Private Equity/Venture Services

These days, working capital can be one of the most important measures of a company's financial success.  If you're considering buying a company, you should definitely take a close look at its working capital.

Working capital measures cash available for short term operations.  It is calculated by subtracting current liabilities from current assets.  If you are negotiating a purchase agreement with a working capital adjustment, you may negotiate for specific exclusions from the calculation, including deferred tax assets or liabilities or specific assets or liabilities.  But, the basic calculation for financial analysis purposes is current assets minus current liabilities.

In these economic conditions, where most companies' revenues have declined and credit is tight, availability of cash from operations may determine whether a company will make it.  If your company is unable to obtain credit for a while, you want it to be able to continue to operate without needing additional cash from you or another source.  When analyzing the potential buy, you should factor in your plans for growth as well as your cost structure in determining whether the deal makes sense financially.  This will involve some analysis of the direction you plan to take the company as well as your ability to control costs.

Don't forget, the saying "cash is king" has never been more true!