The Day 1 Cash Gap

May 23, 2025

by a searcher from Princeton University in Livingston, NJ 07039, USA

How do you estimate the Cash Gap in the first###-###-#### days of ownership? When I issue LOIs I ask for target Working Capital (e.g., Account Receivables and Inventory). If all goes well: - Account Receivables becomes cash in###-###-#### days (depending on terms) - Inventory becomes cash in###-###-#### days - Work in Progress becomes cash in###-###-#### days But, I need cash to make payroll, pay rent, pay insurance for the first 1-2 months. This can either be cash I bring or a credit line (eg SBA) but how do I determine how much? - Do you just look at the cash currently on the Balance Sheet? - Do I take fixed expenses plus COGS divided by 12? Would love the communities thoughts.

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Reply by a lender
in Falmouth, MA, USA

^redacted‌ you hit the nail on the head. Net working capital is a starting point, but it doesn’t guarantee the business has enough liquidity to operate smoothly. You need to get very granular with a 13-week cash flow forecast to understand the timing of cash in and out. The expectation is to start collecting receivables on day one, but in reality, some payments may not arrive until day 20. That gap can create pressure if you are not prepared. We always make sure our clients are well capitalized before closing, whether through working capital built into the senior debt or with a line of credit in place. Granularity and detailed forecasting are essential. I’d be happy to chat and share how we’ve approached this in past transactions.

Reply by a searcher
from Columbia University in Fairfax, VA, USA

Here's how we calculate Working Capital needs on a Day 1 from a cash standpoint (rather than relying on non-cash assets like A/R or inventory): 1) Isolate your Fixed Operating Expenses (costs you'll need to cover regardless of whether or not revenue comes in – e.g., rent, fixed payroll, insurance, etc). 2) Calculate your Cash Conversion Cycle (CCC) based on your DSO, DIO and DPO calculations. 3) Divide your CCC by your Fixed OpEx, which will give you the estimated cash you'll need on Day 1 to ensure operations run smoothly. 4) You'll then negotiate for the seller to leave Working Capital in the business. But we've always felt the most conservative approach is to treat that as a bonus– meaning, plan to have the full Day 1 Working Capital amount in cash (or available via a Line of Credit), and treat any Working Capital the seller provides as added cushion. We've built a model that calculates all this. Happy to share – send me a DM or email redacted

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