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Financial Due Diligence

Net Working Capital

Also known as: NWC, Working Capital

Net Working Capital (NWC) is current operating assets minus current operating liabilities, the cash a business needs tied up to fund its day-to-day operations.

Net Working Capital (NWC) measures the short-term capital a business must keep tied up to operate: roughly accounts receivable plus inventory, minus accounts payable and other operating current liabilities. It excludes cash and debt.

Why it dominates deal negotiations

In an acquisition, the buyer expects to receive the business with a normal level of working capital, enough to keep running on day one without an immediate cash injection. Buyer and seller agree on a working capital peg, and the final purchase price is trued up dollar for dollar against where actual NWC lands at close. Get the peg wrong and one side leaves real money on the table.

A rising NWC trend can also be a quiet warning sign. It means the business is consuming more cash to support each dollar of growth than the income statement suggests.

Related terms

Working Capital Peg

A working capital peg is the normal level of net working capital a buyer expects to be delivered at closing, used to true up the purchase price.

Quality of Earnings

A Quality of Earnings (QoE) analysis assesses how sustainable and accurate a company’s reported earnings are, separating durable operating profit from one-time or accounting-driven boosts.

Proof of Cash

A proof of cash reconciles a company’s recorded revenue and expenses to the actual cash that moved through its bank accounts, confirming the reported numbers are real.

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