The Working Capital Requirement (WCR) influences the investment significantly as it is an integral component of the project cost and directly impacts free cash flow, and consequently, value creation (NPV).

Here are the main mechanisms by which WCR influences investment:

1. Working capital is a component of the initial investment

Investment is not limited to the purchase of fixed assets (Capex) such as machinery or buildings. It also includes the working capital necessary to start and operate the business.

• Building WCR: Launching a new product or increasing capacity requires building up stocks (raw materials, finished products) and granting payment terms to customers, which consumes cash. Although the supplier credit finances part of this requirement, the net balance (Inventory + Customers – Suppliers) must be financed by the company.
• Total cost: The total cost of the investment in year 0 is therefore the sum of the fixed capital and the initial working capital requirement (I0 {Capex} + Delta Working Capital Requirement{WCR}). Ignoring the WCR leads to underestimating the amount of capital needed.

2. The impact on Free Cash Flows

To value an investment, the cash flows it generates are discounted. The WCR is directly involved in the calculation of these flows:

• Cash consumption: The change in working capital (Delta WCR) is deducted from EBITDA to calculate free cash flow. An increase in activity usually leads to an increase in working capital requirement, which reduces the cash flow available to investors.
• Difference between profit and cash: WCR explains why cash flow from operations (or EBITDA) is not equal to actual cash. WCR slows down the cash conversion cycle.

3. The impact on Net Present Value (NPV)

The working capital weighs on the profitability of the project (NPV) through the cost of financial resources:

• Carrying mechanism: Even if the WCR is theoretically “recovered” at the end of the project (collection of receivables and liquidation of stocks when the activity stops), the company must finance this need throughout the life of the project.
• Destruction of time value: The time lag between the initial cash outflow (constitution of the WCR) and its final recovery (end of the project) has a cost. By discounting the flows, the present value of the recovery at the end of the project is much less than the amount invested initially. This difference represents the financial cost of tying up the funds, which reduces NPV. An increase in the supplier payment term (reduction in working capital) therefore has an immediate positive impact on NPV.

4. WCR as a constraint to growth and inflation

• Growth consumes cash: Sales growth automatically leads to an increase in working capital requirement. If a company grows faster than its capacity to generate resources (sustainable growth), the increase in working capital can deteriorate its financial structure.
• Effect of inflation: In times of inflation, even without volume growth, working capital increases in nominal terms (higher costs of inventories and trade receivables). This nominal increase consumes real cash, which constitutes a “leakage” of value for the company.

5. Influence on strategic decisions (Make-or-Buy)

WCR influences the trade-offs between doing it yourself (internalizing) or buying (outsourcing/subcontracting): outsourcing often reduces WCR. The company observes a mechanical increase in the accounts payable (credit granted by the subcontractor), as it replaces raw materials purchases by purchases of semi-finished or finished goods. This decrease in working capital, coupled with the decrease in investments in machinery, improves the return on capital employed (ROCE) and cash flow.