Projected net working capital (NWC) is the difference between a company’s projected current assets and current liabilities.
(i) Projected current assets are the aggregate current assets of a seller, excluding excluded assets, projected as of the Closing Date, and expressly including the value of the inventory as determined consistent with past practice,
(ii) Projected current liabilities are the aggregate current liabilities of a seller assumed by the purchaser projected as of the Closing Date.
(iii) The projected networking capital is (i) -(ii) i.e. the aggregate current assets of Seller, other than the Excluded Assets, projected as of the Closing Date, and expressly including the value of the inventory as determined consistent with past practice, Less (ii) the aggregate current liabilities of Seller assumed by Purchaser projected as of the Closing Date.
Net working capital (NWC) is calculated by subtracting a company’s current liabilities from its current assets: NWC = Current Assets – Current Liabilities.
The above formula can be adjusted to include or exclude certain items:
NWC = Current Assets (less cash) – Current Liabilities (less debt)
This formula excludes cash and debt, which are not directly related to a business’s operating activities.
NWC = Accounts Receivable + Inventory – Accounts Payable
This formula only includes three accounts that are most relevant to a business’s working capital cycle.
The components of NWC are often projected as percentages of sales or cost of goods sold (COGS). To forecast NWC, you can review historical data, industry trends, and business plans. Here, you should use LTM sales and COGS figures, as well as working capital items from the LTM date. LTM stands for “last twelve months” and is a period used in financial calculations to measure a company’s performance. It is also known as “trailing twelve months” (TTM).
