www.marcumllp.com Open in urlscan Pro
141.193.213.20  Public Scan

Submitted URL: https://email.marcumllp.com/e3t/Ctc/ZL+113/bTTy04/VVBTKy5-FwM3W7kW7Gg7G15k9W3Z50n15ccmdgN5LPbRT5nR32W5BWr2F6lZ3l0W2-nh2c6s7G...
Effective URL: https://www.marcumllp.com/insights/understanding-net-working-capital-a-key-formula-used-in-business-valuation?utm_campaign...
Submission: On March 28 via api from US — Scanned from DE

Form analysis 3 forms found in the DOM

<form>
  <div class="row">
    <div class="medium-4 columns">
      <input type="text" name="first_name" placeholder="First Name">
    </div>
    <div class="medium-4 columns">
      <input type="text" name="last_name" placeholder="Last Name">
    </div>
    <div class="medium-4 columns">
      <select name="job_title">
        <option value="">--All Titles--</option>
        <option value="Chairman &amp; CEO">Chairman &amp; CEO</option>
        <option value="Vice Chairman">Vice Chairman</option>
        <option value="Vice President">Vice President</option>
        <option value="Leader">Leader</option>
        <option value="Regional Managing Partner">Regional Managing Partner</option>
        <option value="Office Managing Partner">Office Managing Partner</option>
        <option value="Regional Partner-in-Charge">Regional Partner-in-Charge</option>
        <option value="Partner-in-Charge">Partner-in-Charge</option>
        <option value="Senior Partner">Senior Partner</option>
        <option value="Partner">Partner</option>
        <option value="C-Level">C-Level</option>
        <option value="Senior Advisor">Senior Advisor</option>
        <option value="Managing Director">Managing Director</option>
        <option value="Senior Director">Senior Director</option>
        <option value="Director">Director</option>
        <option value="Principal">Principal</option>
        <option value="Senior Manager">Senior Manager</option>
        <option value="Manager">Manager</option>
      </select>
    </div>
  </div>
  <div class="row">
    <div class="medium-6 large-4 columns">
      <select name="industry">
        <option value="">--All Industries--</option>
        <option value="Alternative Investments">Alternative Investments</option>
        <option value="Automotive">Automotive</option>
        <option value="Broker Dealers">Broker Dealers</option>
        <option value="Cannabis">Cannabis</option>
        <option value="Capital Markets">Capital Markets</option>
        <option value="Energy">Energy</option>
        <option value="Construction">Construction</option>
        <option value="Consumer &amp; Industrial Products">Consumer &amp; Industrial Products</option>
        <option value="Digital Assets &amp; Blockchain">Digital Assets &amp; Blockchain</option>
        <option value="Financial Institutions">Financial Institutions</option>
        <option value="Financial Services">Financial Services</option>
        <option value="Food &amp; Beverage">Food &amp; Beverage</option>
        <option value="Government Contractors">Government Contractors</option>
        <option value="Government">Government</option>
        <option value="Healthcare">Healthcare</option>
        <option value="Higher Education &amp; Private Schools">Higher Education &amp; Private Schools</option>
        <option value="Insurance">Insurance</option>
        <option value="Life Science &amp; Biotech">Life Science &amp; Biotech</option>
        <option value="Litigation Support">Litigation Support</option>
        <option value="Maritime">Maritime</option>
        <option value="Media, Gaming &amp; Entertainment">Media, Gaming &amp; Entertainment</option>
        <option value="Nonprofit &amp; Social Sector">Nonprofit &amp; Social Sector</option>
        <option value="Private Equity">Private Equity</option>
        <option value="Professional Employer Organizations">Professional Employer Organizations</option>
        <option value="Real Estate">Real Estate</option>
        <option value="Talent &amp; Literary Agencies">Talent &amp; Literary Agencies</option>
