Our investment banker mentioned we need to establish a working capital peg for our transaction, but our accounts receivable collection cycles fluctuate wildly from month to month. How do we tighten our billing and collection operations on our exit runway so we do not end up leaving cash on the table at closing?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common places sellers lose money at the closing table. The peg is the target amount of working capital you must leave in the business at close, typically based on a twelve-month historical average. If your accounts receivable collection is erratic, your average working capital will look artificially high, forcing you to leave more cash behind.

To optimize your working capital peg, you must inject operational discipline into your billing and collections cycle at least twelve months before going to market. Start by auditing your current accounts receivable process and updating your weekly Scorecard to track two leading indicators:
- Days Sales Outstanding, with a strict target of under thirty-five days.
- The percentage of receivables that are more than thirty days past due.

Assign ownership of this metric to your finance seat on the Accountability Chart. If the target is missed, the issue must be raised and resolved in your weekly Level 10 Meeting.

Implement automated billing workflows and set up automatic payment reminders. Offer small discounts for early payments or mandate credit card authorization for smaller accounts to compress your collection timeline.

By consistently driving down your Days Sales Outstanding, you normalize your cash flow and lower your average working capital requirement. This ensures that when the working capital peg is calculated, you can cleanly extract your hard-earned excess cash at closing instead of leaving it for the buyer to collect.