Working on a deal that collects all payments in advance for services and therefore has no AR. They mark these deposits in their Payables as Unearned Revenue until the services are rendered.
I've pasted the Current section of the Bal Sheet below. Question is: How do I calculate Working Capital when they have no Receivables?
Current Balance Sheet
CURRENT ASSETS
Cash: $1,051
Deposits: $15
CURRENT LIABILITIES
AP & Accrued Liabilities: $1046
Income Taxes Payable: $82
Working Capital Calculation with no AR
by a searcher from Georgetown University
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From this advice, what I've put into the deal is that the unearned revenue is a debt that will remain with the business, and there must be cash left in the business to fulfill the obligations with a level of profitability. The cash shown on the balance sheet is not free cash, but rather tied to the deposits for service delivery.
I'll need to understand fully how the cash cycle works through diligence (and how exactly they recognize this revenue), but at face value the way they're operating makes sense.
Thanks all for the help here!