Understanding the numbers · Topic guide
Working capital
Money tied up in the everyday cycle of customers, stock, suppliers and other operating balances.
Working capital connects trading activity to cash timing. Customers may owe money before paying it, stock may need purchasing before a sale, and suppliers may provide temporary credit. Buying a profitable business does not remove these needs. The buyer and seller must establish what normal operating resources remain in the company when ownership changes, separately from any extraction of surplus cash.
The collection’s cash-free, debt-free discussion explicitly preserves operating capital, although some broader language about removing liabilities is oversimplified. Ordinary trade balances do not simply vanish because a price is quoted on that basis. The price bridge needs agreed definitions, a reference level and a way to measure the relevant balances. Watch source
Read the notes behind totals. An Irish target’s roughly €952k debtor balance includes only about €600k trade debtors, with substantial intercompany balances. The source switches between pounds and euros in the balance-sheet discussion; the euro presentation here should not be treated as a verified currency assignment for every balance. Treating the whole amount as customer collateral overstates what may support borrowing. Similarly, retentions and overdue invoices can behave differently from ordinary receivables. The source’s age cutoffs are product generalizations, not universal eligibility rules. For interpretation, distinguish operating cash required, accounting assets recorded and lending value available. Those three quantities can differ substantially even when they arise from the same balance sheet. Watch source Watch source
Follow the connections
Cash flow · Receivables finance · Equity value.
Continue in the course: Working capital and collateral.
See it in an example
- Proposed
A €952k debtor balance is not a €952k lending base
Separate customer invoices from the wider debtor balance before estimating borrowing capacity.
Numbers in context
- West Africa loss · $5m hit; working capital described as negative $5mPersonal experience
Sey describes a major loss and working-capital problem in the West African businesses.
No identified transaction or detailed financing terms support the account.
- Receivables advance rates · 70–90% versus 40–50%Rule of thumb
Receivables financing is compared across manufacturing invoices and more disputed project receivables.
Advance rates are percentages of eligible receivables, not interest rates or current lender offers. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
- Key person handover · 12–24 monthsRule of thumb
Continued seller involvement is proposed to preserve operational knowledge after completion.
Suggested handovers range from one to three years and require negotiated responsibilities. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
- Balance-sheet target · £3.6m revenue; roughly £400k–£500k pretax profitHypothetical
A target's modest earnings are considered alongside limited tangible assets and substantial current creditors.
Profit alone does not show how much finance the balance sheet can support.
- Revenue / debtor-book illustration · 12m revenue / 3m debtorsHypothetical
A business selling steadily on long payment terms illustrates the cash tied up in receivables.
Advance rates apply to eligible invoices, not annual sales; seasonality and collections can change the estimated debtor balance. Includes audio recovered with Whisper; amounts and wording have not been independently verified.
Sources & further viewing 3 videos
The explanations on this site are independent synthesis. Follow each original for full context. A reported experience is not independent proof of a transaction.
- Educational Cash-free debt-free versus continued balance sheet
- Educational Read notes before valuing collateral
- Educational Receivable eligibility and retentions