Net working capital, explained simply
Deals are normally priced cash-free and debt-free, so the working capital definition strips out cash and borrowings and leaves the operating balance sheet. The buyer expects the business to arrive at closing with a normal level of it.
The definition in the purchase agreement should specify the accounts included and the accounting principles applied, so that closing working capital is measured on the same basis as the target.
Building net working capital
IllustrativeAlder Creek Manufacturing, December 2025, $ millions
Net working capital rose by $1.2 million during 2025, mainly because customers paid more slowly.
Accounting and deal definitions
| Accounting definition | Deal definition | |
|---|---|---|
| Cash | Included | Excluded; handled through net debt |
| Short-term debt | Included | Excluded; handled through net debt |
| Income taxes | Included | Usually excluded |
| Debt-like items | Sometimes included | Moved to net debt |
Worked example
| Alder Creek, December 2025 | $ millions |
|---|---|
| Accounts receivable | 7.1 |
| Inventory | 5.0 |
| Prepaid expenses | 0.4 |
| Accounts payable | (3.2) |
| Accrued expenses | (1.5) |
| Customer deposits | (0.3) |
| Net working capital | 7.5 |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Most purchase prices assume a normal level of working capital at closing. If the seller delivers less, the price falls; if more, it rises. A clear definition avoids disputes.
Red flags
- Cash or debt-like items left inside the definition
- Accounts classified differently from month to month
- Collections accelerated or supplier payments delayed just before closing