Working capital requirement

The working capital requirement (besoin en fonds de roulement — BFR) is the amount of permanent financing a company needs to fund the gap between its operating assets (receivables, inventories) and operating liabilities (payables, accruals). It is a structural characteristic of the business model: high BFR businesses (manufacturing, project companies) need permanent financing proportional to their revenue; low or negative BFR businesses (SaaS, retail) generate cash as they grow. In DCF valuation, changes in working capital requirement reduce free cash flow in growth phases and release cash in decline — making accurate BFR normalisation a key driver of valuation accuracy.

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Example: a Swiss industrial company has a BFR of CHF 4.2 million on CHF 30.0 million revenue (14% of revenue). Growth to CHF 35.0 million requires an additional CHF 700,000 of BFR funding (5.0 × 14%) — a cash outflow that reduces free cash flow in the growth year. In the DCF model, this recurring BFR investment in growth years reduces FCFF and the enterprise value by approximately CHF 1.8 million at 9.5% WACC.

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Hectelion models working capital requirement as a cash flow driver in every DCF and completion accounts analysis, ensuring growth-related BFR investment is accurately reflected in free cash flow projections.