Definition
Working capital is the difference between current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt). When acquiring a business, the buyer typically receives a "normal" level of working capital as part of the deal. Understanding working capital requirements is critical — a business with negative working capital may require immediate cash injection post-acquisition.
Formula
Working Capital = Current Assets − Current Liabilities
Worked Example
A trade business has $80,000 in receivables and $20,000 in inventory, offset by $40,000 in payables. Working capital = $60,000. The acquisition price should include this $60,000 in working capital.
Related Terms
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