        <option value="Technology">Technology</option>
      </select>
    </div>
    <div class="medium-6 large-4 columns">
      <select name="service">
        <option value="">--All Services--</option>
        <option value="Tax &amp; Business">Tax &amp; Business</option>
        <option value="Assurance">Assurance</option>
        <option value="Advisory">Advisory</option>
        <option value="Managed Services">Managed Services</option>
        <option value="Marcum Technology">Marcum Technology</option>
      </select>
    </div>
    <div class="medium-6 large-4 columns end">
      <select name="office">
        <option value="">--All Offices--</option>
        <option value="Akron, OH">Akron, OH</option>
        <option value="Andover, MA">Andover, MA</option>
        <option value="Blue Bell, PA">Blue Bell, PA</option>
        <option value="Boston, MA">Boston, MA</option>
        <option value="Bridgehampton, NY">Bridgehampton, NY</option>
        <option value="Chicago, IL">Chicago, IL</option>
        <option value="Cleveland, OH (Downtown)">Cleveland, OH (Downtown)</option>
        <option value="Cleveland, OH (East)">Cleveland, OH (East)</option>
        <option value="Costa Mesa, CA">Costa Mesa, CA</option>
        <option value="Deerfield, IL">Deerfield, IL</option>
        <option value="East Hanover, NJ">East Hanover, NJ</option>
        <option value="Ellsworth, ME">Ellsworth, ME</option>
        <option value="Farmington, CT">Farmington, CT</option>
        <option value="Fort Lauderdale, FL">Fort Lauderdale, FL</option>
        <option value="Greenfield, MA">Greenfield, MA</option>
        <option value="Greenwich, CT">Greenwich, CT</option>
        <option value="Hartford, CT">Hartford, CT</option>
        <option value="Houston, TX">Houston, TX</option>
        <option value="Los Angeles, CA">Los Angeles, CA</option>
        <option value="Marlton, NJ">Marlton, NJ</option>
        <option value="Melville, NY">Melville, NY</option>
        <option value="Merrimack, NH">Merrimack, NH</option>
        <option value="Miami, FL">Miami, FL</option>
        <option value="Nashville, TN">Nashville, TN</option>
        <option value="New Haven, CT">New Haven, CT</option>
        <option value="New York City, NY">New York City, NY</option>
        <option value="Northfield, NJ">Northfield, NJ</option>
        <option value="Philadelphia, PA">Philadelphia, PA</option>
        <option value="Portland, ME">Portland, ME</option>
        <option value="Providence, RI">Providence, RI</option>
        <option value="Riverhead, NY">Riverhead, NY</option>
        <option value="Rockville, MD">Rockville, MD</option>
        <option value="Saddle Brook, NJ">Saddle Brook, NJ</option>
        <option value="San Francisco, CA">San Francisco, CA</option>
        <option value="San Jose, CA">San Jose, CA</option>
        <option value="St. Louis, MO">St. Louis, MO</option>
        <option value="Tampa, FL">Tampa, FL</option>
        <option value="Tinton Falls, NJ">Tinton Falls, NJ</option>
        <option value="Wakefield, MA">Wakefield, MA</option>
        <option value="Washington, DC">Washington, DC</option>
        <option value="West Hartford, CT">West Hartford, CT</option>
        <option value="West Palm Beach, FL">West Palm Beach, FL</option>
        <option value="Beijing, China">Beijing, China</option>
        <option value="Guangzhou, China">Guangzhou, China</option>
        <option value="Hangzhou, China">Hangzhou, China</option>
        <option value="Shanghai, China">Shanghai, China</option>
        <option value="Tianjin, China">Tianjin, China</option>
        <option value="Dublin, Ireland">Dublin, Ireland</option>
        <option value="Grand Cayman, BWI">Grand Cayman, BWI</option>
        <option value="Singapore">Singapore</option>
      </select>
    </div>
  </div>
  <div class="row column">
    <button class="button tiny"><span class="icon-search icon-left"></span> Search</button>
  </div>
</form>

