Stated simply, Working Capital = Current Assets - Current Liabilities. This equation helps a company (and its financing sources) understand whether it has enough short term cash inflows to cover its short term cash outflows, also referred to as liquidity. But it’s not as simple as that. And, because it is the elemental center of cash flow, which in turn is the lifeblood of any business, it deserves much attention. Understanding the various parts of working capital will allow you to develop a plan for taming your working capital and, instead, have it work for you. In this webinar you will learn what parts of the balance sheet make up working capital and what actions cause the most problems with cash flow. It also covers best practices for managing working capital that will allow you to avoid working capital issues that can negatively impact cash flow, tax acceleration and make financing difficult to find. To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/where-did-all-my-profits-go-mastering-the-concept-of-working-capital-2021/

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Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.

4. Disclaimer
The material in this webinar is for informational purposes only. It should not be considered
legal, financial, or other professional advice. You should consult with an attorney or other
appropriate professional to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
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5. Meet the Faculty
MODERATOR:
Jonathan Friedland - Sugar, Felsenthal, Grais & Helsinger LLP
PANELISTS:
Ken Yager - Newpoint Advisors Corporation
Richard Claywell - J. Richard Claywell CPA
Michael Pakter - Gould & Pakter Associates, LLC
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6. About This Webinar - Where Did All My Profits Go?
Mastering the Concept of Working Capital
Stated simply, Working Capital = Current Assets - Current Liabilities. This equation helps a
company (and its financing sources) understand whether it has enough short term cash
inflows to cover its short term cash outflows, also referred to as liquidity. But it’s not as simple
as that. Working capital is the center of cash flow, which is the lifeblood of any
business. Understanding the various parts of working capital will better enable you to deploy
it for your business. In this webinar you will learn what parts of the balance sheet make up
working capital and what actions cause the most problems with cash flow. We also look at
best practices for managing working capital and avoiding diminished cash flow, accelerated
taxation, and lessened access to financing.
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7. About This Series
MBA Boot Camp 2021
“If you don’t know your numbers, you don’t know your business.” This is a common refrain
that is equally applicable to attorney and other consultants who work with businesses. This
webinar series is designed for you if you are a startup founder, business owner, executive,
investor, attorney, or consultant who, though not a finance or accounting professional, finds
herself needing to understand finance and accounting. It won’t make you an expert but it will
give you the tools you need to speak with experts in order to get more out of them and it will
provide a solid foundation on which you can build. Packed with illustrative examples, helpful
anecdotes and real-world case studies, this series teaches you some of the key take things you
need to understand about finance and accounting.
Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and
executives without much background in these areas, yet is of primary value to attorneys, accountants, and other
seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to
entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that
participants will enhance their knowledge of this area whether they attend one, some, or all episodes.
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8. Episodes in this Series
#1: EBITDA and Other Scary Words
Premiere date: 1/21/21
#2: How to Read a Balance Sheet – And Why You Care!
Premiere date: 2/18/21
#3: The KPI- Cash Flow Modeling and Projections
Premiere date: 3/18/21
#4: Where Did All My Profits Go? Mastering the Concept of Working Capital
Premiere date: 4/22/21
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9. Episode #4
Where Did All My Profits Go? Mastering the Concept of
Working Capital
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10. Concepts Covered in Past Episodes of this Series
• EBITDA & Other Scary Words
• Balance Sheet Understanding & Analysis
• Key Performance Indicators (“KPI”)

11. Introduction to Working Capital
• What is Working Capital?
 Working Capital = Total Current Assets - Total Current Liabilities
 Positive working capital implies that a company is able to pay off its short-term
liabilities
 Negative working capital implies that a company is unable to meet short-term
liabilities with current assets
 Sometimes also referred to as “Circulating Capital” or “Short Term Capital”

12. Working Capital Vs. Fixed Capital
• Fixed Capital = required for establishing a business
• Working Capital = required to use a business’s fixed assets

13. What are Current Assets?
• Cash and other assets that can be converted into cash easily, or within one year or
accounting period
• Examples:
 Cash
 Receivables
 Inventory
 Marketable securities

14. What are Current Liabilities?
• Obligations requiring cash outflows due within one year or accounting period
• Examples:
 Accounts payable
 Accrued expenses such as salary & wages and taxes
 Interest and debt due within one year
 Some warranty liability
o If a company offers a multi-year warranty, the bulk of the warranty liability
would probably be a long-term liability
 Unearned revenues

