We know that buyers will establish a working capital peg during the transaction. How do we use our weekly Scorecard and inventory management Rocks to optimize our working capital position before we enter due diligence?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common areas where deals get derailed or purchase prices get chipped at the finish line. Buyers look at your historical working capital to set a target that you must deliver at close. If your inventory is bloated or your collections are slow, you will be forced to leave more cash in the business than you anticipated. To protect your cash at close, you must optimize your working capital cycle on your exit runway. Start by tracking days sales outstanding and days inventory outstanding on your weekly Scorecard. These numbers must be healthy and consistent. Assign a Rock to your finance seat to clean up your accounts receivable. Implement strict credit policies and follow up on overdue invoices immediately. At the same time, look at your inventory. Identify slow-moving or obsolete inventory and write it off or liquidate it now. Use your Level 10 Meeting™ to align your operations and sales seats on working capital efficiency. Do not let sales reps offer extended payment terms just to close deals. By running a lean, highly efficient working capital cycle on your runway, you establish a favorable working capital peg that maximizes your cash proceeds at close.