Working capital

COMPREHENSIVE NOTE
ON WORKING CAPITAL
BY: TAXPERT
PROFESSIONALS PRIVATE
LIMITED

info@taxpertpro.com || www.taxpertpro.com || 09769134554 || 022- 25138323
WORKING CAPITAL AND RELEVANCE OF WORKING CAPITAL
Working capital is the difference between the firms current assets and the current liabilities. Wherein the current assets forms the portion like prepaid
expenses, accounts receivable, inventory etc and current liabilities are accounts payable, short term provisions etc. Working capital is the lubricant to run an
organisation and the more efficiently the working capital of an organisation is maintained the better it is.
As such Working capital is a measure of a company's liquidity, efficiency, and overall health. It includes cash, inventory, accounts receivable, accounts payable,
the portion of debt due within one year, and other short-term accounts, a company's working capital reflects the results of a host of company activities,
including inventory management, debt management, revenue collection, and payments to suppliers. Working capital is the one of most essential part of the
business. No business can run without adequate working capital.
The impact of working capital changes are reflected in the cash flow statement. A positive working capital is where the current assets of the company are
more than the current liabilities and means that the company has the liquidity to pay off its creditors, and short term obligations and have enough cash to
run the operations on the other hand a negative working capital means that the firm has spent more cash out than it brought in managing its working capital,
or commitments, within a year.
You must be wondering why are we discussing the working capital and what is the relevance of working capital in valuation. Working capital forms very
important component of any business valuation exercise. As we said business cannot run without the working capital and it is lubricant to the machinery
called business. Hence as we value the assets like plant and machinery it is also essential to value the requirements of working capital in the business to the
extent how much is also present and how much is needed.
There are two concepts of working capital. These are:
1. Gross working capital: (Total Current Assets)
The total of all current assets is the gross working capital. Gross working capital, simply called as working capital refers to the firm’s investment
in current assets. Current assets are the assets, which can be converted into cash within an accounting year or operating cycle.
It includes the following :
1. Inventories ( Inventory can be in any form be it Raw Material, Work in progress or finished goods etc)

2. Trade Debtors
3. Loans and Advance
4. Cash and Bank Balances
5. Bills Receivables.
6. Short-term Investment
2. Net Working Capital: (Total Current Assets – Total Current Liabilities)
Net working capital (NWC) refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to
mature for payment within an accounting year. NWC can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities and a
negative net working capital will arise when current liabilities exceed current assets i.e. there is no working capital, but there is a working capital deficit.
Current assets may include the following
It includes the following :
1. Inventories ( Inventory can be in any form be it Raw Material, Work in progress or finished goods etc)
2. Trade Debtors
3. Loans and Advance
4. Cash and Bank Balances
5. Bills Receivables.
6. Short-term Investment
Current liabilities may include the following :
1. Trade Creditors.
2. Bills Payable.
3. Accrued or Outstanding Expenses.
4. Trade Advances
5. Short Term Borrowings (Commercial Banks and Others)
6. Provisions
7. Bank Overdraft
NEED AND IMPORTANCE OF WORKING CAPITAL

Working capital is required for Strengthen the solvency as it helps the business to operate smoothly without any financial problem for making the payment to short term
debts. Purchase of raw material, payment of salary, wages and overhead are all made out of working capital and with the adequate working capital it is ensured that the
usual work of the company is not stagnated due to want of funds. Also, paying of creditors on time enables a business concern in making and maintaining goodwill. A firm
having adequate working capital, high solvency and good credit rating can arrange loans from banks and financial institutions in easy and favorable terms. Business is not
halted because of want of supply of raw material so that company can pay its suppliers on time and the production is not halted. In short, Working capital is really a life blood
of any business organization which maintains the firm in well condition. Any day to day financial requirement can be met without any shortage of fund. All expenses and
current liabilities are paid on time.
WORKING CAPITAL MANAGEMENT
Management of working capital is very essential for the long term success of a business. A business must therefore have clear policies for the management of each component
of working capital i,e. inventory, accounts receivable, accounts payable etc. Two things are important to be considered in the management of working capital i,e.
- Unnecessary money should not be blocked in the working capital as cash can be put in the business to more effective use
- business should not be stifled for the want of working capital.
The aim of working capital management is to achieve balance between having sufficient
working capital to ensure that the business is liquid but not too much that the level of
working capital reduced profitability. Liquidity means that the business has sufficient
inventory and cash so that it can trade without its cash or inventory depleting. No
business can survive if it cannot meet its day‐to‐day obligations.
Too much of working capital and too less of working capital both are not good. That the
business is overleveraged may be shown from the following that it is struggling to
maintain or grow sales, is paying bills too quickly, or is collecting receivables too slowly.
Increases in working capital, on the other hand, suggest the opposite.