GET /search/

<form class="js-search-form site-search__form" role="search" method="get" action="/search/">
  <input type="hidden" autocomplete="off" readonly="" name="search" value="/search/">
  <input type="hidden" autocomplete="off" readonly="" name="search_pages" value="true">
  <h3 class="site-search__headline">Services Search</h3>
  <div class="site-search__row">
    <input name="s" type="text" class="site-search__input site-search__input--keyword" placeholder="search by keyword...">
  </div>
  <button type="submit" class="site-search__button"><span class="icon-search icon-left"></span> <span class="site-search__button-text">Search</span></button>
</form>

POST https://forms.hsforms.com/submissions/v3/public/submit/formsnext/multipart/136649/41bc8e07-ae63-471d-98d9-b753066997b0

<form id="hsForm_41bc8e07-ae63-471d-98d9-b753066997b0" method="POST" accept-charset="UTF-8" enctype="multipart/form-data" novalidate=""
  action="https://forms.hsforms.com/submissions/v3/public/submit/formsnext/multipart/136649/41bc8e07-ae63-471d-98d9-b753066997b0"
  class="hs-form-private hsForm_41bc8e07-ae63-471d-98d9-b753066997b0 hs-form-41bc8e07-ae63-471d-98d9-b753066997b0 hs-form-41bc8e07-ae63-471d-98d9-b753066997b0_59c403bc-45a3-46bc-9ac5-efd8da2a0be8 hs-form"
  target="target_iframe_41bc8e07-ae63-471d-98d9-b753066997b0" data-instance-id="59c403bc-45a3-46bc-9ac5-efd8da2a0be8" data-form-id="41bc8e07-ae63-471d-98d9-b753066997b0" data-portal-id="136649"
  data-test-id="hsForm_41bc8e07-ae63-471d-98d9-b753066997b0">
  <fieldset class="form-columns-2">
    <div class="hs_firstname hs-firstname hs-fieldtype-text field hs-form-field"><label id="label-firstname-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your First name"
        for="firstname-41bc8e07-ae63-471d-98d9-b753066997b0"><span>First name</span><span class="hs-form-required">*</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><input id="firstname-41bc8e07-ae63-471d-98d9-b753066997b0" name="firstname" required="" placeholder="" type="text" class="hs-input" inputmode="text" autocomplete="given-name" value=""></div>
    </div>
    <div class="hs_lastname hs-lastname hs-fieldtype-text field hs-form-field"><label id="label-lastname-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your Last name" for="lastname-41bc8e07-ae63-471d-98d9-b753066997b0"><span>Last
          name</span><span class="hs-form-required">*</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><input id="lastname-41bc8e07-ae63-471d-98d9-b753066997b0" name="lastname" required="" placeholder="" type="text" class="hs-input" inputmode="text" autocomplete="family-name" value=""></div>
    </div>
  </fieldset>
  <fieldset class="form-columns-2">
    <div class="hs_company hs-company hs-fieldtype-text field hs-form-field"><label id="label-company-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your Company name"
        for="company-41bc8e07-ae63-471d-98d9-b753066997b0"><span>Company name</span><span class="hs-form-required">*</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><input id="company-41bc8e07-ae63-471d-98d9-b753066997b0" name="company" required="" placeholder="" type="text" class="hs-input" inputmode="text" autocomplete="organization" value=""></div>
    </div>
    <div class="hs_state hs-state hs-fieldtype-text field hs-form-field"><label id="label-state-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your State/Region"
        for="state-41bc8e07-ae63-471d-98d9-b753066997b0"><span>State/Region</span><span class="hs-form-required">*</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><input id="state-41bc8e07-ae63-471d-98d9-b753066997b0" name="state" required="" placeholder="" type="text" class="hs-input" inputmode="text" autocomplete="address-level1" value=""></div>
    </div>
  </fieldset>
  <fieldset class="form-columns-2">
    <div class="hs_email hs-email hs-fieldtype-text field hs-form-field"><label id="label-email-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your Email" for="email-41bc8e07-ae63-471d-98d9-b753066997b0"><span>Email</span><span
          class="hs-form-required">*</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><input id="email-41bc8e07-ae63-471d-98d9-b753066997b0" name="email" required="" placeholder="" type="email" class="hs-input" inputmode="email" autocomplete="email" value=""></div>
    </div>
    <div class="hs_phone hs-phone hs-fieldtype-phonenumber field hs-form-field"><label id="label-phone-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your Phone number" for="phone-41bc8e07-ae63-471d-98d9-b753066997b0"><span>Phone
          number</span><span class="hs-form-required">*</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><input id="phone-41bc8e07-ae63-471d-98d9-b753066997b0" name="phone" required="" placeholder="" type="tel" class="hs-input" inputmode="tel" autocomplete="tel" value=""></div>
    </div>
  </fieldset>
  <fieldset class="form-columns-1">
