How do we use our quarterly Rock cycles to systematically clean up aging inventory and stale accounts receivable so we do not get penalized during the working capital adjustment at closing?

Question

Tyler Smith · Accepted Answer

At the closing table, buyers use a net working capital peg to ensure you leave enough cash, inventory, and accounts receivable in the business to run it. If your balance sheet is bloated with stale inventory or uncollectible receivables, the buyer will adjust the purchase price downward. You cannot clean this up in the final thirty days of a deal.

To avoid this penalty, use your quarterly Rock cycles on your exit runway to systemize your balance sheet management. Every quarter, assign a specific Rock to your finance leader or operations manager to audit and clean up a specific balance sheet line item.

For example, set a Rock to reduce accounts receivable over sixty days to less than five percent of your total ledger. Have your team run the IDS® process on any chronically slow paying clients. If a client is a bad credit risk, either restructure their payment terms or transition them out.

Similarly, assign a Rock to audit inventory. Identify slow moving or obsolete items and write them off or liquidate them. Do not carry dead stock on your books hoping a buyer will pay for it. By systematically running these balance sheet clean up Rocks on your runway, you establish a lean, highly efficient working capital cycle. When the buyer sets the working capital peg, your clean books will protect your cash at closing.