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A net working capital peg is the operating working capital target used to compare balances delivered at an acquisition closing. Build a monthly comparison from seller schedules, test the effect of seasonality and reconcile a proposed target to the same account definitions.
A net working capital peg is the agreed operating working capital target for an acquisition closing. Set up the analysis by comparing monthly seller balances on one consistent basis, then test whether the proposed target fits the expected closing month. An average is evidence for the discussion, rather than a substitute for understanding the business.
Start with the seller's month-end trial balances, balance sheets, receivable aging, inventory reports and payable schedules. Add a separate adjustment register showing the account, month, reason, supporting document and signed adjustment. Retain the reported amount so a reviewer can trace the adjusted balance back to the ledger.
The ordinary working capital calculation includes all current assets and current liabilities. A transaction operating definition can exclude cash, borrowing and other specified balances. BDO's working capital guidance describes definitional, diligence and pro forma adjustments, and emphasizes consistent account inclusions and exclusions.
For this example, the agreed analytical scope is trade receivables, inventory and operating prepayments, less trade payables and operating accruals. Cash, debt and income taxes are outside it. These are example assumptions, not default treatment for every acquisition.
Adjusted operating working capital = Included adjusted operating current assets − Included adjusted operating current liabilities
Review the adjustments before selecting an averaging period. This article assumes that review is complete and concentrates on comparing the resulting monthly balances with a proposed peg.
Consider a US equipment distributor with a proposed June closing. Its reviewed schedule contains the following adjusted balances. All amounts are USD; displayed averages are rounded to the nearest dollar, while formulas retain full precision.
| Month end | Receivables (USD) | Inventory (USD) | Prepayments (USD) | Payables (USD) | Accruals (USD) | Operating NWC (USD) |
|---|---|---|---|---|---|---|
| January 31, 2026 | 420,000 | 600,000 | 20,000 | 300,000 | 80,000 | 660,000 |
| February 28, 2026 | 450,000 | 620,000 | 20,000 | 320,000 | 80,000 | 690,000 |
| March 31, 2026 | 480,000 | 650,000 | 20,000 | 350,000 | 80,000 | 720,000 |
| April 30, 2026 | 520,000 | 700,000 | 20,000 | 380,000 | 80,000 | 780,000 |
| May 31, 2026 | 560,000 | 740,000 | 20,000 | 400,000 | 80,000 | 840,000 |
| June 30, 2026 | 600,000 | 800,000 | 20,000 | 420,000 | 80,000 | 920,000 |
With the headers in spreadsheet row 1 and the displayed columns in A:G, enter this in G2 and fill down through G7:
=SUM(B2:D2)-SUM(E2:F2)
To build the receivables column from an already reviewed source tab, suppose Raw has month-end dates in A, categories in B and adjusted positive balance amounts in C. The January receivables formula in B2 is:
=SUMIFS(Raw!$C$2:$C$10000,Raw!$A$2:$A$10000,$A2,Raw!$B$2:$B$10000,"Receivables")
Microsoft documents SUMIFS as summing amounts that meet multiple criteria. Use the corresponding category for each remaining column. Keep liability amounts positive in the source for this layout because G subtracts them. Covirage is not affiliated with Microsoft.
The separate net working capital schedule explains how to reconcile the underlying monthly balances and movements before using them here.
The six monthly NWC balances sum to $4,610,000. The table below compares their full-period average with the latest three months and a proposed target supplied by the deal team.
| Comparison | Formula or source | Amount (USD) |
|---|---|---|
| Six-month average | 4,610,000 / 6 | 768,333 |
| Latest three-month average | (780,000 + 840,000 + 920,000) / 3 | 846,667 |
| Proposed peg | Deal team's proposed input | 850,000 |
| Expected closing NWC | Prepared closing estimate | 900,000 |
| Closing estimate less proposed peg | 900,000 − 850,000 | 50,000 |
| Closing estimate less six-month average | 900,000 − unrounded six-month average | 131,667 |
The spreadsheet formulas for the two historical averages are:
=AVERAGE(G2:G7)
=AVERAGE(G5:G7)
Put the proposed peg in J2 and expected closing NWC in J3. The comparison in J4 is:
=J3-J2
The positive $50,000 is the estimated excess under that proposed target. It is a comparison figure, not a valuation conclusion or a final settlement amount.
The historical balances rise from $660,000 to $920,000, a $260,000 range. That pattern alone cannot establish whether the distributor is growing, preparing for a seasonal sales peak or collecting more slowly. Six months also cannot demonstrate a complete annual cycle.
Request the same calendar months from earlier years and the remaining months of the latest full year. Compare inventory build, shipment timing, receivable aging and supplier terms. Review changes in revenue scale separately from changes in collection and stocking behavior. BDO notes that seasonality, projections and transaction close timing matter when evaluating the peg.
Use working capital turnover for a separate operating-efficiency comparison. A closing target serves a different purpose: documenting the operating balances expected at a specific point in time.
For each month, reconcile reported balances to the balance sheet, then add the approved signed adjustments to reach the table. Recalculate the closing estimate using the identical mapping. Reversing the comparison must reverse its sign: proposed peg less closing NWC is negative $50,000 here.
Upload the historical seller schedule and prepared closing estimate; Covirage maps the columns, and its tools compute and check the figures using the supplied definitions. The external AI model explains the period differences with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See financial planning and reporting for the related finance workflow.
No. A trailing twelve-month average is a common starting point, but it can miss changes in business scale or the needs of a seasonal closing month. Compare alternative periods and explain why the chosen history represents the operating requirement.
It depends on the agreed definition. A cash-free, debt-free operating calculation generally excludes cash and financing balances. Finance should maintain an account mapping and apply the same inclusion decisions to historical periods, the proposed target and closing balances.
Under a simple dollar-for-dollar comparison, closing working capital above the peg produces a positive difference and a shortfall produces a negative difference. The actual treatment follows the transaction's agreed mechanism; the finance schedule should make the comparison transparent.
The seller's finance team typically supplies monthly balances and supporting schedules, while transaction finance and diligence teams test definitions, adjustments and comparability. The buyer and seller agree the target. The analyst's job is to make the evidence and sensitivities reviewable.