You pay for goods today, but your customers will not pay you for several weeks. Your business has to finance that gap. The working capital requirement, often called BFR in French-speaking Switzerland, helps you measure it.
Key points
- The working capital requirement measures money tied up in inventory and unpaid sales, less the operating funding provided mainly by suppliers.
- A simplified formula is inventory + trade receivables − trade payables.
- A positive requirement needs financing. A negative figure can provide operating funding, but does not guarantee a healthy business.
- It is neither your bank balance nor the broader calculation of all current assets minus all current liabilities.
What is a working capital requirement?
A retailer buys products, stores them, sells them and waits for payment. Inventory and customer receivables tie up money. The payment terms granted by suppliers finance part of that operating cycle.
A service business can also have a substantial requirement. It pays staff before invoicing a project or receiving payment, even though it holds no goods.
The requirement is therefore an amount to fund, not an indicator that the business can run without external financing. Equity, stable longer-term funding or a suitable credit facility can cover it.
Order quantities, deposits and payment terms all change the amount. A profitable order can require cash before it generates any.
How to calculate your working capital requirement
For an initial assessment, use:
Working capital requirement = inventory + trade receivables − trade payables.
A fuller analysis includes other relevant operating assets and liabilities, such as work in progress, certain advances and tax or social-contribution balances. Keep the scope consistent from one period to the next.
Do not automatically include the bank account, cash investments or short-term loans in this formula. These belong to cash and financing, rather than the operating requirement defined here.
A worked example in Swiss francs
| Item | CHF |
|---|---|
| Inventory | 40,000 |
| Unpaid customer invoices | 30,000 |
| Unpaid supplier invoices | −25,000 |
| Simplified working capital requirement | 45,000 |
The business needs to fund CHF 45,000 tied up in this cycle. That does not tell you how much remains in the bank: the business may have sufficient financing or already be short of cash.
Calculate the requirement using your own figures
- Choose one date, such as the last day of the month. All balances must relate to that date.
- Collect three amounts: the inventory value used in the accounts, unpaid customer invoices and unpaid supplier invoices.
- Apply the formula: inventory + receivables − payables. This gives an initial assessment, not the available bank balance.
- Expand the calculation if needed: include material work in progress, advances and other operating balances with your accountant.
- Compare with the previous month: explain the change and record an action to take.
Working capital requirement, net working capital and cash: the difference
Net working capital is the portion of long-term funding, such as equity and long-term loans, left after financing fixed assets. The operating working capital requirement is the money tied up in day-to-day operations. The difference gives net cash, provided the items are classified consistently.
You can calculate net working capital in two ways from the same balance sheet:
- From long-term funding: equity + long-term liabilities − fixed assets.
- From current balances: current assets − current liabilities.
Suppose a business has CHF 100,000 of equity, CHF 60,000 of long-term debt and CHF 50,000 of current liabilities. Its assets comprise CHF 100,000 of fixed assets and CHF 110,000 of current assets. Both calculations produce CHF 60,000: 100,000 + 60,000 − 100,000, or 110,000 − 50,000.
Unlike the simplified operating requirement, the current-assets calculation includes cash and short-term financing. To reconcile net working capital to net cash, identify every item included in the operating requirement.
With CHF 60,000 of net working capital and CHF 45,000 of operating requirement, net cash is CHF 15,000. Mixing different definitions or scopes makes this reconciliation misleading.
| Concept | The question it answers |
|---|---|
| Working capital requirement | How much funding is tied up in purchasing, inventory and customer payment cycles? |
| Net working capital | How much long-term funding remains after financing fixed assets? |
| Net cash | What is the balance of cash resources after deducting the short-term bank financing included in the analysis? |
| Profit | Does income exceed expenses for the period? That profit may not yet have been collected in cash. |
The balance sheet provides the starting figures. A cash-flow budget adds something the balance sheet cannot show: the future dates of receipts and payments.
Expressing the working capital requirement in days
Relating the requirement to revenue helps compare periods when activity changes. Using a 360-day year:
Requirement in days of revenue = working capital requirement ÷ annual revenue excluding VAT × 360.
A CHF 45,000 requirement on CHF 360,000 of annual revenue represents 45 days of revenue. This is not necessarily the number of days each invoice remains unpaid.
Break down the operating cycle to see where the requirement comes from:
| Indicator | Calculation using 360 days |
|---|---|
| Customer collection period | Average trade receivables ÷ annual credit sales including VAT × 360. |
| Inventory holding period | Average inventory at cost ÷ annual cost of goods sold × 360. |
| Supplier payment period | Average trade payables ÷ annual credit purchases including VAT × 360. |
Average inventory of CHF 20,000 and annual cost of goods sold of CHF 120,000 give 60 inventory days. Use monthly averages for seasonal businesses. A 365-day convention also works: keep the same basis for comparisons.