When not managed carefully, businesses can grow themselves out of cash by needing
more working capital to fulfill expansion plans than they can generate in their current
state. This usually occurs when a company has used cash to pay for everything, rather
than seeking financing that would smooth out the payments and make cash available
for other uses. As a result, working capital shortages cause many businesses to fail even
though they may actually turn a profit. The most efficient companies invest wisely to avoid these situations. One of the most significant uses of working capital is inventory.
The longer inventory sits on the shelf or in the warehouse, the longer the company's working capital is tied up.
There are several ways to evaluate a company's working capital of a company like calculating the inventory-turnover ratio, the receivables ratio, days payable, the current
ratio, and the quick ratio. We shall see this in detail in the chapter. The timing of asset purchases, payment and collection policies, the likelihood that a company will write
off some past-due receivables, and even capital-raising efforts can generate different working capital needs for similar companies. Equally important is that working capital
needs vary from industry to industry, especially considering how different industries depend on expensive equipment, use different revenue accounting methods, and
approach other industry-specific matters. Finding ways to smooth out cash payments in order to keep working capital stable is particularly difficult for manufacturers and
other companies that require a lot of up-front costs. For these reasons, comparison of working capital is generally most meaningful among companies within the same
industry, and the definition of a "high" or "low" ratio should be made within this context.
Every business needs different type of working capital. For eg. a consulting firm in service industry needs the working capital to pay off the salaries at the same time
manufacturers will probably require more because they need raw material stocks, work‐in‐progress and finished goods. Retailers may sell for cash therefore having few
receivables and producers may have trade customers and have greater receivables. If supply deliveries are uncertain the level of inventory will be greater. If the level of
activity increases specifically sales then inventory, receivable and payables will increase.
CALCULATION OF WORKING CAPITAL
The level of working capital is determined by operating cycle of the business.
The operating cycle or cash conversion cycle is important because it determines the amount of working capital a business needs. If the turnover period for inventories and
accounts receivable lengthen, or the payment period to accounts payable shortens, then the operating cycle will lengthen and the investment in working capital will increase.
The cash conversion cycle model focuses on the length of time between when the company must make payments and when it receives cash inflows. The cash conversion
Operating cycle is the length of time
between the company outflow on raw
materials, wages and other expenditures
and the inflow of cash from the sale of
goods.

cycle is determined by three factors: (1) The inventory conversion period, which is the average time required to convert materials into finished goods and then to sell those
goods. The inventory conversion period is measured by dividing inventory by the average daily sales. (2) The receivables collection period, which is the length of time
required to convert the firm's receivables into cash, or how long it takes to collect cash from a sale. The receivables collection period is measured by the days sales outstanding
ratio (DSO), which is accounts receivable divided by average daily sales. (3) The payables deferral period, which is the average length of time between the purchase of
materials and labor and payment for them. The payable deferral period is calculated by dividing average accounts payable by purchases per day (cost of goods sold divided
by 360 or 365 days).
Operating cycle is made up of three components:
1. The inventory turnover days
2. The average receivable collection days
3. The average payable days
Operating cycle = Inventory days + Receivable days - payable days
 Inventory days = Inventory / Cost of sales x 365days
 Receivable days = Receivables / Sales x 365 days
 Payable days = Payables / Cost of sales x 365 days
A measure of how much of total current assets are financed by current liabilities. A ratio of 2:1 or greater is considered a safe measure.
Calculate the cash conversion cycle for the Blue Chip Company (BCC). Annual sales are $10 million, and the annual cost of goods sold is $8 million. The average levels of
inventory, receivables, and accounts payable are $2,000,000, $657,534, and $657,534, respectively. BCC uses a 365-day accounting year.
Sales $100,00,000
COGS $80,00,000
Inventories $20,00,000
AR $6,57,534
AP $6,57,534
Days/year 365
Cash Conversion cycle = Inventory conversion Period + Receivables conversion period - Payables deferral period
= Inventory/Sales per day + Accounts receivables/Sales per day - Accounts receivables /cost of good sold per day
= 73+ 24- 30

