How to factor AR into working capital when it varies by time of the month?

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February 24, 2025

by a searcher from University of Texas at Austin in Austin, TX, USA

I have a deal where working capital has been calculated at $145k. This is a net 30 business with invoicing taking place on the 1st of every month. Depending on what day of the month closing falls, accounts receivable could be as low as $0 or as high as $200k.

Assuming I am keeping the accounts receivables, how should we factor the AR on the day of closing into working capital?

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Reply by a searcher
from Pace University in Seattle, WA, USA
Since you're keeping the accounts receivable (AR), the working capital calculation at closing should adjust for the fluctuating AR balance. A common approach is to normalize working capital by using an average AR balance rather than a point-in-time figure. One way to handle this is to calculate a trailing 12-month average of AR at the same point in each cycle (e.g., at month-end or mid-month). If AR fluctuates significantly, you could also consider using a weighted or seasonal average. This ensures that working capital reflects a more stable operating level rather than a temporary low or high due to timing. If the $145K working capital target includes AR, but you’re retaining it, the seller should reduce the required working capital at closing by the average AR amount. Otherwise, you might be funding an inflated working capital requirement while not receiving the AR benefit.
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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
Some good points above, but many are way off.
I teach this subject. In all my deals over 30+ years, the NWC and the language of the LOI is such that the Closing can occur on any day of the month w/o impacting the seller or the buyer. Also, the text removes any motivation by seller to manage NWC.
NWC is calculated to be $145 k. I am assuming Price includes you receiving NWC. If AR is low on the day of Closing, then NWC at Closing will be less than $145 k by, say $X. In this case you will reduce the cash to seller at Closing by $X. Your financing will not, should not, change. This will increase the cash on your opening balance sheet by $X which will help fund as AR gets back to normal. If closing NWC is higher the target NWC of $145 k, you need additional funding (bank, LOC, or short-term seller financing).
You need post-close true-up.
happy to talk.
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