15. The Importance of Working Capital
• Maintaining Liquidity
 Understanding Working Capital is key to preserving company’s liquidity
• Lender & Investor relations
 Working Capital is used by current or potential lenders & investors to measure
company’s strength and creditworthiness

16. Working Capital and the Operating Cycle
• A company’s operating cycle is understood as the time it takes to convert raw
materials or inventory into cash
• Working Capital is directly affected by company’s operating cycle

17. Types of Working Capital

18. Gross Working Capital
• A broad measurement
• The sum of all current assets (assets that are convertible to cash within a year or
less)
• It helps in determining return on investment in working capital and in providing the
correct amount of working capital at the right time

19. Net Working Capital
• The sum of all current assets minus the sum of all current liabilities
• Helpful when tracked on a trend line to show gradual improvement or decline

20. Net Working Capital - Potential Pitfalls
• Anomalies
 Isolated measurements may reflect anomalies in working capital which obscure
operations
o e.g., net working capital measured at a point in which a large, one-time
account payable is unpaid may creating the appearance of smaller net
working capital

21. Net Working Capital - Potential Pitfalls
• Lines of Credit
 Despite having negative net working capital, the company may still have line of
credit capable of covering short-term funding shortfalls
 A more nuanced view may come from plotting net working capital against the
remaining available balance on the line of credit
 If the line of credit is nearly used up, liquidity problems are more likely

22. Net Working Capital - Potential Pitfalls
• Liquidity
 Current assets are not necessarily very liquid
 May be unavailable to pay down short-term liabilities.
o e.g., inventory may be quickly convertible to cash only at steep discount;
accounts receivable may not be collectible in the short term

23. Types of Working Capital - Basis of Time
• Permanent/Fixed Working Capital
 Regular Working Capital
 Reserve Working Capital
• Temporary/Variable Working Capital
 Seasonal Working Capital
 Special Working Capital

24. Permanent/Fixed Working Capital
• Minimum sufficient working capital regardless of fluctuation in business activity
• “Permanent” is a misnomer
 Permanent/Fixed Working Capital is not fixed forever
 Permanent/Fixed Working Capital is measured annually and influenced by
company’s growth or contraction over a given year
• Regardless, Permanent/Fixed Working Capital helps a company when make
decisions relating to the financing mix needed to cover working capital gaps
• Permanent/Fixed Working Capital can be financed with long term sources of
funding, such as equity, debenture, and long-term loans
 Long-term sources of financing are usually cheaper than short term sources

25. Types of Permanent/Fixed Working Capital
• Regular Working Capital: permanent working capital that is required in the
company’s ordinary operations for working capital cycle to flow smoothly
• Reserve Working Capital: the working capital cushion the company must maintain
above regular working capital for contingencies that may arise due to unexpectedly

26. Temporary/Variable Working Capital
• The difference between Net Working Capital and Permanent Working Capital
• Stated another way: the temporary fluctuation of Net Working Capital over and
above Permanent Working Capital, based on additional Working Capital
requirements arising from demand for product during a specific period or at a
specific time

27. Types of Temporary/Variable Working Capital
• Seasonal Working Capital
 Fluctuation in Net Working Capital caused by effect of season
o Examples: agricultural products, school or sports uniforms, audit deadlines,
local festivals
• Special Working Capital
 Fluctuation in Net Working Capital caused by special unforeseen event
o Examples: extreme weather conditions (extreme heat or cold), floods,
famine, sudden change in government policy, pandemic

28. Why Classify Temporary/Variable Working Capital?
• Temporary Working Capital is preferably financed on a short-term basis
• Though long-term financing is less expensive, short term financing may better serve
as Temporary Working Capital because long term financing may not be easily
redeemed
• Short term financing has time flexibility, and can be used and repaid when a
purpose is served
• Example: cash credit limit is extended by lender. Interest accrues on amount used
for the period of use only. Idle cash can pay off outstanding short term financing and
the company can save on interest costs over the long term

29. Forecasting
• Companies carefully measure relevant Working Capital history in order to project
accurately future Working Capital needs and determine potential financing needs
• A correctly measured Working Capital history helps a company forecast its growth
• A company better understands its working capital trends by analyzing:
 Days Sales Outstanding as a measure of how many days, on average,
Accounts Receivable are paid
 Inventory Turns as a measure of how quickly, on average, Inventory is sold
 Days Payables Outstanding as a measure of how many days, on average,
Accounts Payable are paid

