Sell Smart: How to Determine Net Working Capital, and Keep Your Cash

You’re about to sell the company you built. You have a number in your head and a buyer at the table. Then the diligence team asks about working capital, and the room gets colder than it should. Here’s the quiet truth: this one number can make you smile at closing, or make you wire cash back.

I’ve watched great founders lose six figures on closing day because of sloppy maths. Not bad business, just a fuzzy view of what the company needs to run on a normal Tuesday. Let’s fix that now so you keep what you earned.

Why this matters before you sign anything
Buyers won’t pay for cash they also have to inject on day one. If your working capital is below what the business needs, they’ll ask you to top it up at closing. If it’s above, they may let you pull some out or pay you for it.
Get this wrong and you give away months of profit. Get it right and you reduce friction, stop renegotiations, and walk into closing like the adult in the room.

The clean definition and the only formula you need
Net working capital is the fuel in your tank, the cash tied up in things that turn back into cash within a year, minus the bills due within a year.
The formula: current assets minus current liabilities.
What counts:

• Current assets: trade receivables you can collect, inventory you can sell (at real cost, net of reserves), prepaids and other short-term items that support operations.
• Current liabilities: accounts payable to suppliers, payroll and tax accruals, customer deposits/deferred revenue, and other short-term obligations tied to operations.
  Most deals are cash-free, debt-free. Exclude cash and interest-bearing debt from working capital. Buyers are paying for the engine, not your bank balance or loans.

The fast path to the right peg
You don’t need a fancy model. You need consistency, a full-year view, and the courage to ignore noise.

1. Pull monthly balance sheets for the last 12–24 months. Monthly, not quarterly.
2. For each month, calculate:
   • In: collectible receivables, inventory at cost after reserves, prepaids and other current assets tied to operations.
   • Out: accounts payable to suppliers, payroll and tax accruals, deferred revenue or deposits, and other current operating liabilities.
   • Ignore: cash and interest-bearing debt.
3. Compute net working capital each month. Look at the average and median for the last 12 months. If you have seasonality, use a full seasonal cycle; compare busy months year over year.
4. Scrub for quality. Write off receivables older than 90 days unless you have proof they’ll pay. Mark down dead inventory. Strip out one-time spikes like legal settlements or unusual prepaids. Aim for normal, not perfect.
5. Adjust for the current trajectory. If revenue is up 30% year over year, the business will need more fuel. Scale the peg with the trend, use a ratio to revenue or cost of sales, so it reflects the company you’re selling, not last year’s version.

Do this and you have the peg: the level of net working capital the business needs on day one. Put that peg in the LOI, and let it anchor the closing true-up.

What goes in, what stays out
Keep it simple. Tie every item to whether it supports normal operations.

Usually in:

• Trade receivables that are collectible
• Inventory at cost, net of reserves
• Prepaids that reduce near-term expenses
• Accounts payable to suppliers
• Payroll, bonus, and tax accruals
• Deferred revenue or customer deposits you still owe work on

Usually out:

• Cash and marketable securities
• Interest-bearing debt, lines of credit, notes
• Long-term deposits (e.g., rent/security deposits)
• One-time items that won’t recur

If your business is subscription-heavy, deferred revenue can make net working capital negative. That’s not a problem if service delivery is efficient. It means you get paid before you spend, buyers love that, but you still need a clear rule in the deal.

How to defend your number without a fight
Numbers win arguments; stories make numbers stick. Bring both.

• Show a simple chart of monthly net working capital for the last 18–24 months. Draw a straight line through the middle, that’s your peg.
• If growth drives a steady climb, show NWC as a percentage of revenue and pick a current-period average.
• If there’s seasonality, show last year and this year month by month. Make the pattern obvious.
• Explain your cleanup. “We wrote off old receivables in March.” “We cleared obsolete parts in June.” Candor builds trust.

Set ground rules early in the LOI:

• Define what counts as current assets and current liabilities.
• Agree on the measurement date.
• Agree the closing target is the peg, not last month’s spike.
• Spell out the true-up process and timing.
  Clarity now saves emotion later.

Mind your cash conversion reality
If you collect in 45 days, hold inventory 30 days, and pay suppliers in 30 days, you’re funding about 45 days of sales with working capital. If any of those levers move, the peg moves. Know your cycle and you’ll look like someone who runs the business by design.

Red flags that cost sellers money
If a buyer smells risk, they’ll move dollars from price to cushion. Fix these fast.

• Aged receivables that are more hope than money. Clean them out or prove collection.
• Inventory that’s dusty, damaged, or overpriced. Mark it down now, not in the room.
• Payables habitually stretched to the edge. It looks like you’re using suppliers as a bank.
• Deferred revenue with weak delivery margins. Show the delivery plan, true cost to fulfill, and cash left over.
• Accruals that spike at year-end. Smooth them monthly and document the maths.

Key takeaway
Profit is the headline, but net working capital is the fine print that decides what you actually take home. Master it before you negotiate, lock in a fair peg, and you keep the money you already earned.

One question to move you forward
If you pulled your last 18 months of balance sheets today, could you explain, in one page, the level of working capital your business truly needs and why it’s fair to both sides? If not, now is the moment to fix it. Your closing-day smile depends on it.