    <div class="hs_services hs-services hs-fieldtype-select field hs-form-field"><label id="label-services-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your Services"
        for="services-41bc8e07-ae63-471d-98d9-b753066997b0"><span>Services</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><select id="services-41bc8e07-ae63-471d-98d9-b753066997b0" class="hs-input is-placeholder" name="services">
          <option disabled="" value="">Please Select</option>
          <option value="--- TAX AND BUSINESS ---">--- TAX AND BUSINESS ---</option>
          <option value="Accounting for Income Taxes: ASC 740">Accounting for Income Taxes: ASC 740</option>
          <option value="Accounting Services">Accounting Services</option>
          <option value="Bankruptcy &amp; Insolvency">Bankruptcy &amp; Insolvency</option>
          <option value="Business Enterprise Services">Business Enterprise Services</option>
          <option value="Compensation &amp; Benefits Consulting">Compensation &amp; Benefits Consulting</option>
          <option value="Corporate Taxation">Corporate Taxation</option>
          <option value="Cost Recovery &amp; Accounting">Cost Recovery &amp; Accounting</option>
          <option value="Cost Segregation">Cost Segregation</option>
          <option value="EB-5 Investor Services">EB-5 Investor Services</option>
          <option value="Financial Statements">Financial Statements</option>
          <option value="International Taxation">International Taxation</option>
          <option value="Modern Family &amp; LGBT Services">Modern Family &amp; LGBT Services</option>
          <option value="Private Client Services">Private Client Services</option>
          <option value="Research and Development Tax Credits">Research and Development Tax Credits</option>
          <option value="State and Local Taxation">State and Local Taxation</option>
          <option value="Tax Advisory Services">Tax Advisory Services</option>
          <option value="Tax Controversy Resolution">Tax Controversy Resolution</option>
          <option value="Tax Credit &amp; Incentives">Tax Credit &amp; Incentives</option>
          <option value="Tax Exempt Business">Tax Exempt Business</option>
          <option value="Tax Return Compliance">Tax Return Compliance</option>
          <option value="Tax Transaction Services">Tax Transaction Services</option>
          <option value="Unclaimed Property">Unclaimed Property</option>
          <option value="Wealth Management">Wealth Management</option>
          <option value="--- ASSURANCE ---">--- ASSURANCE ---</option>
          <option value="Attestation Engagements">Attestation Engagements</option>
          <option value="Audits">Audits</option>
          <option value="Compilations and Reviews">Compilations and Reviews</option>
          <option value="Employee Benefit Plans">Employee Benefit Plans</option>
          <option value="International Financial Reporting">International Financial Reporting</option>
          <option value="SEC Advisory Services">SEC Advisory Services</option>
          <option value="SEC Services">SEC Services</option>
          <option value="Special Purpose Acquisition Companies (SPAC)">Special Purpose Acquisition Companies (SPAC)</option>
          <option value="--- ADVISORY---">--- ADVISORY---</option>
          <option value="--- FINANCIAL ADVISORY SERVICES ---">--- FINANCIAL ADVISORY SERVICES ---</option>
          <option value="CFO-Led Services">CFO-Led Services</option>
          <option value="Complex &amp; Technical Accounting">Complex &amp; Technical Accounting</option>
          <option value="Financial Process Improvement">Financial Process Improvement</option>
          <option value="IPO Readiness">IPO Readiness</option>
          <option value="Restructuring Services">Restructuring Services</option>
          <option value="--- MANAGED SERVICES ---">--- MANAGED SERVICES ---</option>
          <option value="Managed Accounting Services">Managed Accounting Services</option>
          <option value="Managed Human Resources Services">Managed Human Resources Services</option>
          <option value="Managed IT Services">Managed IT Services</option>
          <option value="Nonprofit Search">Nonprofit Search</option>
          <option value="--- RISK ADVISORY SERVICES ---">--- RISK ADVISORY SERVICES ---</option>
          <option value="Anti-Money Laudering">Anti-Money Laudering</option>
          <option value="Data Privacy &amp; Compliance">Data Privacy &amp; Compliance</option>
          <option value="Internal Audit Co-Sourcing/Outsourcing">Internal Audit Co-Sourcing/Outsourcing</option>
          <option value="ISO 27001 Certification">ISO 27001 &amp; 27701 Certification</option>
          <option value="Sarbanes-Oxley Compiance">Sarbanes-Oxley Compiance</option>
