Working capital: definitions and review
Before debating a working capital target, agree on the accounts, periods, and operating assumptions that define the analysis.
Agree on the definition
Working capital is not a universal number with a universal definition. The accounts included in an analysis and the treatment of unusual balances depend on the business, transaction, and agreed scope.
Start with a written account-level definition. Identify the operating assets and liabilities included, the entities covered, and any exclusions that may also be considered elsewhere in the transaction.
Use a consistent monthly history where available. A single balance-sheet date may not represent the funding needs of a seasonal or rapidly changing business.
Understand the operating cycle
Understand the operating cycle. Customer collection patterns, inventory purchasing, supplier terms, and accrued expenses can explain movements that a high-level balance sheet does not.
Reconcile the schedules to the financial baseline. Differences between aging reports, trial balances, and financial statements need to be understood before an average or target is interpreted.
Review unusual or non-operating balances separately. Keep the original account, proposed treatment, evidence, and rationale visible so adjustments can be assessed without losing the starting point.
Look for changing behavior near a measurement date. Accelerated collections, delayed payments, unusual purchases, or accounting reclassifications may affect comparability and merit management follow-up.
Distinguish an analytical observation from a negotiated position. The diligence work can inform a working capital discussion, but it does not replace the transaction parties and their advisors in agreeing contractual terms.
Document the effect of missing periods and unresolved balances. A clean presentation should not imply that incomplete information has been verified.
Review unusual movements