These three ratios have different denominators. Combining them describes the cash conversion cycle, but does not directly replace the calculation of the requirement in days of revenue.
Swiss VAT: an unpaid invoice can already create a cash outflow
The default Swiss VAT reporting method is based on agreed consideration, broadly the invoiced basis: invoicing generally triggers VAT reporting before the customer pays. Reporting on consideration received, based on collections, is possible on application to the Federal Tax Administration under Article 39 of the VAT Act.
For example, an invoice for CHF 10,000 excluding VAT at 8.1% includes CHF 810 of VAT. If the customer pays late, the VAT can enter your return before you collect CHF 10,810. The net amount payable also depends on deductible input tax. Include this timing gap in the cash forecast alongside outstanding invoices.
Is a positive or negative requirement good?
A positive requirement is common and does not necessarily indicate poor management. It depends on the sector, payment terms and seasonality. Sales growth can increase the requirement before it generates cash.
A negative requirement means that operating liabilities and advances provide more funding than is tied up in the inventory and receivables included. This can happen when customers pay immediately while suppliers offer credit. However, achieving a negative figure by accumulating overdue supplier invoices is not a healthy improvement.
Compare several periods and relate changes to activity. A 31 December balance can hide a much higher requirement before the busy season.
Why growth can consume cash
Suppose your simplified requirement rises from CHF 45,000 to CHF 60,000 as sales grow. The extra CHF 15,000 needs financing. It is not an additional CHF 15,000 expense in the income statement: more resources are committed to the operating cycle.
Profits from growth may help fund that increase, but not necessarily at the right time or in a sufficient amount. Purchases and wages may fall due before the additional customer payments arrive.
Before accepting a large order, estimate purchases, supplier deposits, billing milestones and the likely final payment date. An agreed customer deposit or staged billing can reduce the gap.
Monitor peaks as well as annual averages. A seasonal business can return to a modest requirement after its busy period while needing much more financing to prepare for it. Monthly balances and cash forecasts make that peak visible.
What happens when the requirement is poorly managed?
The warning is tangible: your order book is full, but you cannot pay suppliers, wages, AHV or VAT. Late payments can block deliveries and add charges. Taking on further orders may deepen the shortage. Estimate peak funding before promising additional delivery dates.
Calculate the effect of slower customer payments
A business makes CHF 360,000 of annual credit sales, evenly spread through the year. To isolate the timing effect, use a 360-day year and consistent figures excluding VAT. With an average collection period of 30 days, theoretical receivables are 360,000 × 30 ÷ 360 = CHF 30,000.
If the collection period rises to 45 days, receivables reach CHF 45,000. The business needs CHF 15,000 more financing even though annual sales have not changed. The problem is collection time, not lower sales.
For actual accounts, compare consistent bases: VAT-inclusive receivables should not be divided directly by VAT-exclusive sales when calculating the collection period. Consider seasonality, cash sales and deposits. The estimate gives an order of magnitude; the open-invoice list identifies which customers explain the delay.
A lower figure does not always mean more cash
Selling and collecting payment for CHF 10,000 of inventory can release cash. Writing down unsaleable inventory by CHF 10,000 also reduces its balance-sheet value, but brings no money into the bank. Writing off an uncollectible customer invoice likewise reduces the calculated requirement without collecting anything.
Explain every movement: sales and payments, value adjustments, changes in scope or overdue liabilities. A falling indicator is useful only when you understand whether it improves the ability to pay.
Four ways to reduce the funding requirement
Manage inventory more closely
Identify slow-moving products and adjust orders to demand. Cutting stock without considering replenishment lead times can cause shortages. Our inventory management guide explains that trade-off.
Collect customer payments earlier
Invoice as soon as the work allows, check billing details and agree deposits where appropriate. Organise customer payment tracking and reminders. Compare an early-payment discount with its effect on your margin.
For overdue invoices, use a defined process. Our Swiss unpaid-invoice guide includes reminder and formal-demand templates and explains debt enforcement.
Negotiate supplier payment terms
An agreed payment period helps finance the cycle. Discuss it with suppliers and confirm the terms in writing. Honour the agreed dates and protect the relationship. Simply delaying payment without agreement creates other problems.
Plan financing before growth arrives
Prepare a scenario with higher sales and the resulting increase in inventory and receivables. Arrange business financing before the peak. Software helps you monitor the numbers, but it cannot validate unrealistic assumptions.
How much cash could you release?
Return to the CHF 45,000 example. Better purchasing reduces inventory from CHF 40,000 to CHF 35,000. Faster collections reduce receivables from CHF 30,000 to CHF 20,000. Negotiated supplier terms increase payables from CHF 25,000 to CHF 30,000.
