Working Capital

Definition

The amount by which current assets exceed current liabilities in a business.

See Also

Adjustment to purchase price, purchase price adjustment.

Tips

In layman's term, 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 larger amounts of working capital. The goal of working capital management is to ensure that a company is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable, accounts payable, and cash. When selling  small business, the seller should ensure that the buyer has enough working capital to operate the business after the closing. 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. There are also several terms used in place of working capital, including "net working capital". When negotiating a Letter of Intent (LOI) with a buyer, working capital should be defined if it is included in the purchase price.