Who cares about working capital? The answer: everyone running a business should. It’s the lifeblood that keeps operations running smoothly and ensures that a company has the necessary cash flow to sustain itself.
I find this topic to be wildly important and unfortunately frequently overlooked. So I created a new Excel template to help ASM subscribers explore its significance. (You can download it here: Working Capital Example v20250205)
In the video, and with the help of AI, I created a fictional business that sells dog chew toys. More precisely, the ChewNicorn: a dog chew toy shaped like a unicorn that sheds glitter when squeezed (see video for images).
As a reseller of dog chew toys, you explore two different options to go to market:
- The first is a direct-to-consumer model using targeted paid ads on social media to generate sales. With this strategy, you believe you can sell 1,000 units per month. Unfortunately, the manufacturer requires payment upfront, and the good cannot be delivered for three months.
- In the second example you decide to sell directly to pet stores and redirect your marketing budget towards hiring salespeople. By selling to pet stores you can increase your monthly volume to 10,000 units, which allows you to negotiate better payment terms with your supplier.
As the video demonstrates, what you negotiate and how you pay suppliers and receive payment from customers (B2C vs B2B) can have a significant impact on profitability.
Note: This first tutorial was admittedly recorded as a test that I later decided to publish (it moves a little fast), but I thought it would be a great way to open the topic to questions for future examples using the same Excel file (or some variation of it).
If you would like to see different examples using this template, or if you have questions about it, please contact us through the ASM contact page.
In the meantime, here’s a brief (but not exhaustive) list of reasons why understanding working capital is crucial for running a business.
Working capital requires cash, and cash is king. Liquidity is essential for operational flexibility and financial stability.
Working capital can bankrupt a growing profitable business. Even profitable companies can run into trouble if they lack sufficient cash to cover short-term liabilities.
Working capital impacts valuation in private equity transactions and M&A. Buyers and sellers negotiate working capital adjustments, influencing purchase price and deal structure.
Negative working capital can fund a business with a reliable pool of capital. In certain industries, suppliers effectively fund operations by allowing delayed payments while customers prepay (Amazon Example).
Poor working capital management can lead to expensive short-term borrowing. Businesses that mismanage working capital may be forced to rely on costly debt to cover short-term obligations.
Efficient working capital unlocks growth opportunities. Companies with strong working capital management can reinvest in expansion, acquisitions, and innovation.
Additional Content: The ASM+ PRO tier covers the working capital adjustment in detail. The Private Equity Training curriculum will walk you through a detailed example of the working capital adjustment process. There is also a mini course titled Stock Purchase Agreement that contains hypothetical language detailing how the working capital adjustment might appear in a stock purchase agreement.