In LBO modeling, is a full Balance Sheet required?

• A. No, you can approximate with net working capital changes rather than listing every balance sheet item.
• B. Yes, a full Balance Sheet must be projected.
• C. Only assets are needed.
• D. Only liabilities are needed.

Answer: (A)

In LBO modeling, the most important driver is cash flow and how it supports debt service, so you don’t need to project every line item on a full balance sheet. Net working capital changes capture the day-to-day liquidity needs of the business as it grows or shrinks. By estimating NWC as a function of activity (for example, a percentage of revenue or costs), you can approximate how much cash is tied up in the balance sheet without enumerating every asset and liability item.

This approach lets you model how operating cash flow interacts with financing (debt drawdown and repayment) while keeping the balance sheet balanced through the cash account and a simplified set of balance sheet components. It’s common to treat other non-cash balance sheet items as baseline or implicit, and to use a cash plug to ensure everything balances.

Trying to model only assets or only liabilities wouldn’t give you a balanced view or capture the cash needs of operations; focusing on NWC provides a practical, effective shortcut for LBO analysis.