Our Value Growth Audit revealed that our inconsistent inventory management creates huge swings in our monthly working capital calculations. How do we stabilize this to prevent a buyer from setting an unfavorable Net Working Capital peg?

Question

Tyler Smith · Accepted Answer

Wild swings in your inventory levels create massive volatility in your monthly working capital, which can severely damage your position when negotiating the net working capital peg in an LOI. Buyers look for stability; if they see unpredictable cash-to-card cycles, they will set a high net working capital target that forces you to leave a significant amount of cash in the business at close. To stabilize your operations and defend your liquidity, you must fix your inventory management processes well before going to market. Start by introducing a new, dedicated scorecard measure in your weekly Level 10 Meeting to track inventory turns and raw material lead times. Assign this metric to a specific seat on your Accountability Chart to ensure clear ownership. By implementing structured operational guidelines and standardizing your purchasing cadence, you can smooth out the cash flow cycles. This consistency allows you to present a clean, predictable working capital trend line to the buyer's Quality of Earnings team. When you can prove your inventory levels are optimized and predictable, you can negotiate a lower working capital peg, ensuring you take more cash off the table at closing.