=67
It takes 73 days to make and then sell and another 24 days to collect cash after the sale, or a total of 97 days between spending money and collecting cash. However, the
company can delay payment for parts and labour for 30 days. Therefore, the net days the firm must finance its labour and purchases is 97 - 30 = 67 days, which is the cash
conversion cycle. Companies like to shorten their cash conversion cycles as much as possible without adversely impacting operations.
REQUIREMENTS OF WORKING CAPITAL
It is important to work out the level of working capital requirement in any organisation. Following questions should be answered while analysing the working capital
requirement of an organisation.
1. Will the company be able pay its current obligations promptly?
2. Can a company effectively utilize the capital available?
3. Is the liquidity position of company improving?
For evaluation of working capital three fold analyses should be taken which is mentioned as under :
we shall discuss each one of above, one by one
A. AN ANALYSIS OF WORKING CAPITAL TREND IN ORGANISATION
How the various elements of the working capital have moved in past is analysed to establish a trend in the
movements. The trends can be upwards or downwards. Working capital trend analysis represents a picture of
variations in current assets, current liabilities and working capital of company over a period of time. Trend Analysis
is a tool of financial analysis where changes are compared to the base year, keeping the base year as 100. The
Working Capital Trend
Working Capital
Efficiency
Liquidity Position

percentage of increase or decrease from the base year is establish The following analysis was carried out to find out working capital trend in organisation
1. Current Assets Trend Analysis
2. Current Liabilities Trend Analysis
3. Working Capital Trend Analysis
B. EFFICIENCY ANALYSIS OF ORGANISATION
Under efficiency analysis it is examined how efficiently different working capital components are used in an enterprise. Working capital have various components. The various
parts of working capital display their own patterns over the business cycle. When a company is experiencing a negative shock to demand, its inventories of final products will
generally rise. Later on, when it becomes clear that this demand shock was the beginning of a recession and the firm is in financial distress the firm will try to shed inventories
of all kinds, to collect accounts receivable, and try to postpone payments of debts. That is as the recessions gets worse, the liquidity of firms measures as working capital
decreases as does cash flow. Efficient turnover of these components results into higher efficiency which in turn results into higher profitability. Following working capital
ratios are calculated to measure the efficiency :
1. Working Capital Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio
1. Working Capital Turnover Ratio
The working capital is required for the smooth running of day to day operations of the business. Hence, it has utmost importance in analysing business operation both
internally and externally. Inadequacy or mismanagement of working capital leads towards business failure.
The Working Capital Turnover Ratio is one of the best measures to analyse the efficiency of a firm in managing its working capital. It is figured as shown below:
Working Capital Turnover Ratio =
Working Capital over Net Sales
if the company is a service sector, net sales is replaced by net revenue.
The faster the working capital turnover, the lower is the total investment and is greater the profit. However, a very high turnover of working capital may, in some cases,
denote deficiency of working funds for the given volume of business, which ultimately adversely affects the profitability.
2. Debtors Turnover Ratio
The Debtors Turnover ratio is also termed as Debtors speed ratio. It indicates the quickness in realization of sundry debtors. The main object of this ratio is to know how
much credit time is allowed and capital blocked in debtors.

