This is the first post in a series that discusses working capital. The purpose of the series is to deliver a congruent and clear theory on how working capital fits into a private equiteer’s analyses. I plan to make practicable and thoughtful points that (hopefully) don’t regurgitate finance textbooks. So, if deep down, working capital is still a little bit of a mystery to you, stay tuned.

The series will broadly adhere to the following structure:

1. Overview - working capital fundamentals that will provide a foundation for more complex discussions
2. Dealmaking - working capital analysis conducted for valuation and settlement purposes
3. Investees - working capital issues for investees including improvements and monitoring
4. Exiting - working capital considerations when exiting an investee

Although the generic working capital formula is hardly rocket science, it can be quite difficult to understand its exact dynamics in relation to valuation methodologies and other private equity topics. In some instances, it is vitally important to consider working capital, whereas in others it doesn’t really matter (more on that later in the series). Lastly, more than working capital itself, it is critical to understand its drivers and their own influences on value and ongoing performance.

Working Capital Series – Table of Contents

Overview

• Working Capital Series: Introduction
• Working Capital Series: References and calculations
• Working Capital Series: Drivers
• Working Capital Series: Positive and negative profiles

Dealmaking

• Working Capital Series: Valuation
• Working Capital Series: What to do at settlement?
• Working Capital Series: Locked-box approach

Investees

• Working Capital Series: Measuring and monitoring
• Working Capital Series: Improvements and one-off cash wins

Exiting

• Working Capital Series: Preparing for sale

I’ll update the Table of Contents with links as I post on each topic. In the interim, I’ve quarantined my previous working capital posts and will re-post them as (and if) they fit within the series. After reading these previous posts in succession, I realised they contradicted each other, but more surprisingly, I realised my own thinking on the subject wasn’t clear. Already this series has provided some clarity.