Our working capital fluctuates wildly from month to month, which we have always managed with a line of credit. How will sophisticated buyers view this volatility on our exit runway, and how do we stabilize it?

Question

Tyler Smith · Accepted Answer

Sophisticated buyers hate working capital volatility because it signals operational inefficiency and poor cash management. During due diligence, a buyer will calculate a working capital peg based on your historical average. If your working capital is highly volatile, they will structure the peg to protect themselves, which often means leaving more of your cash in the business at close or reducing the purchase price. You must stabilize your cash flow on your exit runway. Start by tracking your cash conversion cycle as a primary metric on your weekly Scorecard. This includes measuring days sales outstanding and days inventory outstanding. Assign ownership of these metrics to specific seats on your Accountability Chart, typically your head of finance or operations. If your days sales outstanding exceeds thirty days, make reducing it a quarterly Rock. Look at your invoicing process and contract terms. Switch customers to automated clearing house payments or upfront retainer structures. Run any collection bottlenecks through the IDS® process during your weekly Level 10 Meeting™. By systematically reducing the time it takes to convert sales into cash, you prove to a buyer that your business does not require constant capital injections to sustain its growth, directly increasing your valuation.