Debtors’ turnover ratio also shows the effectiveness in collection of debts due. Generally, higher ratio is the indication of efficient management of liquidity. However, a firm
should maintain a balance between the debtors outstanding and the amount of interest incurred on the blocked funds.
It is figured as shown below:
Debtors Turnover Ratio =
Debors/NetSales (Net Revenue)
As in working capital turnover ratio, net sales are replaced by net revenue in debtors turnover ratio also.
3. Creditors Turnover Ratio
The main object of this ratio is to know how much credit time received by the firm from its trade creditors. Creditors’ turnover ratio shows the breathing time received by
the firm in terms of payment of credit purchase. Hence, the effectiveness lies in whether the firm is enjoying the actual credit period promised by suppliers.
It is figured as shown below:
Creditors Turnover Ratio =
Creditors/NetSales (Net Revenue)
C. AN ANALYSIS OF LIQUIDITY POSITION OF ORGANISATION
Liquidity means the ability of an asset to be converted into cash without a significant price concession. Liquidity has two dimensions: the time required for converting the
asset into cash and the certainty of the price realized.
The liquidity ratios measure the ability of a firm to meet its short-term obligations and reflect the short-term financial strength/solvency of a firm. It is very important for a
firm to meet its current obligations as they become due. Though, liquidity analysis is better understood by cash budget and cash flow and fund flow statement, liquidity ratios
give quick measures of liquidity. They do so by comparing cash and current assets to current obligations. From these ratios, much insight can be obtained into the present
solvency of the firm and the firm’s ability to remain solvent in the event of adversity. Liquidity implies that funds are idle or they earn very little. A firm suffers from lack of
liquidity cannot meet its obligations in time, which results in poor creditworthiness, lack of creditor’s confidence, closure of company due to legal tangles. If a firm keeps
higher level of liquidity, the firms fund will be unnecessarily tied up in current assets, which earns nothing.
Therefore, a firm should maintain proper balance between lack of liquidity and high liquidity. For analyzing liquidity position of company, following ratios have been
computed:
 Current Ratio
 Quick Ratio
 Cash Ratio / Super Quick Ratio
 Interval Measure Ratio / Defensive Interval Ratio
 Cash flow Coverage Ratio
Although ratios have been described more elaborately in the chapter relating to ratios, we have discussed below few ratios in detail, which are relevant here :

Current Ratio
The Current Ratio is one of the best known measures of financial strength. It is figured as shown below: Current Ratio = Current Liabilities/ Current Assets
The main question this ratio addresses is: "Does the business have enough current assets to meet the payment schedule of its current debts with a margin of safety for
possible losses in current assets, such as inventory shrinkage or collectable accounts?"
Thus, current ratio measures firm’s short-term solvency. It indicates firm’s ability to cover its current liabilities with its current assets. In a more specific manner, it indicates
the availability of current assets in rupees for every one rupee of current liability. As such, higher the current ratio, the larger is the amount of rupees available per rupee of
current liability, the more is the firm’s ability to meet current obligations and greater is the safety of funds of short term creditors. Thus, current ratio measures margin of
safety to the short-term creditors. The current ratio is calculated by dividing current assets by current liabilities. Current assets include cash and those assets, which can be
converted into cash within one year such as marketable securities, debtors, inventories, and prepaid expenses. Current liabilities include all obligations those are matured
within a year such as creditors, bills payable, accrued expenses, short-term bank loan, income tax liability and long-term debt maturing in the current year. A current ratio of
2 : 1 or more is considered satisfactory. But, whether or not a specific ratio is satisfactory depends on the nature of the business and the characteristics of its current assets
and liabilities. The minimum acceptable current ratio is obviously 1:1, but that relationship is usually playing it too close for comfort. However, it may happen that the firm
having higher current ratio may be struggling to meet its obligations and in reverse firms having lower current ratio may be doing well. This is because current ratio only
measures total current assets and total current liabilities and does not measure qualities of current assets and current liabilities. So we cannot solely depend upon the current
ratio. But at the same time we cannot ignore it because it is the crude and- quick measure of the firm’s liquidity.
Acid-Test (Quick) Ratio
The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures of liquidity. It is figured as shown below:
Quick Ratio = Current Liabilities/ Current Assets - Inventory
The quick ratio measures firm’s current financial condition. It indicates a firm’s ability to meet its current liabilities
with its most liquid (quick) assets. The quick ratio is calculated by dividing quick assets (current assets – inventories)
by current liabilities. Quick assets are those current assets which can be converted into cash immediately or at a
short notice without diminution of value such as cash, marketable securities, debtors, and bills receivables
excluding inventories. This is so, because it requires some time for converting into cash, added by their values tend
to fluctuate.
Current liabilities include all obligations, which mature within a year such as creditors, bills payable, accrued
expenses, short-term bank loan, income tax liability and long-term debt excluding bank overdraft, all of which
quickly mature in the current year. This ratio serves as a supplement to the current ratio in analyzing liquidity. This
ratio is same as current ratio except it excludes inventories – presumably the least liquid portion of current assets.

