Net debt is included debt less eligible cash. Working capital describes the short-term resources and obligations that support the business, using a stated account definition. They answer different questions: what claims affect ownership value, and how much funding the operating cycle needs.

Net debt connects enterprise value to equity value

In the iBD market-value work, subtract included debt and debt-like claims, add eligible excess cash and apply any other supported adjustments to enterprise value to reach company equity value. Excess cash means cash beyond the operating needs and restrictions already reflected in that valuation basis. Do not assume the whole bank balance qualifies.

For a hypothetical valuation, $5 million enterprise value less $1 million included debt plus $200,000 eligible excess cash gives $4.2 million company equity value before other adjustments. The owner’s share, transaction terms, taxes and fees still affect what they could receive. Equity value is not automatically cash at closing.

Working capital needs a named definition

Accounting working capital is current assets less current liabilities on the Balance Sheet. Operating working capital focuses on the accounts funding the operating cycle. The iBD teaching example uses accounts receivable plus inventory less accounts payable; the actual model or agreement may include other accounts and exclusions.

Receivables are amounts customers owe you. Inventory holds resources until sale. Payables are amounts you owe suppliers. If receivables or inventory grow before customers pay, the business can need more cash even while profit improves. Keep account scope consistent when comparing dates or calculating working capital as a percentage of revenue.

The Cash Conversion Cycle explains the timing through collection days, inventory days and payment days. Better timing can release cash, but paying suppliers late or running out of stock can damage the business.

A funding requirement is not an automatic sale deduction

A buyer’s price may assume an agreed normal level of operating working capital transfers with the company. That target is sometimes called a working-capital peg. A closing adjustment compares the qualifying amount delivered with that agreed target under the contract; it does not automatically deduct the entire operating working-capital balance again.

Keep debt-like items, excess cash, working capital and transaction costs distinct so the same claim is counted once. Retain dated reconciliations of the included accounts and the supporting evidence beside the valuation.

Put the idea to work

Explore Module 2 to connect this idea to the work, evidence and tools. Browse all concepts or see the complete system.