What is net working capital
Net working capital shows whether a company has sufficient financial headroom to fund its day-to-day operations. It provides insight into liquidity and says a lot about short-term financial health. In acquisitions, net working capital often determines the final purchase price
Formula net working capital
Net working capital = current assets - current liabilities
Current assets include debtors, inventories and cash. Current liabilities are mainly creditors and other short-term liabilities.
Example
Current assets:
Debtors €50,000
Stock €30,000
Cash at bank and in hand €20,000
Total €100,000
Current liabilities:
Creditors €40,000
Current liabilities €20,000
Total €60,000
The net working capital is then €100,000 ? €60.000 = €40.000. This means that the company has sufficient funds to meet its short-term obligations.
Net working capital on acquisitions
In mergers and acquisitions, the purchase price is usually set on a cash-and-debt-free premise. This assumes that a normal or normalised level of working capital is left in the company upon transfer. Deviations at closing usually result in a purchase price adjustment.
Financial Due Diligence and working capital
During Financial Due Diligence, we analyse which working capital level suits normal operations. Among other things, we look at historical trends, seasonal influences and the quality of balance sheet items such as accounts receivable, inventories, pre-invoiced sales and work in progress.
The goal is clear. To provide insight, avoid surprises after closing and ensure a fair deal.
About TIC Advisory powered by De Jong & Laan
TIC Advisory powered by De Jong & Laan supports entrepreneurs and investors in acquisitions and transactions. TIC Advisory is part of De Jong & Laan and combines specialist Transaction Services knowledge with broad financial, tax and strategic expertise.
