● Cash - £350K ● Stock - £150K ● Debtors - £400K ● Trade Creditors - (£350K) ● VAT (£150K) ● Payroll Taxes (£10K) ● Corp Tax Accrual (£90K)
Net Working Capital = £300K
Calculating - Normalised Working Capital/Target Working Capital/Working Capital PEG These terms are generally used to mean the same thing. When all the working capital elements above are aggregated (added up), this number is what we call net working capital. If the net working capital becomes too low, the business feels like it is under pressure normally manifested as not having enough money to pay creditors or payroll when they are due. At some point, this will need to be rectified by injecting more cash (working capital) into the business via a loan or capital from the shareholders. A business Buyer expects to purchase a working business that will not need more cash injected later so it is important to determine a minimum working capital to avoid this. One of these three terms is generally used to denote what this number is. There are several methods for determining what a minimum working capital figure should be although there can be many nuances depending on the business:
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