The new requirement is 35,000 + 20,000 − 30,000 = CHF 25,000, a reduction of CHF 20,000. With unchanged net working capital of CHF 60,000 and a consistent scope, net cash rises from CHF 15,000 to CHF 35,000. This financing benefit is not CHF 20,000 of extra profit.
A service business can need working capital without inventory
An agency holds no stock. Its customers owe CHF 24,000 and it owes suppliers CHF 6,000. Considering only those balances, the requirement is 0 + 24,000 − 6,000 = CHF 18,000.
Wages may be due long before client projects are paid. Having no goods does not eliminate the funding gap. Add work in progress, customer deposits and other operating liabilities where they belong in the analysis.
How to finance working capital in Switzerland
Measure inventory, receivables and payables at the same date each month. Explain movements and put expected customer payments into your cash-flow monitoring. Improving the cycle should preserve customer service and supplier relationships.
Match the funding term to the need. The permanent part requires stable resources; a seasonal peak may suit temporary finance.
| Option | What it addresses | What to compare |
|---|---|---|
| Current-account credit or overdraft | A temporary or seasonal gap within an agreed bank limit. | Interest, fees, security and how long the facility is available. |
| Factoring | An advance against invoices assigned to a specialist provider. | Fees, eligible customers and whether non-payment risk is transferred. |
| Loan guarantee | Support for access to bank credit for a viable business. | A guarantee is neither a grant nor a cash payment: the loan must still be repaid. |
| Customer deposits and staged billing | Customer funding of part of an order. | Contractually agreed dates and consistency with actual progress. |
| Equity or longer-term borrowing | The underlying need that remains outside seasonal peaks. | Repayment obligations and the cash buffer left after funding. |
Cautionnement romand can assess needs connected with working capital (website in French). Prepare accounts, a cash forecast and an explanation of the need before discussing it with the organisation and your bank.
Our Swiss business-loan guide explains the finance and guarantees to compare.
A monthly tracking table you can reuse
| Item | Previous month | This month | Agreed action |
|---|---|---|---|
| Inventory | CHF 40,000 | CHF 35,000 | Reduce purchases of slow-moving lines. |
| Trade receivables | CHF 30,000 | CHF 20,000 | Continue the follow-up that accelerated collections. |
| Trade payables | CHF 25,000 | CHF 30,000 | Check that revised payment dates are agreed and respected. |
| Simplified requirement | CHF 45,000 | CHF 25,000 | Confirm that the CHF 20,000 reduction comes from operations, rather than recorded losses. |
These figures follow the example above. Add an owner and deadline for each action. For seasonal activity, also compare with the same month last year.
Download the monthly working capital Excel tracker
Enter inventory, unpaid customer invoices and unpaid supplier invoices each month. The workbook calculates the requirement and its change, with space for an action, owner and due date. It also contains the worked example from this guide.
Download the free Excel tracker
Our accounting team can help you track the balances behind the requirement and relate their changes to business activity.
If funding no longer covers amounts falling due, review when cash shortages become insolvency and the duties that may arise for management.
Frequently asked questions about working capital requirements
Is a working capital requirement a ratio?
It is an amount of money. You can then express it in days of revenue, using consistent bases, to make comparisons easier.
Can a business without inventory have a working capital requirement?
Yes. Customer receivables and other operating timing differences can create a funding need, particularly in service businesses.
Should every business aim for a negative requirement?
No. The aim is a requirement that is understood, controlled and financed, while respecting the business’s operating needs and payment commitments.
What is the difference between net working capital and the operating requirement?
Net working capital is the portion of long-term resources remaining after fixed assets are financed. The operating requirement measures funding tied up in the operating cycle. With consistent classifications, net working capital less the operating requirement gives net cash.
How do you calculate the requirement in days of revenue?
Divide the requirement by annual revenue excluding VAT and multiply by 360 or 365 according to your convention. CHF 45,000 on CHF 360,000 of revenue gives 45 days using a 360-day year.
How can a Swiss business finance its working capital requirement?
Customer deposits, an overdraft facility and factoring can reduce or finance temporary gaps. A loan guarantee may help obtain bank credit. The permanent part needs stable resources such as equity or longer-term financing.
Sources and further reading
- Swiss VAT Act, Article 39: reporting methods.
- GENILEM: understanding the working capital requirement (French).
- SECO SME Portal: the importance of budget planning.
- SECO SME Portal: liquidity planning.
- Bpifrance Création: the working capital requirement calculation (French; used for the financial concept, not Swiss legal rules).
Romain Prieur is a Swiss Certified Public Accountant and founder of Entreprendre.ch. With more than ten years of experience in audit and business advisory in Switzerland, he advises entrepreneurs on company formation, accounting and tax.
