The buyer wants to use a standard twelve-month rolling average for our working capital peg, but our recent automated payment workflows have significantly shortened our accounts receivable cycle. How do we prevent this legacy calculation from leaving too much cash on the table?

Question

Tyler Smith · Accepted Answer

A traditional twelve-month rolling average for working capital can penalize you if you have recently automated your operational workflows. If your technology has accelerated your billing cycle and shortened your accounts receivable collections, your balance sheet will show less cash tied up in working capital than it did historically. To prevent the buyer from using an outdated working capital peg that forces you to leave excess cash in the business at close, you must use an Adjusted Book Value analysis. Recalculate your historical working capital needs by adjusting for the structural improvements in your cash conversion cycle. Show the buyer that your automated billing workflows have permanently reduced the net working capital required to run the business. Use your weekly EOS® Scorecard historical data to prove that your cash collection cycle is consistently faster and less volatile than in previous years. By showing a stable, low-working-capital baseline, you can argue for a lower working capital peg in the purchase agreement. This ensures you keep more of your hard-earned cash at closing, rather than leaving it behind to fund a working capital target based on obsolete, manual operations.