The buy-side Quality of Earnings team is claiming our strategic stockpiling of key components during supply chain disruptions was an unnecessary cash drag and wants to adjust our historical working capital peg upward. How do we defend this inventory level?

Question

Tyler Smith · Accepted Answer

To defeat this adjustment, you must demonstrate that your inventory levels were not a random cash drag but a deliberate, risk-mitigating operational strategy that directly preserved your EBITDA. Start by presenting the data from your weekly Level 10 Meetings™ and quarterly Rocks, proving that this stockpiling was a calculated decision to secure client delivery times. Under the principle of substitution, a buyer would have spent significantly more to source these materials late, or worse, lost core customer revenue entirely. Work with your advisory team to run a scenario analysis showing how your gross margins would have suffered without this inventory buffer. Show the Quality of Earnings team that this stock was high-velocity, not obsolete or slow-moving. By proving that this strategic asset directly drove your high net retention rate and protected your recurring revenue, you can argue that using a standard historical average for the working capital peg is inappropriate. Request a seasonal or custom collar that reflects the actual cash cycle of these strategic buys rather than allowing the buy-side team to punish you for operational foresight.