The acquisition proposal appears affordable. The purchase price fits within the approved financing, the target reports a profit and management expects the combined business to benefit from shared customers and resources. The board approves the transaction, leaving finance to finalise the funding arrangements.
Then the operational questions emerge. Payroll falls due shortly after completion, suppliers expect payment before releasing new orders and several large customer invoices will not be collected for another two months. The purchase financing covers the shares, but the acquired business needs additional cash to continue operating.
An acquisition decision should therefore consider both the amount required to complete the transaction and the funding needed afterwards. Lee & Hew’s accounting, consolidation and complex accounting advisory services are relevant to the financial information underlying that assessment. For directors, the immediate priority is to understand whether the funding plan reflects the business they will actually own.
Separate the Purchase Price From the Operating Requirement
The amount paid to the seller is only one component of an acquisition’s cash requirement. Transaction costs, debt settlements, integration spending and operating funding may all require separate provision. Combining them into one broad estimate makes it difficult to see where a shortfall could arise.
Working capital concerns the money tied up in the operating cycle, including customer collections, inventory and supplier payments. The practical funding requirement depends on when those cash movements occur. A business can hold substantial receivables and inventory while lacking enough cash to meet next week’s obligations.
Finance should prepare a funding schedule that distinguishes completion payments from subsequent operating needs. Each amount should have a purpose, expected date and identified funding source. This allows directors to assess the transaction’s total demand on liquidity without treating the purchase price as the complete investment.
Start With the Cash Available on Day One
The target’s latest bank balance may not be the amount available after completion. Cash might be used to settle existing liabilities, repay shareholder balances or make payments permitted under the sale agreement. Some balances may also be restricted or held in accounts that the buyer cannot operate immediately.
Establish what cash is expected to remain in the acquired company and reconcile that assumption to the transaction terms. Confirm how existing overdrafts, cash-pooling arrangements and banking mandates will be handled. An account balance is of limited operational use if the new management team cannot authorise payments.
The forecast should begin with a supported opening cash figure. Where an amount remains uncertain, show that uncertainty explicitly. Using an optimistic opening balance can make every subsequent week appear adequately funded even when the initial assumption is wrong.
Test Customer Collections Against Actual Behaviour
A receivables balance represents amounts recorded as due, but it does not establish when money will arrive. Some invoices may be awaiting customer approval, others may be disputed, and certain customers may routinely pay later than their contractual terms.
Review collections by customer and invoice age. Compare recent receipts with the dates previously forecast, and identify balances dependent on milestones, retention releases or supporting documents. Large individual invoices deserve attention because a single delay can materially change the funding position.
Management should also consider whether the acquisition itself could interrupt collections. Customers may require updated supplier details or confirmation of payment instructions. These administrative changes can be manageable, but the forecast should reflect the time needed to complete them rather than assuming that the transition will have no effect.
Examine Inventory Beyond Its Reported Value
Inventory can absorb cash long before it generates a customer receipt. The target may need to place replenishment orders immediately after completion, maintain minimum stock levels or pay deposits for imported goods. A healthy inventory balance does not necessarily remove those requirements.
Separate stock that is readily saleable from slow-moving items, specialised components and goods committed to particular customers. Review purchase commitments alongside the stock already on hand. Otherwise, finance may forecast new purchases without recognising that older inventory is unlikely to turn into cash soon.
Seasonality also matters. Acquiring a business just before its main purchasing season can create a much larger initial requirement than an annual average suggests. Directors should understand where completion falls within the operating cycle and whether the available financing can support the next stock build.
Confirm Whether Supplier Terms Will Continue
The target’s historical cash performance may depend on favourable credit from suppliers. Those terms may reflect a long relationship with the seller, a parent guarantee or a group purchasing arrangement that changes after completion.
Identify critical suppliers and confirm the expected trading terms. If a supplier requires advance payment instead of allowing 60 days’ credit, the business will need cash earlier even if its sales and margins remain unchanged. Similar effects can arise when credit limits are reduced or overdue balances must be cleared before further deliveries.
Do not treat extended payment periods in the historical accounts as evidence of sustainable supplier financing. They may reflect payment delays rather than agreed terms. Distinguishing the two helps management avoid building a funding plan around obligations that suppliers already expect to be settled.
Build a Weekly Forecast Around the First Months
A monthly profit forecast can conceal short periods of severe cash pressure. Payroll, rent, supplier settlements and customer receipts rarely occur evenly throughout the month. A positive closing balance may follow a negative position midway through the same period.
Prepare a weekly cash forecast for the initial transition, commonly covering at least the first 13 weeks, and extend the outlook where the business cycle requires it. Use the expected timing of actual receipts and payments rather than dividing monthly totals into equal portions.
The forecast should connect to supporting schedules and avoid double counting. Opening receivables collections, new sales receipts, existing payables and future purchases need clear treatment. Finance should be able to explain how each major amount was derived and who has confirmed the underlying assumption.
