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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?