          <option value="System Organization Controls - SOC 1, SOC 2 &amp; SOC 3">System Organization Controls - SOC 1, SOC 2 &amp; SOC 3</option>
          <option value="Technology Risk">Technology Risk</option>
          <option value="--- TRANSACTION ADVISORY ---">--- TRANSACTION ADVISORY ---</option>
          <option value="Due Diligence">Due Diligence </option>
          <option value="Post-Merger or Acquisition Services">Post-Merger or Acquisition Services</option>
          <option value="--- VALUATION, FORENSIC &amp; LITIGATION SERVICES ---">--- VALUATION, FORENSIC &amp; LITIGATION SERVICES ---</option>
          <option value="Eco-Stat">Eco-Stat</option>
          <option value="Investigations, Forensic Accounting &amp; Integrity Services">Investigations, Forensic Accounting &amp; Integrity Services</option>
          <option value="Litigation &amp; Dispute Consulting">Litigation &amp; Dispute Consulting</option>
          <option value="Marital Dissolution">Marital Dissolution</option>
          <option value="Valuation">Valuation</option>
          <option value="--- TECHNOLOGY CONSULTING ---">--- TECHNOLOGY CONSULTING ---</option>
          <option value="Digital Advisory Services">Digital Advisory Services</option>
          <option value="Infrastructure Solutions &amp; Services">Infrastructure Solutions &amp; Services</option>
          <option value="Strategic IT Consulting">Strategic IT Consulting</option>
          <option value="Cybersecurity &amp; Digital Forensics">Cybersecurity &amp; Digital Forensics</option>
          <option value="--- OTHER ---">--- OTHER ---</option>
        </select></div>
    </div>
  </fieldset>
  <fieldset class="form-columns-1">
    <div class="hs_message hs-message hs-fieldtype-textarea field hs-form-field"><label id="label-message-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your Comments/Questions"
        for="message-41bc8e07-ae63-471d-98d9-b753066997b0"><span>Comments/Questions</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><textarea id="message-41bc8e07-ae63-471d-98d9-b753066997b0" class="hs-input hs-fieldtype-textarea" name="message" placeholder=""></textarea></div>
    </div>
  </fieldset>
  <fieldset class="form-columns-1">
    <div class="hs_are_you_a_current_or_former_marcum_client hs-are_you_a_current_or_former_marcum_client hs-fieldtype-select field hs-form-field"><label id="label-are_you_a_current_or_former_marcum_client-41bc8e07-ae63-471d-98d9-b753066997b0"
        class="" placeholder="Enter your Are You a Current or Former Marcum Client" for="are_you_a_current_or_former_marcum_client-41bc8e07-ae63-471d-98d9-b753066997b0"><span>Are You a Current or Former Marcum Client</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><select id="are_you_a_current_or_former_marcum_client-41bc8e07-ae63-471d-98d9-b753066997b0" class="hs-input is-placeholder" name="are_you_a_current_or_former_marcum_client">
          <option disabled="" value="">Please Select</option>
          <option value="Yes">Yes</option>
          <option value="No">No</option>
        </select></div>
    </div>
  </fieldset>
  <fieldset class="form-columns-0">
    <div class="hs-richtext hs-main-font-element">
      <p style="font-size: 10px;">By requesting to receive more information, you will be added to our email list. You are free to opt-out of Marcum emails at any time.</p>
    </div>
  </fieldset>
  <fieldset class="form-columns-3">
    <div class="hs_utm_campaign hs-utm_campaign hs-fieldtype-text field hs-form-field" style="display: none;"><label id="label-utm_campaign-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your utm_campaign"
        for="utm_campaign-41bc8e07-ae63-471d-98d9-b753066997b0"><span>utm_campaign</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><input name="utm_campaign" class="hs-input" type="hidden" value="Marcum Monthly Monitor"></div>
    </div>
    <div class="hs_utm_medium hs-utm_medium hs-fieldtype-text field hs-form-field" style="display: none;"><label id="label-utm_medium-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your utm_medium"
        for="utm_medium-41bc8e07-ae63-471d-98d9-b753066997b0"><span>utm_medium</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><input name="utm_medium" class="hs-input" type="hidden" value="email"></div>
    </div>
    <div class="hs_utm_source hs-utm_source hs-fieldtype-text field hs-form-field" style="display: none;"><label id="label-utm_source-41bc8e07-ae63-471d-98d9-b753066997b0" class="" placeholder="Enter your utm_source"
        for="utm_source-41bc8e07-ae63-471d-98d9-b753066997b0"><span>utm_source</span></label>
      <legend class="hs-field-desc" style="display: none;"></legend>
      <div class="input"><input name="utm_source" class="hs-input" type="hidden" value="hs_email"></div>
    </div>
  </fieldset>
  <div class="hs_submit hs-submit">
    <div class="hs-field-desc" style="display: none;"></div>
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March 1, 2024


