERENCE TO SHORT-TERM DEBT.
WORKING CAPITAL = WORKING CAPITAL NEEDS +/- CASH
The justification for the Working Capital Fund, as an indicator of the gap between current assets and short-term
liabilities is based on the thesis of the automatic liquidation of debts in the short term. According to this thesis, the
accumulated stocks to confront seasonal demands are fully funded by the short term loans. The use of these
'temporary' stocks will cause cash flow that become available for the reimbursement of these loans. The idea of
'automatic liquidation' has been extended to the whole of the surplus of the values of working capital term debt. In
other words, capital circulating 'temporary' would be funded by the immediate liabilities and the 'remaining'
circulating capital through ongoing resources: The Working Capital Fund.
The Working Capital Fund is therefore a margin of safety: it corresponds to the losses that can undergo a company
unless it is required to sell a portion of its assets or borrowing. In the absence of this margin, the deflation of shortterm
loans resulting from a cause, for example, of a momentary decrease in activity, plunges the company into a
crisis of cash by putting in a State of cessation of payments.
2 - THE WORKING CAPITAL FUND IS THE MEASURE OF THE TRADE-OFF BETWEEN PROFITABILITY AND SOLVENCY.
The decrease in working capital leads to an increase in the profitability of the company but at the same time an
increase in the risk of insolvency and vice versa.
2.1 - AN INCREASE OF PROFITABILITY.
At an equal amount, loans in the medium and long term are generally more expensive than short-term loans. Indeed:
On the one hand, interest paid on long-term loans are generally higher than those paid on short-term loans.
On the other hand, the rigidity of long-term borrowing makes their jobs more expensive than those in the
short term. In addition, the ratio "results / Capital" will be higher.
2.2 - AN INCREASE OF THE RISK OF INSOLVENCY.
The company increases its risk when it increases its short-term funding commitments in the long term. In the event
of non-renewal of short-term loans, the importance of its cash-flow problems will be proportional to the share of the
short-term in its resources. The cost of the risk of insolvency can range from the high price of requested assistance
of extreme urgency until the bankruptcy.
B - THE WORKING CAPITAL FUND IS NOT A GOOD INDICATOR OF SOLVENCY.
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