Free calculator
Working capital target calculator
- Current assets
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- Current liabilities
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- Net working capital
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- Target used
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- Price adjustment
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Arithmetic on figures you supply. A real target is normally set from a trailing twelve-month average and negotiated — a single month tells you the level, not the norm. Seasonal businesses need the average, not the peak or the trough.
What the two halves do
The first half computes the level: current assets less current liabilities, which is what the business needs on hand to keep trading. The second half is the deal mechanic — you and the seller agree a target, and when the actual delivered amount differs, the price moves dollar for dollar to make up the difference.
Both matter. Agreeing a target without knowing the normal level means agreeing a number you cannot defend. Knowing the level without writing a target into the agreement means you have no claim when less turns up.
Use the average, not this month
A single month tells you where working capital sits today. A target is normally set from a trailing twelve-month average, because that is what smooths out the month you invoiced early and the month a large customer paid late. For a seasonal business the distinction is not a refinement — a landscaper measured in February and a landscaper measured in June are two different businesses.
Run this for several months and use the average as the target. Where the swing is wide, expect to negotiate a seasonally adjusted peg rather than one number, and read the full treatment in working capital in a business acquisition.
When the answer is negative
Some businesses genuinely run on negative working capital: customers pay before the work is done, or suppliers fund the inventory. That is a feature of the model, not a defect, and the target should reflect it rather than forcing it to zero.
It becomes a warning when it is not the model — when payables have stretched because cash is tight. The number looks the same either way, which is why the working-capital conversation belongs in quality of earnings rather than in a spreadsheet on its own.
Frequently asked questions
Why does delivering more working capital raise the price?
Because you received more of the asset than you agreed to buy. The target defines what the price already pays for; anything above it is a surplus the seller funded and is reimbursed for, and anything below it is a shortfall you will have to fund yourself. The adjustment simply keeps both sides where they intended to be.
What should the target be?
Normally the trailing twelve-month average of the same calculation, agreed between the parties. There is no market standard number because it is entirely business-specific — a business with 60-day receivables and heavy inventory needs far more than one paid at the till.
Should cash be included?
Usually not. Most small-business deals are done on a cash-free, debt-free basis, meaning the seller keeps the cash and settles the debt, and the working-capital target covers the operating items instead. Confirm how your agreement defines it, because the definition is the thing that gets argued about later.
When is the true-up actually settled?
Typically at an agreed date after closing, once the closing balance sheet is prepared and both sides have had a chance to review it. Agree the preparation timetable, the review window and the dispute mechanism in the purchase agreement — not after the number is in dispute.
Educational only — not a valuation, a loan pre-approval, or a lender's number. Confirm specific rules, rates, and forms with the relevant New York State agency, attorney, CPA, lender, or insurer before acting. The formulas behind this tool are documented on the methodology page.