A quick ratio of 1 : 1 is considered as satisfactory. The Quick Ratio is a much more exact measure than the Current Ratio. By excluding inventories, it concentrates on the
really liquid assets, with value that is fairly certain. It helps answer the question: "If all sales revenues should disappear, could the business meet its current obligations
with the readily convertible `quick' funds on hand?"
MAIN FACTORS AFFECTING THE WORKING CAPITAL ARE AS FOLLOWS:
There are no set rules or formula to determine the working capital requirements of the firms. A large number of factors influence the working capital need of the firms. All
factors are of different importance and also importance change for the firm over time. Therefore, an analysis of the relevant factors should be made in order to determine
the total investment in working capital. Generally the following factors influence the working capital requirements of the firm:
(1) Nature of Business:
The requirement of working capital depends on the nature of business. The nature of business is usually of two types: Manufacturing Business and Trading Business.
In case of trading business the goods are sold immediately after purchasing or sometimes the sale is affected even before the purchase itself. Therefore, very little working
capital is required. Moreover, in case of service businesses, the working capital is almost nil since there is nothing in stock.
In the case of manufacturing business it takes a lot of time in converting raw material into finished goods. Therefore, capital remains invested for a long time in raw material,
semi-finished goods and the stocking of the finished goods. Consequently, more working capital is required.
(2) Scale of Operations:
There is a direct link between the working capital and the scale of operations. More working capital is required in case of big organisations while less working capital is needed
in case of small organisations.
(3) Business Cycle:
The need for the working capital is affected by various stages of the business cycle. During the boom period, the demand of a product increases and sales also increase.
Therefore, more working capital is needed. On the contrary, during the period of depression, the demand declines and it affects both the production and sales of goods.
Therefore, in such a situation less working capital is required.
(4) Seasonal Factors:

Some goods are demanded throughout the year while others have seasonal demand. Goods which have uniform demand the whole year their production and sale are
continuous. Consequently, such enterprises need little working capital.
On the other hand, some goods have seasonal demand but the same are produced almost the whole year so that their supply is available readily when demanded.
Such enterprises have to maintain large stocks of raw material and finished products and so they need large amount of working capital for this purpose.
(5) Production Cycle:
Production cycle means the time involved in converting raw material into finished product. The longer this period, the more will be the time for which the capital remains
blocked in raw material and semi-manufactured products.
Thus, more working capital will be needed. On the contrary, where period of production cycle is little, less working capital will be needed.
(6) Credit Allowed:
Those enterprises which sell goods on cash payment basis need little working capital but those who provide credit facilities to the customers need more working capital.
(7) Credit Availed:
If raw material and other inputs are easily available on credit, less working capital is needed. On the contrary, if these things are not available on credit then to make cash
payment quickly large amount of working capital will be needed.
(8) Operating Efficiency:
Operating efficiency means efficiently completing the various business operations. Operating efficiency of every organisation happens to be different. Some such examples
are: (i) converting raw material into finished goods at the earliest, (ii) selling the finished goods quickly, and (iii) quickly getting payments from the debtors. A company which
has a better operating efficiency has to invest less in stock and the debtors.
Therefore, it requires less working capital, while the case is different in respect of companies with less operating efficiency.
(9) Availability of Raw Material:
Availability of raw material also influences the amount of working capital. If the enterprise makes use of such raw material which is available easily throughout the year, then
less working capital will be required, because there will be no need to stock it in large quantity.

