Optimization of the company's cash flow

Whereas part of stocks was practically incompressible and in fact was also indispensable to the company than its
industrial assets, it came to argue that the working capital fund should be sufficient to finance this minimum stock
called from "exposure" or “Inventory tool stock” or “Stock-Outil” in French. This note is based although partial.
Indeed, there is nothing limiting the analysis to only stocks; It is set in the same way a position 'customers-tool',
'debtors divers tools or “Diverse Inventory Tool Stock”, etc. In other words, the working capital fund should cover a
fraction, or even all, of circulating assets either incompressible or permanent.
1.3 - The Working Capital Funds
Needs in working capital of a company represent working capital necessary for this company so that taking into
account the needs and resources related to the operation, the cash is not negative. The cycle of operating a business,
in fact, generates both (stocks, credit-clients, etc.) needs and resources (credit-suppliers etc...). Comparing these
needs and resources, it determines the volume of the funds needed to ensure the proper functioning of the company.
2 - Calculation of working capital needs.
The proposed methods can be grouped into three categories:
Mathematical methods based on the optimization of the couple "security-profitability."
Banking methods that use the balance sheet (Accounting);
The methods of calculation from the operating account, or “methods of Accountants” or “Expert-Accounting
Methods”
2.1 - Mathematical calculation of the optimum of the Working Capital Fund:
This calculation can be approached in three ways:
(a) The theoretical optimal working capital fund will be the one for which the marginal profitability and the marginal
cost of the corresponding insolvency risk will be equal. Thus, a reduction in working capital will result in:
An increase in the profitability obtained by overriding the short term to long term;
And by an increase in the cost of the risk of insolvency.
In fact this calculation has only a very limited operational scope:
First, it seems very difficult, if not impossible, to assign practice of subjective probabilities and the specific
costs to the different possibilities of having cash difficulties.
Then this method is that an indirect reference to the needs of operation (in the assessment of the risk), then
the level of the working capital fund depends on the importance and the nature of these needs;
Finally, the substitution of loans long-term by a short term ones leads not necessarily an improvement in
profitability: the real cost of short-term bank loans is closely dependent on their use (here again we must
know the nature of the needs).
(b) The theoretical optimal working capital fund depends on two contradictory costs: the cost of debt, C1, and the
cost of additional short-term loans requested emergency, C2.
The function of the total cost of a certain level of working capital, C = C1 + C2 is represented by Figure 1 following:
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