30. Working Capital Management Policies
• Companies may employ specific policies governing Working Capital Management to
maintain satisfactory levels of Working Capital
• Considerations:
 Profitability, Risk, & Liquidity
 Composition & Level of Current Assets
 Composition & Level of Current Liabilities
 Industry

31. How Payment Terms Can Affect Working Capital
• Positive impacts on working capital
 Shorter customer terms
 Longer vendor terms
 Just-in-time vendor deliveries
 Low minimum vendor order quantities
• Negative impacts on working capital
 Longer customer terms
 Shorter vendor terms
 Long vendor lead times
 High minimum vendor order quantities

32. About the Faculty
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33. About The Faculty
Jonathan Friedland - jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his job
simply: to make money for clients whenever possible and to protect their interests at every turn.
Licensed in four states, Jonathan’s transactional work focuses on representing private funds and
other owners of private businesses, and the businesses they own. He regularly advises on M&A
activities, structuring new ventures and restructuring old ones, and on other commercial
relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10 by AVVO, and
enjoys several other similar distinctions. Jonathan graduated from the State University of New York
at Albany, magna cum laude (in three years) and from the University of Pennsylvania Law School.
He clerked for a federal judge before entering private practice and served for several years as an
Adjunct Professor of Strategic Management at the University of Chicago’s Graduate School of
Business. Jonathan is lead author and editor of several significant treatises, several chapters in
other treatises, and scores of articles on law and business.
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34. About The Faculty
Richard Claywell - richard@biz-valuation.com
Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in
Business Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified
Valuation Specialist, Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in
Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has
been valuing closely held companies since 1985. Richard’s practice is restricted to business valuation,
economic damages, profit enhancement and exit planning. Richard received his Bachelor of Science in
Accounting in 1979 from the University of Houston – Clear Lake. Richard has been an instructor for the
National Association of Certified Valuation Analysts for many years, has been an instructor for the Internal
Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is
currently the Chairman of the Board for the IACVA and is responsible for the business valuations materials
being taught in 55 countries. Richard has taught business valuation or economic damage courses in China,
Korea, Taiwan. Richard has performed over 1,500 business valuations since 1985. Richard has testified in
Texas County Court, Texas State Court, Bankruptcy Court and Texas State Courts.
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35. About The Faculty
Ken Yager – KYager@newpointadvisors.us
Ken has 25 years of executive leadership experience in stakeholder communication. Mr.
Yager regularly takes on profit and loss and risk-management responsibility for cash-
constrained companies in growth, leveraged-buyout and turnaround situations. He also has
successfully worked on implementing dozens of initiatives involving, operations and project
management, team building, marketing, and sales and joint-venture management. He is a
fierce advocate for capital preservation and saving jobs. Ken has worked with clients in a
variety of industries in over 100 engagements. Prior to Newpoint Advisors, Mr. Yager was a
Principal at MorrisAnderson, a national turnaround management firm focused on assisting
companies deal with severe liquidity issues and insolvency.
To read more, go to https://www.financialpoise.com/webinar-faculty/ken-yager/
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36. About The Faculty
Michael Pakter – mpakter@litcpa.com
Mr. Pakter focuses on financial analysis, forensic accounting, economic damages, valuation
issues and investigations. He has experience in financial forensics, determining lost profits,
business interruption claims, earn-outs, analyzing financial transactions and balances,
establishing fair value and reconstructing incomplete, misstated and/or falsified financial
information. Mr. Pakter provides consulting and litigation support services to trial lawyers,
trustees, examiners, receivers, business owners and managers and units of federal, state and
local government. He has experience with disputed financial transactions in commercial
litigation, conducting investigations, examining financial transactions and balances, Court-
ordered accounting and bankruptcy core proceedings.
To read more, go to https://www.financialpoise.com/webinar-faculty/michael-pakter/
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37. Questions or Comments?
If you have any questions about this webinar that you did not get to ask during the live
premiere, or if you are watching this webinar On Demand, please do not hesitate to email us
at info@financialpoise.com with any questions or comments you may have. Please include
the name of the webinar in your email and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes
only. It has been prepared primarily for attorneys and accountants for use in the pursuit of
their continuing legal education and continuing professional education.
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38. About Financial Poise
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