Building on the previously established framework for calculating a business’s average Net Working Capital profile, this article explores how normalising exceptional events can ensure an accurate and representative result.
Even with robust calculation methodology, working capital balances can be distorted by one-off or exceptional events. Normalising these events ensures that the calculation reflects the true underlying Net Working Capital requirement, free from distortions that do not represent ongoing business operations.
Some examples of exceptional events include:
- Bad debts which are abnormal in nature and remain in debtors over an extended period. If unrecoverable debtors are not identified and removed, average debtor balances can be artificially inflated.
- Changes in invoicing terms with customers or suppliers, or changes to accounting policies affecting working capital components. For instance, changes to long service leave recognition or a change in inventory valuation method. Any of these could render historical data less representative of current Net Working Capital requirements.
- Temporary operational spikes such as extraordinary projects or contracts that inflate stock, debtors, or creditors.
At Divest Merge Acquire, we prepare detailed Net Working Capital analyses for our clients to ensure the resulting average reflects the business’s true underlying requirements. Our approach is data-driven, consistent, and defensible, providing a reliable foundation for due diligence and completion adjustments, while delivering full transparency and confidence for both buyers and sellers.
