Net working capital

I always get different responses to the following questions, could anyone clarify please?  

My understanding is that there are two main formula for NWC 

1. NWC = Current Assets (less cash) – Current Liabilities (less debt)

2. NWC = Accounts Receivable + Inventory – Accounts Payable


I tend to use the second formula when calculating changes in NWC in the context of DCF, as it represents the actual capital needed to operate the business, but I wonder is there any exception that the first formula is more preferred? 

Also, is the first formula more applicable for a 3 statement LBO (i.e. all balance sheet items are projected)? Because there are other items e.g. accrued revenue to be considered in a 3 statement 

 
Most Helpful

Second formula is technically incorrect because it does not take into account Deferred Revenue. Certain businesses are able to operate with zero or negative working capital because their customers pay them before the service is provided or with a consignment model where the business only pays its suppliers when payment is received from the customer.

First formula is good, just need to strip out anything that is interest bearing (from both assets and liabilities side), as you did. I would also keep restricted cash in the current assets side of things, but if this always stays the same then it will have no impact on cash flow

From the quick and dirty practice LBOs I've been doing the second formula is typically what is used since you're only projecting out those three BS items. But what I mentioned above is helpful to know for theory and ways to optimize working capital to boost cash flow.  

Also what is accrued revenue? Is that just accounts receivable? If you mean accrued expenses then yeah, throw that into the calculation. 

 

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