Illustrate the Peak Funding Gap Clearly
Consider a hypothetical acquisition in which S$300,000 of unrestricted cash remains in the target at completion. During the first four weeks, expected customer receipts total S$450,000, while operating payments total S$900,000. Without additional funding, cash would fall to negative S$150,000 by the end of that period.
If management requires a minimum operating buffer of S$200,000, the additional funding needed at that point would be S$350,000. The calculation assumes the receipts and payments occur as forecast and excludes acquisition consideration, transaction fees and integration expenditure.
The weekly position could require even more funding if major payments fall due before collections arrive. Directors should therefore review the lowest projected cash balance and its timing, rather than relying solely on the total cash movement over several months. The required facility should reflect that peak exposure and an appropriate allowance for uncertainty.
Understand What the Purchase Agreement’s Working Capital Target Does
An acquisition agreement may include a working capital target and a mechanism for adjusting the price. That arrangement can help address the financial position delivered at completion, but it does not guarantee that the acquired business will have sufficient cash to operate afterwards.
Contractual working capital definitions may exclude cash, debt or particular balances. An adjustment may also be agreed and paid only after completion accounts have been prepared and reviewed. Any resulting payment could arrive later than the operating shortfall.
Finance should reconcile the contractual calculation with the cash forecast and explain the distinction to the board. A price adjustment expected from the seller should not be treated as immediately available funding unless its timing and availability are supported. The commercial protection and the operating finance plan serve related but different purposes.
Challenge Assumptions About Immediate Improvements
Acquisition proposals often include benefits from better collections, reduced inventory or improved supplier terms. Those improvements may be achievable, but they usually require operational changes and time. Funding the first payroll cycle on the assumption that collections will improve immediately creates unnecessary uncertainty.
Prepare an initial forecast based on supported trading behaviour, then show the effect of planned improvements separately. Identify the actions required, the person responsible and the earliest realistic date for each benefit. This makes it easier to distinguish existing cash capacity from expected future gains.
Lee & Hew’s accounting and group reporting capabilities provide a relevant basis for discussing the quality and consistency of financial information used in these assessments. Management should ensure that the forecast remains grounded in the underlying records and that proposed improvements are traceable to specific operational plans.
Test a Downside Case Before Relying on the Funding Plan
The board should understand what happens if the main assumptions do not hold. A major customer paying two weeks late, a supplier requesting a deposit or slower stock sales may be enough to increase the funding requirement materially.
Use a small number of realistic scenarios rather than applying an arbitrary percentage to every line. Link each scenario to a known exposure and show its effect on the timing and size of the cash gap. Where several events could occur together, consider their combined impact.
The response should also be practical. Identify whether an additional facility is committed, whether non-essential spending can be postponed and who can approve contingency funding. A forecast showing a shortfall is useful only if management understands the available actions and their limits.
Assess the Effect on the Acquiring Group
The acquired company may be able to operate with an additional cash injection, but that money must come from somewhere. Using the parent’s available cash can affect other subsidiaries, planned investment and existing payment commitments.
Review the funding requirement at both entity and group level. Confirm which company will provide the funds, in what form and when. Consider any restrictions on moving cash between entities and avoid assuming that all bank balances across the group are freely available for the acquisition.
Keep operating funding separate from integration expenditure such as systems changes, relocation and restructuring. Both may occur after completion, but they have different drivers. A consolidated view should include each requirement once and show the remaining headroom after the transaction.
Return to the Board When the Funding Assessment Changes
If the acquisition has already been approved, a newly identified funding gap should be brought back to the appropriate decision-makers promptly. The additional requirement may change the transaction’s affordability, the financing structure or the expected return.
Prepare a concise update explaining the original assumption, the revised requirement and the reasons for the difference. Include the peak funding date, downside exposure and proposed funding source. Where commitments have already been made, involve the relevant advisers before assuming that terms or completion dates can be changed.
After completion, compare actual cash movements with the forecast regularly. Investigate significant differences and update the remaining outlook. This turns the acquisition funding assessment into an active management process rather than a document that becomes outdated as soon as the transaction closes.
Support the Acquisition With a Complete Funding Picture
An acquisition can be strategically attractive and still place pressure on the group if the operating cash requirement has not been tested. The board needs to understand the connection between the agreed price, the cash delivered at completion and the money required to sustain the business afterwards.
Reliable customer, inventory and supplier records provide the foundation. A dated cash forecast, realistic downside scenarios and confirmed funding arrangements then translate those records into a decision directors can assess. The objective is to make the full commitment visible before unexpected shortages restrict management’s options.
For groups preparing an acquisition, discuss the underlying accounting and reporting requirements with Lee & Hew early. Bringing together the target’s financial records, transaction assumptions and initial cash forecast provides a practical starting point for identifying information gaps and supporting a more informed funding decision.