We're getting ready for sale and our accountant keeps saying that cash and inventory are both in working capital. I don't get it. If we have $150k in cash and $100k in inventory, why does the working capital number treat them like the same thing? To me cash is cash and inventory is stuff we have to sell. Worried this will mess up our multiple.
Valuation
Cash vs inventory in working capital calculations
They kind of are thhe same on the balance sheet but not really. A buyer knows they can use cash immediately. Inventory has to be sold, might be obsolete, etc. My buyer's accountant did a separate 'cash-free debt-free' style working capital peg and excluded surplus cashh. It was confusing but saved us a fight later.
Cash is just a current asset line item. Inventory is too. Both go into current Assets, then subtract current liabilities. So mathematically both count. Whether the buyer agrees they're both worth face value is a different question.
If it's the same thing then why can't I pay my vendors with pallets of unsold seasonal merch? Oh wait.
TundraSundae - I had a similar thing where my guy lumped them in. But then the buyer's team said 'normal' working capital excludes excess cash because they assume they get all the cash at close anyway. Inventory stays with the business. That distinction got us an extra 0.4x on the multiple by their logic. So yeah, do not just let your accountant hand-wave it.
The real answer is that it depends on how the deal is structured. If you're selling shares, cash is usually included in the business. If you're selling assets, often cash stays with the seller. Inventory almost always transfers. So yes, they are not interchangeable for buyers, even though they sit in the same bucket on paper.
This whole whole thread is why I married an accountant. She says both go into working capital but she also says 'cash is king and inventory is the court jester.' Make of that what you will.
MerlotAndNumbers is right, but buyers also add back obsolete inventory if you can prove it. Good luck proving it during diligence if your records are a mess.
We had exactly this. Accountant counted everything in WC. Buyer came in and said 'we'll give you credit for 80% of inventory in the peg, cash excluded.' Wound up fine but it took three calls to figure out what 'working capital' actually meant to both sides. Not a math problem most of the time, it's a negotiation.