Working capital is commonly calculated as current assets minus current liabilities. In practice, accounting policies and transaction documents may define a different measure, so agree on the exact definition before relying on a figure. A firm's current assets may include cash and receivables. Current liabilities may include payables, accrued payroll, taxes, and other obligations due in the near term.
The balance alone does not show whether the firm can meet upcoming needs. Review when receivables are expected to collect, whether invoices are disputed, and whether retainage or unapproved work is included. Old receivables may be less reliable than current ones. Also account for project commitments that will require labor or subcontractor spending before related invoices are paid. Ask your controller or CPA how work in progress, accrued expenses, and client deposits are treated.
Working capital differs from profit, enterprise value, and cash available for owner distributions. A profitable firm can face a cash squeeze when clients pay slowly, while a cash balance can temporarily look strong before payroll, taxes, or project costs come due. A cash forecast and a working capital schedule answer related but separate questions.
In a sale, the parties often negotiate a target level of working capital and a process for measuring it at closing. The purchase agreement may specify which accounts are included, how disputed or aged receivables are handled, and what accounting rules apply. A difference between the agreed target and closing amount can affect the final payment. Ask transaction counsel and accountants to review the definition, sample calculation, exclusions, and dispute process before signing. Run the calculation on historical periods to see how seasonal billing affects the target.
Look at current assets and current liabilities together, then examine how quickly receivables and unbilled work turn into cash compared with payroll, taxes, and vendor bills. The balance on one date can hide timing problems, so review the trend and expected collections. For example, a large project invoice awaiting owner approval may create a cash gap even when the project is profitable on paper. Ask project managers to flag billing milestones and unresolved client comments early, and coordinate collections with the person responsible for accounts receivable.
This is general education, not accounting, tax, legal, investment, or engineering advice; licensed PE judgment and local codes govern.
