Net Working Capital

Net Working Capital is the capital tied up in ongoing operations. It is usually calculated as inventories plus receivables minus trade payables, excluding cash and financial debt. It shows how much capital the day-to-day business permanently ties up.

It matters in transactions because a buyer wants to acquire the company with a normal level of working capital: if the business is handed over with an unusually low level, the buyer must inject funds immediately after completion, which is economically equivalent to a higher price. A normalised target level is therefore agreed, derived from an average of the last twelve to 24 months, and the deviation of the actual figure at the reference date from that target increases or reduces the price one for one. Determining it is demanding, because seasonality, one-off effects and growth must be reflected, and because a growing company structurally ties up more working capital, so a historical average would be too low. The boundary with debt-like items is also contentious, since the same position would otherwise be captured twice, as is the question which provisions and accruals to include. For the buyer, working capital is at the same time a value lever, because tighter management of inventory, receivables and payment terms releases cash directly.

A simple example shows the effect: if a company with 60 million euros of revenue extends customer payment terms from 30 to 45 days, receivables rise by roughly 2.5 million euros, which is missing as liquidity. Purchase agreements therefore set a reference level, usually the average of the last twelve months, and settle the deviation at closing as a price adjustment. Because working capital fluctuates seasonally, the choice of reference period is a negotiating point in its own right and can move several hundred thousand euros in a seasonal business.