Working capital

What it means

Working capital is the cash a business needs on hand to bridge the gap between paying its costs and collecting its revenue. Every business has one, and for online businesses it is created by payment terms: the hosting bill and the writer's invoice are due now, while the advertising revenue for this month arrives in two months' time. The money that covers the difference is working capital.

Why it surprises buyers

The purchase price is the visible number, so buyers plan for it and stop. Then completion happens, the previous owner's final payout goes to the previous owner, and the new owner is funding the site for six to eight weeks before anything comes in. On a site with $900 a month of costs that is a real amount of cash arriving at the least convenient moment, and it is the most common reason a well-priced acquisition feels like a mistake in month one.

How much to hold

Two to three months of operating costs suits most content and affiliate sites. Increase it where revenue sits on long terms, where the site buys traffic, or where a single large payout dominates the month. Ecommerce needs more again, because inventory has to be bought before it can be sold, and a stock position is often negotiated separately from the business itself.

Where it belongs in the return calculation

Working capital is committed capital, so it belongs in the denominator when you calculate your return. A $90,000 purchase that needs a further $6,000 of float is a $96,000 commitment, and a return calculated on the purchase price alone overstates the outcome. Include it before you set your maximum bid rather than discovering it after completion.