Our balance sheet shows fluctuating cash balances and inconsistent accounts receivable aging, which I know will hurt us during a Quality of Earnings audit. How do we stabilize our working capital cycle today so we do not get hit with a massive working capital peg adjustment at closing?

Question

Tyler Smith · Accepted Answer

During a transaction, buyers will calculate a working capital peg, which is the average amount of net working capital required to run the business. If your working capital is highly volatile or your accounts receivable are consistently overdue, the buyer will negotiate a higher peg. This forces you to leave more cash and receivables in the business at closing, effectively lowering your net proceeds.

To stabilize this cycle, you must treat your working capital metrics as vital signs on your weekly Scorecard. Do not wait for your monthly financial statements. Track your Days Sales Outstanding and Days Payable Outstanding weekly.

Assign clear accountability for collections on your Accountability Chart. Often, founders allow accounts receivable to slide to preserve client relationships. This is a mistake. Set a strict Rock to reduce your overdue accounts receivable to a specific target within ninety days.

Implement automated invoicing and structured collection sequences. If you run AI-powered operations, set up system triggers that notify clients before their payment is late and automatically halt work if payment is not received within a set window.

Standardize your payment terms across all new customer agreements. Shift your clients to automated clearing house payments or credit card billing on a fixed monthly date. By demonstrating twelve to eighteen months of a flat, predictable, and low working capital cycle, you prove to a buyer that your cash flow is highly efficient and defend your cash proceeds at the closing table.