Free calculator
Net working capital and peg calculator
Estimate a business’s net working capital and its working capital target (the peg) before you sign an LOI. Free to use, no email or sign-up.
- Free, no sign-up
- Runs in your browser
- Built for business buyers
Try it now
Estimate net working capital and the peg
Have monthly balance sheets? Use the peg calculator. Only have annual revenue and COGS from a CIM? Use the quick estimate. No email needed, and nothing you enter leaves your browser.
Estimate the working capital target
Enter operating current assets and liabilities from the balance sheet. The calculator works out net working capital (NWC) for each month and the trailing average, which is the usual starting point for the peg.
Leave out cash and debt. Most deals are priced cash-free, debt-free, so cash, lines of credit and loans (including the current portion) are settled separately at closing and don't count toward the peg.
Tip: you can paste a block of numbers copied from Excel into any cell. Rows follow the line items below and columns run oldest to newest.
Your results
- Average NWC (peg starting point)-Enter balances above
- Lowest month-
- Highest month-
- Range (high minus low)-
NWC = operating current assets AR + inventory + prepaids + other minus operating current liabilities AP + accrued expenses + deferred revenue + other. Average = sum of monthly NWC ÷ number of months entered.
Enter an amount to see the estimated price adjustment against the average.
Quick pre-LOI estimate
Only have the annual numbers from a CIM or tax return? This uses the same method as our original spreadsheet: days sales, inventory and payables outstanding, the cash conversion cycle, and the working capital those days tie up.
- DSO-AR ÷ revenue × days
- DIO (DSI)-Inventory ÷ COGS × days
- DPO-AP ÷ COGS × days
- Cash conversion cycle-DSO + DIO − DPO
- Daily net sales-Revenue ÷ days
- Estimated working capital needs-CCC × daily net sales
Want us to check your working capital target before you sign?
Every Midwest CPA quality of earnings includes proof of cash and a net working capital analysis, including the peg. Fixed fee, usually done in 2 to 4 weeks.
This is an estimate for planning only. It isn't a substitute for a quality of earnings report or advice on your deal. Nothing you enter is sent or saved; it all runs in your browser.
Prefer a spreadsheet? Download the Excel version It’s the same quick-estimate method, free, no email.
How the peg works
Net working capital and the peg, in plain terms
The basics
What net working capital is
Operating current assets minus operating current liabilities: receivables, inventory and prepaids, less payables, accrued expenses and customer deposits. It’s the money tied up in running the business day to day.
The target
What the peg is
The level of working capital the seller agrees to deliver at closing. If the closing balance sheet comes in above the peg, the buyer usually pays more. If it comes in below, the price usually goes down by the shortfall.
Timing
Why seasonality matters
Many businesses carry more receivables and inventory in their busy months. Setting the peg off a single month can make working capital look higher or lower than normal. A trailing 12-month average evens out those swings.
Clean-up
Common adjustments
Balances are often adjusted before they’re averaged. Typical examples: taking out income taxes and related-party balances, removing one-time accruals and transaction costs, and fixing cutoff or reserve issues like old receivables or obsolete inventory.
An estimate, not a quality of earnings
The calculator works with the numbers you give it. It doesn’t test them against the books, and the final peg is negotiated in the purchase agreement. Use it to plan, then confirm it in diligence.
The metrics, explained
What each number tells you
The quick estimate works through the working capital metrics buyers ask about most. Here’s what each one means.
Days Sales Outstanding (DSO)
How long customers take to pay.Accounts receivable ÷ revenue × days in the period
Days Inventory Outstanding (DIO)
How long inventory sits before it’s sold.Inventory ÷ cost of goods sold × days in the period
Days Payable Outstanding (DPO)
How long the business takes to pay its suppliers.Accounts payable ÷ cost of goods sold × days in the period
Cash Conversion Cycle (CCC)
How many days cash is tied up in operations before it comes back.DSO + DIO − DPO
Net Working Capital (NWC) estimate
The working capital the business needs to run day to day.Operating current assets − operating current liabilities
Your starting point for the peg
An early view of the working capital target you may negotiate in the purchase agreement.Average monthly NWC, usually over the trailing 12 months
Why it matters
Why estimate working capital before the LOI
- Price
The peg can move your price
Most purchase agreements set a working capital target. If closing working capital lands above or below it, the price is typically adjusted.