On the contrary, if the enterprise makes use of such raw material which is available only in some particular months of the year whereas for continuous production it is needed
all the year round, then large quantity of it will be stocked. Under the circumstances, more working capital will be required.
(10) Growth Prospects:
Growth means the development of the scale of business operations (production, sales, etc.). The organisations which have sufficient
possibilities of growth require more working capital, while the case is different in respect of companies with less growth prospects.
(11) Level of Competition:
High level of competition increases the need for more working capital. In order to face competition, more stock is required for quick
delivery and credit facility for a long period has to be made available.
(12) Inflation:
Inflation means rise in prices. In such a situation more capital is required than before in order to maintain the previous scale of
production and sales. Therefore, with the increasing rate of inflation, there is a corresponding increase in the working capital.
Few important concepts.
WORKING CAPITAL AND VALUATION
For all the relevance working capital has to its credit, almost all the Merger and acquisition (M&A) transactions include a provision for a working capital adjustment as part
of the overall purchase price. Typically, a buyer and seller agree to a target working capital amount which is documented in the purchase agreement (the typical conditions
to be included in the model purchase agreement are given in Annexure 1). The buyer wants to acquire the business as a going concern i,e. with adequate working capital to
meet the immediate the short-term operating requirements. At the same time seller wants to be compensated for the capital it has already put in the business and for
business that they have already performed and not give away excess working capital at closing.
The need of both the seller and the buyer calls for the working capital adjustment. Working capital adjustment where in buyer pay the seller for any excess in the closing
balance sheet that is above the target or on the flip side the seller will receive less for any shortfall in the closing balance sheet that is below the target. Escrow accounts are
typically used to reserve for working capital adjustments. Due to the necessity and often the significance of working capital provisions included in purchase agreements for
M&A deals, it’s important for a seller to be aware of how company’s balance sheet will affect the potential consideration that will be received in a transaction.

Excess working capital balances (or deficiencies) affect the equity value of a business. Purchase consideration of the business is usually decided subjected to final adjustment
in relation to working capital adjustment. Enterprise value of the business is first arrived at. This valuation can be achieved via a discounted cash flow analysis or by applying
valuation multiples to the company’s financial metrics (such as an enterprise value/EBITDA multiple). The enterprise value is generally referred to as the “Base Purchase
Price” in the purchase agreement. Next, after any interest bearing debt has been subtracted, the buyer will usually include an upward or downward adjustment for the
working capital, referred to as the “Working Capital Adjustment.”
The purchase agreement generally states that the closing balance sheet will be delivered within one to three months after the closing date with the assistance of an
independent accounting firm. The closing balance sheet is prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) and is typically equal to current
assets less current liabilities. There may be always the case that the buyer and seller may disagree on what should or should not be included in the working capital calculation.
In a business valuation, if it is for a company to determine the strike price of its options or for a purchase price allocation, the process includes an analysis of working capital
levels. The working capital analysis affects the reconciliation of the company’s balance sheet to the net equity in the business. Whether the working capital analysis is taken
into account as part of the reconciliation from enterprise value to equity value (as excess working capital or as a working capital deficiency) or if it is taken into account as
part of the discounted cash flow analysis, an understanding of the working capital requirements is essential in a business valuation. Therefore, a valuation needs to assume
that a buyer will require a certain working capital amount.
To estimate the target working capital, a company can analyze a number of different factors, such as:
• The company’s historical working capital levels (as a percentage of revenue or other metric);
• Working capital levels of comparable public companies, or
• A rule-of-thumb for the number of days of operating expenses for the company’s industry. To provide more background on the last factor, companies in certain industries
tend to peg working capital levels to a target number of days of operating expenses.
The company’s working capital plays an important role in the final determination of the equity in a business and the ultimate consideration paid to the seller. Therefore, it’s
important for business owners to be aware of how working capital factors into the equation.
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Annexure I
Definitions
“Net Working Capital” means, as of a particular date of determination, (a) the value of the categories of current assets of the Corporation listed on Schedule
1, (b) less the value of the categories of current liabilities of the Corporation listed on Schedule 1, in each case determined in accordance with [GAAP/IFRS],
consistent with past practice;
“NWC Adjustment” has the meaning given to it in Section 4;
“NWC Reference Amount” means $...........;

