Working Capital

Roy Williams – FHA Deputy Chief Underwriter

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Working Capital Formula

Accounting Definition – Current Assets less Current Liabilities

HUD Definition - Includes conservative adjustments made to the above calculation – MAP Appendix 8C

Cash and Cash Equivalents

Operating Cash

Savings Accounts

Money Market Accounts

Restricted Cash – Monies earmarked for a specific purpose and therefore not available for immediate and general use by an organization Tax and Insurance Escrows Amounts Designated for Re-payment of Debt

Compensating Balances – Amounts required to be held on deposit in exchange for extension of credit

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Marketable Securities

Publically Traded Stocks and Bonds – Determine the Current Value

Request recent brokerage statement

Refer to published pricing sources such as Bloomberg or Wall Street Journal

Privately Held Securities – Value is not published anywhere

Discount the value of the securities listed on the financial statement

Choose not to include the value of the securities in the working capital calculation

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Accounts Receivable

Trade Accounts Receivable Review A/R Aging Schedule to determine amounts past due no more

than 60 days

Allowance for Bad Debts (if applicable) should be deducted from the total balance

Exception – Funds from a local, State or Federal source past due beyond 60 days may be considered if evidence is provided that source is historically late and it can be expected that these funds will be received before initial closing.

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Accounts Receivable - Other

Amounts due from officers or employees

Amounts advanced to subsidiary, affiliated or associated companies

Disputed amounts

All of the above are not allowable and should be excluded from the working capital calculation

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Syndication Proceeds/Notes Receivable

Amounts from other projects to be collected should only be recognized if assumed collectible during the normal business cycle or 1 year, whichever is less

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Inventory

Liquidation value of inventory can only be included if it has been subject to an accountant’s review

Inventory listed on an unaudited financial statement should not be included in working capital

Food For Thought – What is inventory in the case of a General Contractor?

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Prepaid Expenses

Prepaid expenses are not to be included in working capital unless they are associated with the subject project

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Other Items Excluded From Working Capital

Land Equity – Recognized on HUD 92264-A (Warranted Price of Land)

Cash Equity in additional Land or Properties intended for sale. Must establish that those properties are readily marketable and intended to be placed on the market

Anticipated profits from other business ventures

Equity in real estate with high LTV ratios

Unlisted securities

Goodwill and other intangible assets

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Current Liabilities

In general, all current liabilities listed on the balance sheet should be considered as deductions from working capital

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Accounts Payable

Accounts payable aging schedule – All payables should be deductions for working capital

Aging schedule is a valuable indicator in determining an entity’s history in meeting its obligations

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Other Current Liabilities – All Deductions From WC Amounts due to officers, employees or affiliates

unless it is established that the obligations have a definite long-term maturity

Amounts needed to satisfy a brokerage margin account

Current portion of long-term liabilities

Current year income taxes payable

NOTE: Outstanding debt on subject land is accounted for on Form HUD 92264-A and is not part of the working capital analysis

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Working Capital Calculation

Excess of Current Assets over Current Liabilities

Additional Items To Consider:

Effects of contingent liabilities

Financial needs of additional projects in planning or under construction

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Example #1 – Personal Financial Statement

Willie Robertson

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Example #2 – Developer Financial Statement

Duck Commander Development, LLC

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Example #3 – General Contractor

Bob the Builder – Can He Build It?

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Questions?