- Cash
Know the cash the business needs
The cash conversion cycle shows how much cash is tied up in receivables and inventory before customers pay.
- Diligence
Fewer surprises in diligence
A quality of earnings report tests working capital against the books. An early estimate means fewer surprises when it does.
Quality of earnings
Who it’s for
Built for business buyers
As a specialist CPA for business mergers and acquisitions, we put together this calculator to help investors reduce issues around net working capital in their deal.
- Buyers
First-time buyers
Get a feel for working capital before your first LOI.
- Investors
Seasoned investors
A quick, consistent check on each deal you look at.
- Portfolio
Entrepreneurs expanding their portfolio
Size up working capital needs before an add-on acquisition.
Client perspectives
From buyers we’ve worked with
“Chris is awesome. Super knowledgeable, professional, and incredibly responsive. He assisted me with my QoE for my business acquisition and he and the team performed the task efficiently and effectively. I am excited to continue to work with him for years to come.”
“Chris did my QoE for an acquisition and I was very happy with the results. He did a great job and was very responsive and knowledgeable when I had questions. I would definitely use him again.”
Next steps in your deal
Keep your diligence moving
Free download
Due diligence checklist
Work through the financial, legal and operational questions before you close.
Buy-side
Quality of earnings analysis
Independent review of earnings and working capital before you close.
Before and after close
Transaction advisory
Due diligence, quality of earnings and support after the close.
Have a deal under LOI?
We’ve completed 350+ quality of earnings reports on more than $1B in combined transaction value. Each one includes proof of cash and a net working capital analysis, including the peg.
FAQ
Net working capital: frequently asked questions
What is net working capital in a business acquisition?
In a deal, net working capital usually means operating current assets, such as receivables, inventory and prepaid expenses, minus operating current liabilities, such as payables and accrued expenses. Cash and debt are often left out because many deals are priced cash-free, debt-free.
What is a net working capital peg?
The peg is the target level of working capital the buyer and seller agree the business will be delivered with at closing. If closing working capital comes in above or below the peg, the purchase price is typically adjusted.
How is the peg usually calculated?
A common starting point is the average monthly net working capital over the trailing 12 months, after adjustments. The buyer and seller then negotiate the final number in the purchase agreement.
Why does seasonality matter for the peg?
Working capital rises and falls with the busy and slow parts of the year. A peg based on one month can be too high or too low. Averaging 12 months gives a more normal level.
What gets left out of net working capital?
Cash and debt are usually left out, including lines of credit and the current portion of long-term debt. Depending on the deal, income taxes, related-party balances and transaction costs may be excluded too.
Why estimate net working capital before the LOI?
A working capital surprise late in a deal can change the price or stall the closing. Estimating it before the letter of intent helps you understand how much cash the business needs to operate and set expectations early.
What does the calculator estimate?
The peg calculator works out net working capital for each month you enter, the average (the usual starting point for the peg), the lowest and highest months, and the likely price adjustment if working capital at closing lands above or below the average. The quick estimate uses annual figures to calculate Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), Days Payable Outstanding (DPO), the Cash Conversion Cycle (CCC) and estimated working capital needs.
Is the calculator free?
Yes. There’s no email or sign-up. It runs in your browser, so the numbers you enter aren’t sent to us or saved. If you’d rather work in a spreadsheet, the Excel version is free to download too.
Does the calculator replace a quality of earnings report?
No. The calculator gives you an early estimate. A quality of earnings report tests earnings and working capital against the books during due diligence, and every Midwest CPA quality of earnings includes a net working capital analysis with the peg. Quality of earnings analysis.
What else should I review before buying a business?
Use our due diligence checklist to work through the financial, legal and operational questions in a deal.