We recently integrated AI automated workflows that slashed our days inventory outstanding, but the buyer's Quality of Earnings firm is using a historical average that penalizes our current efficiency. How do we recalculate the working capital target to ensure we do not leave excess cash behind?

Question

Tyler Smith · Accepted Answer

A standard net working capital peg is calculated using a twelve-month rolling average. If you recently optimized your inventory cycles using new AI automated workflows, your current working capital requirements are significantly lower than they were a year ago. Using a trailing twelve-month average will force you to leave a massive chunk of excess cash in the business at closing.

You must demand a target peg based on your post-automation performance. Under IVS 105, your working capital target must reflect the current operational reality of the business. Argue that the historical months are no longer representative of your ongoing operations.

Present a rolling three-month average or a pro-forma adjustment that reflects your permanently reduced cash cycle. Use your EOS scorecard data to prove that your shortened days inventory outstanding is a permanent operational improvement, not a temporary spike. If your team has successfully run this automated workflow as a quarterly Rock, you have the historical data to back up your claim.

Do not let the buyer use outdated averages to capture your hard-earned cash. If they refuse to adjust the peg, propose a post-closing adjustment mechanism that returns any excess cash to you once the post-close working capital requirements are verified. Protect your efficiency gains at all costs.