Module II· DCF — Mechanics & FCFAdvanced
Question
How do you treat a company with permanently negative working capital (e.g. subscription / SaaS)?
Answer
Mechanics
Negative NWC arises when customers pay in advance (subscriptions) and suppliers are paid only later — this creates an operating source of cash. In the DCF, an even more negative NWC means a negative ΔNWC, which becomes a cash inflow. With growth this advantage compounds: the faster the company grows, the more 'interest-free working capital' it gets.
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Consequence
SaaS companies have structurally higher FCF conversion than their P&L margins suggest.
Examples
SAP and other subscription-software companies show exactly this pattern — deferred revenue on the balance sheet acts like operating funding. Modeling: hold NWC as a constant negative % of revenue, and the cash advantage then flows in automatically as the company grows.