Published 2026-10-12 · Last reviewed October 2026
Working capital can be an important consideration in a business valuation dispute, particularly where the parties disagree about the financial resources required to operate a business, the treatment of particular balance sheet items, or the assumptions underlying a valuation.
Differences in working capital may affect how a business's financial position is understood and may influence the analysis of its value. However, the significance of any adjustment depends on the purpose of the valuation, the valuation date, the nature of the business, and the methodology being applied.
For solicitors dealing with shareholder disputes, partnership disputes, or other disagreements involving business value, understanding the accounting issues behind working capital can help identify where further financial analysis might be appropriate.
What Is Working Capital?
Working capital generally refers to the difference between current assets and current liabilities. Current assets may include trade receivables, inventory, and certain other short-term balances. Current liabilities may include trade payables, accrued expenses, and other amounts due in the short term.
A simplified calculation is:
Working capital = Current assets − Current liabilities
The precise calculation depends on the purpose of the analysis. Not every current asset or liability will necessarily be included in a working capital measure used for valuation purposes.
For example, cash, borrowings, tax balances, and shareholder-related accounts may require separate consideration depending on the valuation methodology and the question being addressed.
Working capital should therefore not be treated as a standardised figure without examining what is included and why.
Why Working Capital Matters in a Business Valuation Dispute
A business may report a profit while still requiring substantial funds to support its day-to-day operations. Customers may take time to pay invoices, inventory may need to be held before sale, and suppliers may provide credit on different terms.
These factors can affect the amount of funding a business needs to operate.
In a business valuation dispute, working capital analysis may be relevant when considering:
- Whether the business has sufficient operating resources.
- Whether reported current assets are likely to be realised at their recorded values.
- Whether liabilities and accrued expenses have been appropriately recognised.
- Whether historical working capital levels provide a reasonable basis for financial assumptions.
- Whether working capital has been treated consistently within the valuation methodology.
The relevance of these matters depends on the valuation question. A working capital difference does not automatically mean that the business's value should be adjusted by the same amount.
For an overview of the different financial issues that may arise in commercial and shareholder disputes, see Types of Accounting Disputes.
Common Sources of Working Capital Disagreement
Trade Receivables and Recoverability
Trade receivables represent amounts owed by customers for goods or services supplied. Their recorded value may require closer examination where there are overdue balances, disputed invoices, or concerns about whether customers will pay.
A valuation analysis may consider the age of outstanding receivables, subsequent receipts, credit notes, and relevant information about customer disputes.
An overdue balance does not necessarily mean that the amount is irrecoverable. Equally, a balance recorded in the accounts does not by itself establish that the full amount will be collected.
The appropriate treatment depends on the available evidence and the purpose of the valuation.
Inventory Valuation
Inventory may form a significant part of working capital for businesses that manufacture, distribute, or sell physical products.
Differences can arise over the valuation of inventory, its condition, expected selling prices, or whether particular items remain usable or saleable.
Relevant considerations may include inventory ageing, stock records, historical sales, subsequent sales, and the accounting policies used to value inventory.
The analysis may also need to distinguish between inventory that is slow-moving and inventory that has little or no recoverable value. Those categories are not necessarily equivalent.
Trade Payables and Accrued Expenses
Trade payables represent amounts owed to suppliers, while accrued expenses generally relate to costs incurred but not yet invoiced or paid.
Disagreements may arise where liabilities have not been recorded consistently, invoices were received after the reporting date, or the parties interpret the relevant accounting information differently.
A review may examine supplier statements, invoices, payment records, accrual calculations, and the period to which the costs relate.
The objective is to understand the financial position on the relevant date, taking account of the available evidence and applicable accounting treatment.
Provisions and Other Current Liabilities
Provisions and other current liabilities may also affect the working capital calculation.
For example, a business may have obligations relating to customer claims, returns, warranties, employee costs, or other expenses. Whether and how these amounts should be reflected depends on the circumstances and the accounting basis being applied.
A dispute accountant may need to examine the supporting information, the basis on which the amount was calculated, and whether the liability has been treated consistently with the valuation assumptions.
Normalised Working Capital and Historical Trends
A single balance sheet may not show the working capital a business typically requires to operate.
Working capital can fluctuate because of seasonal trading, changes in customer payment patterns, supplier terms, inventory purchasing, or the timing of significant transactions.
For that reason, a valuation analysis may consider working capital over a period rather than relying solely on the balance at one date.
Why Historical Comparisons Might Be Useful
Historical monthly or quarterly information may help identify recurring patterns and unusual movements.
For example, a business that experiences seasonal demand may hold more inventory before its busiest trading period. A year-end balance may therefore differ materially from the level observed during other months.
Historical comparisons may help distinguish recurring operating requirements from temporary movements. They do not, by themselves, establish what working capital level should be assumed for valuation purposes.
What Does Normalised Working Capital Mean?
Normalised working capital is an estimate of the level of working capital ordinarily required for a business to operate under the circumstances being considered.
The analysis may involve reviewing historical balances, trading patterns, changes in business activity, and unusual or non-recurring items.
Normalisation requires judgement. The selected period, calculation method, and treatment of individual balances should be explained and supported by the available information.
A period affected by unusual trading conditions may not provide a representative basis for the analysis. Conversely, excluding a period without a sound reason may also distort the result.
