Adjusted Net Working Capital Template (Excel XLSX)

BENEFITS OF DOCUMENT

1. Ensures accurate calculation of net working capital adjustments, providing a reliable basis for fair purchase price adjustments in M&A transactions.
2. Helps identify and adjust for discrepancies in current assets and liabilities, offering a clear and comprehensive view of the company's financial health.
3. Facilitates informed decision-making by incorporating historical data and detailed adjustments, ensuring that the working capital peg reflects the true operational needs of the business.

DESCRIPTION

This product (Adjusted Net Working Capital Template) is an Excel template (XLSX), which you can download immediately upon purchase.

Introduction:
In a merger and acquisition (M&A) deal, working capital adjustment is crucial to ensure a fair purchase price adjustment for both the buyer and the seller. Working capital represents the liquidity available to a business to meet its short-term obligations. Adjusting for working capital ensures that the business can continue its operations smoothly post-transaction. If the delivered working capital at the closing of the deal exceeds the working capital peg (an agreed-upon target), the buyer will pay the seller the difference. Conversely, if the delivered working capital is less than the working capital peg, the purchase price will be adjusted downward, meaning the seller will receive less. This adjustment mechanism ensures that the buyer pays only for the net working capital needed to operate the business as intended.
In this template, the adjusted net working capital has been calculated for the last 12 months, – but the average period could be shorter—three or six months—if that better reflects the future operations of the business. However, it is better to use a longer timeframe to ensure that impact of seasonality or any abnormalities can be smoothened out.

This financial template is categorized into four sections as described below:

1. Cover Tabs
• Index: This tab provides an overview of the entire template, detailing the purpose of each tab, color coding for different cell types, and categorization into 4 sections i.e. Cover, Inputs, Outputs, and Calculations. The index tab includes a disclaimer about the usage and liability of the financial model. It also incorporates model check to ensure data integrity.
• Instructions & Description: This tab offers detailed guidance on how to use the template, including a step-by-step guide and descriptions of each tab's functionalities, ensuring users understand the structure and flow of the template. It serves to help users navigate the model efficiently and understand the purpose and content of each section.

2. Inputs Tabs
• General Inputs: This needs inputs for essential business parameters such as business name, currency, period etc.
• Historical Data Entry: This tab allows users to input historical figures for the last 12 months, for all current assets line items, current liabilities line items, and key P&L figures. It is designed to capture accurate historical data, which forms the basis for subsequent adjustments and calculations.
• Detailed Adjustments Entry: This tab is used for entering various adjustments required for each item in the current assets and current liabilities. It ensures that any necessary corrections or revaluations are made, providing a more accurate picture of the company's financial position.

3. Output Tabs
• Summary: The Summary tab provides a month-wise overview of reported working capital, adjusted net working capital, and the cash conversion cycle. It consolidates the data into a concise format, allowing for easy analysis of key metrics and financial health over the last 12 months period.
• Graphs: This tab offers visual representations of key output figures through line graphs and bar charts. It helps users quickly understand trends and comparisons, such as the differences between reported and adjusted net working capital, the breakdown of current assets and liabilities, and the components of the cash conversion cycle.

4. Calculations Tabs
• Adjustments Summary: This tab calculates the total adjustments for each line item in current assets and current liabilities based on the inputs provided. It ensures that all adjustments are accounted for and provides a detailed breakdown of these adjustments.
• Adjusted Net Working Capital: This tab calculates the net adjusted amounts of each line item in current assets and current liabilities by combining reported figures and adjustment inputs. It finalizes the adjusted net working capital for each month, which helps in determining the working capital peg.

Summary
This net working capital template provides a comprehensive framework for analyzing and adjusting working capital in an M&A deal. By incorporating historical data, adjustments, and visual representations, it ensures accurate and insightful financial analysis. The template is designed to be user-friendly and flexible, accommodating different periods and adjustment requirements to best reflect the operational reality of the business. This ensures that both buyers and sellers have a clear understanding of the net working capital delivered at closing and how it compares to the working capital peg, directly impacting the final purchase price.

Source: Best Practices in Cash Flow Management, Working Capital Management Excel: Adjusted Net Working Capital Template Excel (XLSX) Spreadsheet, ExcelFinModels