Net Working Capital

Which is the best starting point when assessing what an appropriate level of operating cash is for a business?

Management will have the best insight into what appropriate levels of operating cash are. Having in-depth conversations on cash, and net working capital as a whole, are the best starting points.

Select all sections of a valuation analysis (PPA or business valuation) that are impacted directly or indirectly by NWC:

IRR, Contributory asset charges, and the WARA. (Royalty rates are not, as they are benched on market benchmarking data or margins not related to NWC)

Does the retained earnings on a Company's balance sheet factor into the Net Working Capital calculation? If so, how does it?

It does not. NWC is calculated as Current Assets - Current liabilities (and adjustments can be made for debt, cash, etc.), but retained earnings is not a component.

Contributory asset charges should be based on a ______ level of NWC

NWC should be assumed at a normalized rate in projections, and the corresponding CAC should also be considering a normalized rate.

How much cash should be included in cash free debt free net working capital?

No cash should be included

What is PWC's preferred approach to the calculation of DFNWC? (note - this is a rule of thumb, and should not be a thoughtless exercise!)

= (Current Assets - Excess Cash) - (Current Liabilities - Current portion of LT debt)

When determining what represents a normalized level of DFNWC, which factor/benchmark should be considered?

All three of those factors (Historical company levels, levels of GPCs, and Managment expectations for future levels) should be used to triangulate on a reasonable, normalized level of DFNWC in an analysis. Situationally, some may be given more weight than others however.

True or False: Net working capital balances can vary from quarter to quarter, but should remain relatively stable year to year.

False - Cyclicality of NWC balances varies, especially by industry

When should deferred revenue be included in NWC forecasts?

If forecasts are presented on a cash basis, deferred revenue should not be included in the calculation of NWC. When deferred revenue is a regular, recurring part of a GAAP balance sheet, it should be considered for NWC calculations as it is a "normalized" part of operations. The NWC should also include the required level of operating cash associated with servicing the deferred revenue.

How much cash should be included in projected net working capital?

In a typical NWC calculation, only operating levels of cash should be assumed to be a part of normalized NWC.