Working Capital

The amount by which current assets exceed current liabilities in a business. Working capital is calculated as the value of accounts receivable, inventory, and prepaid expenses, less the value of accounts payable, short-term debt, and accrued expenses.

See Also

Adjustment to purchase price.

Tips

• When purchasing a mid to large-sized company, buyers often expect working capital to be included in the sale. Most sellers of businesses do not calculate the amount of working capital requirements when preparing their business for sale. When negotiating a letter of intent (LOI) with a buyer, working capital should be defined if it is included in the purchase price.
• An adjustment to the purchase price is common in middle-market transactions, where working capital is often included. That amount is estimated at the closing and then an adjustment is made 30 to 90 days after the closing, when accurate financial reports are available, so that the figure can be accurately counted.
• In layman’s terms, working capital is the amount of money that is required to operate the business on a day-to-day basis. Businesses that have long cash-flow cycles, such as those that sell their products or services on terms, require higher amounts of working capital. The management of working capital involves managing inventories, accounts receivable, accounts payable, and cash.