How Working Capital Can Affect Valuation Methodology
The effect of working capital on a business valuation depends partly on the valuation approach.
Earnings-Based Valuations
Where a valuation uses an earnings multiple, working capital may be relevant to assessing the sustainability and quality of the earnings being valued.
For example, a business may report increasing sales while receivables grow more quickly than revenue. This could raise questions about collection periods, customer payment terms, or the relationship between reported earnings and cash generation.
Such a pattern does not necessarily indicate that reported earnings are incorrect. It may, however, require further analysis before the financial information is relied upon in a valuation.
The relationship between earnings and working capital should be considered in the context of the business's operations and the valuation assumptions.
Discounted Cash Flow Valuations
A discounted cash flow valuation considers projected future cash flows and applies an appropriate discount rate.
Changes in working capital can affect projected cash flow because increases in operating working capital may absorb cash, while reductions may release cash.
The analysis may therefore need to consider assumptions about receivables, inventory, payables, sales growth, and the operating cycle.
Where forecasts rely on significant changes in working capital, the assumptions should be examined for consistency with historical experience, expected business activity, and other relevant evidence.
Asset-Based Valuations
An asset-based approach may require consideration of the value of relevant assets and liabilities.
Working capital balances may form part of that assessment, but their treatment depends on the valuation basis and the assets and liabilities included.
Care is needed to avoid counting the same economic item more than once. The treatment of cash, debt, operating liabilities, and other balances should be consistent with the valuation methodology.
Working Capital Disputes in Shareholder and Partnership Matters
Working capital disagreements may arise in shareholder disputes, partnership disputes, and other matters involving the value of a business interest.
For example, the parties may disagree about whether historical accounts reflect the business's normal operating position, whether particular balances require adjustment, or whether the assumptions used in a valuation are reasonable.
In a shareholder dispute, the relevant questions may also involve the valuation date, the basis on which shares are to be valued, and the treatment of particular assets and liabilities. The appropriate approach depends on the facts and the terms of the instruction.
In partnership matters, the analysis may need to distinguish the business's operating working capital from partners' current accounts, capital accounts, or other balances arising from the partnership arrangements.
These are different accounting questions and should not automatically be treated as interchangeable.
Working Capital in Business Sales Versus Valuation Disputes
Working capital can also feature in disputes following a business acquisition. However, a contractual working capital adjustment in a sale agreement is not necessarily the same as a working capital assessment undertaken as part of a business valuation.
In a transaction dispute, the sale and purchase agreement may define the relevant balances, accounting policies, calculation method, and adjustment mechanism. The contractual definitions may determine how the completion accounts are prepared and how a disputed adjustment is assessed.
In a general business valuation dispute, the focus may instead be on the financial assumptions and methodology used to estimate the value of a business or shareholding.
The distinction matters because a contractual price adjustment and a valuation adjustment serve different purposes. The relevant documents, valuation basis, and scope of the dispute should guide the analysis.
Further information about the range of accounting issues considered in these matters is available on the Dispute Accounting Services page.
What Financial Information May Be Needed?
The information required will depend on the business, the valuation date, and the working capital issue being examined.
Potentially relevant material may include:
- Historical statutory accounts and management accounts.
- Monthly or quarterly balance sheets.
- General ledger detail for relevant accounts.
- Aged trade receivables and payable reports.
- Inventory listings and stock valuation records.
- Records of subsequent receipts and payments.
- Accrual and provision schedules.
- Budgets, forecasts, and supporting assumptions.
- Information about seasonal trading or material changes in operations.
These records may help an accountant understand how working capital has changed and how the reported figures were calculated.
The presence of a particular document does not establish that a balance is correct. The reliability, completeness, and relevance of the information may need to be assessed in the context of the dispute.
How a Dispute Accountant May Analyse Working Capital Differences
A dispute accountant may examine working capital as part of a wider business valuation or financial dispute instruction.
Depending on the scope of the work, the analysis may involve:
- Defining the issue: Clarifying the valuation question, relevant date, and working capital measure being considered.
- Reviewing the records: Examining the accounting information supporting the relevant assets and liabilities.
- Comparing periods: Assessing historical trends and identifying unusual movements that may require explanation.
- Testing assumptions: Considering whether the working capital assumptions are consistent with the available financial and operational information.
- Explaining differences: Setting out the basis of any proposed adjustments and identifying areas where the evidence remains uncertain.
The resulting analysis should distinguish between information supported by records, assumptions used in the valuation, and matters that cannot be resolved from the available evidence.
The scope of any expert work will depend on the questions asked and the information available. Accounting analysis does not determine the legal outcome of a dispute.
Conclusion
Working capital can influence how the financial position and operating requirements of a business are understood in a valuation dispute. Differences involving receivables, inventory, payables, provisions, and historical trading patterns may require closer examination where they affect the assumptions used in a valuation.
However, the significance of a working capital difference depends on the valuation methodology, the relevant date, the nature of the business, and the evidence available. A difference in a balance does not automatically translate into an equivalent change in business value.
For solicitors, identifying the precise valuation question and distinguishing operating working capital from other financial balances can help clarify which accounting issues require further analysis.
Disclaimer: This article provides general information about working capital and business valuation disputes. It is not legal, accounting, or financial advice. The appropriate treatment of working capital will depend on the facts, valuation basis, and circumstances of the particular case.