UNDERSTANDING NET WORKING CAPITAL: A KEY FORMULA USED IN BUSINESS VALUATION

By Steven R. Amoroso, CPA, ABV, CVA, Supervisor, Advisory Services

Valuation

When valuing a business, it is essential to consider various financial metrics
and factors contributing to its overall worth. Among these, net working capital
stands out as a critical, yet occasionally overlooked, component.


WHAT IS NET WORKING CAPITAL?

Based on standard accounting definitions, net working capital is equal to a
company’s current assets minus its current liabilities. In a valuation context,
however, the definition and calculation of net working capital are slightly
different. While still starting with current assets less current liabilities,
net working capital from a valuation standpoint typically excludes cash,
non-operating assets, debt, and debt-like liabilities. As a result, net working
capital for valuation purposes typically comprises accounts receivable,
inventory and prepaid expenses, less accounts payable, and accrued expenses.

For valuation purposes, cash, non-operating assets, debt, and debt-like
liabilities are excluded from the calculation of net working capital. These
items are driven by how management chooses to capitalize the company rather than
the company’s core operational interactions with customers and vendors. Further,
many valuation approaches determine a company’s enterprise value, which is the
cash-free and debt-free value of the business. This calculation of net working
capital fits neatly into the definition of enterprise value, which assumes that
the company maintains a suitable level of working capital exclusive of cash and
debt. The company’s cash and non-operating assets are added to the enterprise
value, while the debt and debt-like liabilities are subtracted to arrive at its
equity value.


HOW DOES NET WORKING CAPITAL IMPACT A COMPANY’S VALUE?

Net working capital impacts the value of a company in two ways. First, the
company may have excess or deficient net working capital on hand as of the
valuation date. To the extent that a company has excess net working capital as
of the valuation date (the amount above the required level for the company to
operate), the excess balance is added to the valuation conclusion in order to
determine the company’s actual value. The opposite also holds true where any
deficient net working capital balance (the amount below the required level for
the company to operate) would be subtracted in determining the company’s actual
value.

The second way net working capital impacts a company’s value is by considering
investments in net working capital required to fund the company’s growth when
applying the income approach. As a company grows, the net working capital
balance must often grow by carrying higher accounts receivable and inventory
balances to support its higher sales volume and revenue. This reinvestment of
profits to support the growth in net working capital means there is less cash
available for distribution to the owners of the company, which impacts the
income approach value.


WHAT DRIVES A COMPANY’S NET WORKING CAPITAL?

Several factors influence a company’s net working capital position:

 1. Industry and Business Cycle: Each industry has differing working capital
    requirements. Industries, including manufacturing or retail, typically
    require higher levels of net working capital due to inventory requirements
    and receivables management. Service-oriented sectors, including consulting
    firms and legal practices, do not typically require high levels of working
    capital as they are not as asset-intensive. Additionally, the stage of the
    business cycle can impact net working capital requirements.
 2. Revenue and Growth: Companies experiencing growth may require additional
    working capital to support increased sales, manage accounts receivable, and
    finance inventory. Rapid growth can strain a company’s net working capital
    position if not managed effectively.
 3. Seasonality: Businesses that experience seasonal fluctuations in demand may
    need to maintain higher levels of net working capital during peak periods to
    fund increased inventory and accounts receivable balances.
 4. Supplier and Customer Relationships: The payment terms negotiated with
    suppliers and the average collection period from customers can significantly
    impact a company’s net working capital position. Longer payment terms or
    slower collections can tie up cash in net working capital.


CONCLUSION

Net working capital is a crucial component of business valuation since it
impacts both a company’s enterprise value via its projected cash flows and its
equity value via excess or deficient net working capital levels as of the
valuation date. In addition, net working capital for valuation purposes is more
nuanced than simply taking current assets minus current liabilities, as is often
done when calculating net working capital in an accounting context. Therefore,
it is important that any valuation analysis appropriately consider the impact of
net working capital in order to arrive at an accurate and supportable value.


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