1.0 Purchase and Sale
Upon fulfilment of the Closing Conditions but in no event later than the Closing Date, the Seller shall sell and the Buyer shall purchase, effective as of the
Closing Date, the Purchased Shares on the terms and subject to the conditions of this Agreement (the “Transaction”).
2.0 Purchase Price
The purchase Purchase Price”) as adjusted in accordance with Section 4.0.
3.0 Settlement
3.1 Preparation. The Buyer shall prepare (or cause to be prepared) and deliver to the Seller the Closing Date Balance Sheet and Settlement Statements, in
draft form within 60 days of the Closing Date.
3.2 Draft Statements. The draft Closing Date Balance Sheet and Settlement Statements will be final and binding upon the Parties unless the Seller gives notice
to the Buyer of its objection thereto within 20 Business Days of its receipt. A notice under this Section shall specify in reasonable detail the disputed items
and its motives.
3.3 Disputes. If the Seller objects to the draft Closing Date Balance Sheet and Settlement Statements, the Parties shall use their reasonable commercial efforts to resolve the
dispute within 30 Business Days. If unresolved, the dispute shall be submitted for resolution by any Party to an independent accounting firm selected by mutual agreement
4 Net Working Capital Adjustment. If the Net Working Capital at Closing is less than the NWC Reference Amount, then the Purchase Price shall be reduced
by an amount equal to the amount by which the NWC Reference Amount exceeds the Net Working Capital or if the Net Working Capital at Closing exceeds
the NWC Reference Amount, then the Purchase Price shall be increased by an amount equal to the amount by which the Net Working Capital exceeds the
NWC Reference Amount (the “NWC Adjustment”). On the Closing Date, the Net Working Capital for the purposes of estimating the NWC Adjustment shall
be as shown on Schedule 1. Any further NWC Adjustment payable to the Buyer shall be paid to the Buyer by Seller within 10 Business Days following the date
at which the Settlement Statements are final and not subject to disputes by the Parties. Any further NWC Adjustment payable to the Seller shall be paid to
the Seller by the Buyer within 10 Business Days following the date at which the Settlement Statements are final and not subject to disputes by the Parties.
5 Conduct of Business Before Closing
During the period from the date of this Agreement to the Closing Date, the Seller shall cause Corporation to, and the Corporation shall conduct the business in the ordinary
course of business and continue to operate and maintain the business in substantially the same manner as currently operated and maintained;
6.0 Representations of Seller
6.1 Financial Statements. The balance sheets and statements of income of the Corporation for the financial years ended December 31 2010, 2011 and 2012
(the “Annual Financial Statements”) and the balance sheet and statements of income for the Corporation as at and for the interim period ended June 30,
2011 (the “Interim Financial Statements” were prepared in accordance with [GAAP/IFRS] and fairly present the financial condition of the Corporation at the
respective dates indicated and the results of operation of the Corporation for the periods covered thereby.

6.2 Liabilities of the Corporation. There are no liabilities (fixed, contingent or otherwise) of the Corporation required to be disclosed in accordance with
[GAAP/IFRS], other than liabilities that have been disclosed, accurately reflected or provided for in the Financial Statements or incurred since the Interim
Financial Statements in the ordinary course of business.
6.3 Debt Obligations. Except as disclosed in the Interim Financial Statements, the Corporation has no outstanding Indebtedness or Guarantee and is under
no obligation to create or issue Indebtedness or a Guarantee other than liabilities incurred in the ordinary course of business. Except as disclosed in Schedule
X, neither the Seller nor any other Person has outstanding Indebtedness or Guarantee in favour of or for the Corporation’s benefit.
6.4 Tax
6.4.1 The Corporation has duly prepared, and duly and on a timely basis filed, all Tax Returns required to be filed and such Tax Returns are complete and
accurate. iii 6.4.2 The Corporation has paid on a timely basis all Taxes that are due and payable by it on or before the Closing Date.
6.4.3 With respect to any period ending on or before the Closing Date and for which Tax returns have not yet been filed or for which Taxes are not yet due
and payable, the Corporation has made full provision in the Financial Statements for all Taxes that are not yet due and payable. The Corporation has made
adequate and timely instalments of Taxes required to be made.
6.4.4 All relevant Tax or other Governmental Entities have issued their tax assessments to the Corporation covering all past periods up to and including the
fiscal year ended December 31, 2012. No Proceeding is pending or, to the knowledge of the Seller or the Corporation, threatened against the Corporation in
respect of Taxes.
6.4.5 There is no agreement, waiver or other arrangement providing for any extension of time with respect to the filing of Tax Returns, the payment of Taxes
by the Corporation or the period for any assessment or reassessment of Taxes.
6.4.6 The Corporation has withheld or collected from each amount paid or credited to a Person the amount of Taxes required to be withheld or collected therefrom and has
remitted those Taxes to the proper Tax or other Governmental Entity within the time required under Law.

FOR GETTING YOUR WORKING CAPITAL ASSESSED CALL US 022- 25138323
WRITE TO US AT INFO@TAXPERTPRO.COM
VISIT US AT WWW.TAXPERTPRO.COM

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