You closed the deal. The working-capital peg was set at $4.2 million, normalized from the trailing twelve months. Three months in, you realize the seller ran a pre-close collection blitz, stretched payables past their natural cadence, and shipped inventory they knew would return. The “normal” working capital you agreed to is not the business you now own. You are funding the gap from the equity check, and EBITDA is eroding because you are scrambling to restore supplier relationships and chase returns. Working capital should never be reviewed in isolation. Commercial diligence often explains why working capital behaves the way it does.
This is not an accounting problem. This is an operating problem that lands on your desk the moment you take the keys. The working capital adjustment is one of the most consequential, and most gamed, mechanics in any acquisition. If you do not understand the peg well enough to pressure-test it before close and manage to it after, you will bleed cash in ways that never show up in the quality-of-earnings report.
A peg set on normal levels you cannot sustain becomes an operating liability
Working capital adjustments exist because the business you buy should have enough cash tied up in operations to run without immediate infusions. The target is supposed to reflect “normal” levels of receivables, payables, and inventory. But normal is a negotiated fiction. Sellers have every incentive to compress receivables, inflate payables, and time shipments to show a lower working-capital requirement than the business actually needs.
According to a 2023 Bain report on post-merger integration, working-capital surprises are among the top three sources of value leakage in the first year after close. The problem is not that buyers fail to negotiate a peg. The problem is that they negotiate a peg they cannot operationally sustain, because they treated it as a finance exercise rather than an operating one.
When the peg is wrong, you either fund the shortfall from cash reserves or you destroy supplier and customer relationships trying to match a number that was never real. Neither outcome is acceptable.
What the adjustment actually compares, and when the delta becomes your problem
The working capital adjustment is a mechanism that compares the actual net working capital at close to an agreed target, then adjusts the purchase price up or down to compensate. If actual working capital is $500,000 below target, the seller owes you $500,000. If it is above, you owe them.
Net working capital, for these purposes, typically means current assets minus current liabilities, excluding cash and debt. The specific line items vary by deal, and the definition matters enormously. Some agreements exclude deferred revenue. Others include it. Some treat prepaid expenses as working capital. Others do not.
The adjustment happens at close, using a closing balance sheet, and is often subject to a true-up period where disputed items get resolved. But the real action happens earlier, when the target itself is set. That target, often called the working capital peg, is derived from a normalization process that is supposed to strip out one-time items, seasonality effects, and timing anomalies. In practice, it is where the battle is fought.
Three moves sellers use to depress the peg before you close
Working capital normalization is supposed to produce a number that reflects steady-state operations. Analysts look at the trailing twelve months, sometimes twenty-four, and adjust for items like one-time large orders, unusual customer payment terms, inventory build-ups for specific projects, or payables that were artificially extended.
The gaming happens in three places:
Receivables Compression
Sellers accelerate collections before close. They call in favors, offer early-payment discounts, or simply hound customers harder than usual. The result is that DSO (days sales outstanding) drops below its natural level. Once you take over, DSO reverts, and you need more cash tied up in receivables than the peg assumed.
Payables Extension
Sellers stretch payables beyond normal terms. They delay vendor payments, sometimes past agreed terms, to show a higher current liability base and reduce the apparent working-capital requirement. After close, you inherit strained supplier relationships and past-due invoices that demand immediate payment.
Inventory Timing
Sellers ship inventory aggressively before close, converting it to receivables or cash. They may also delay incoming inventory to suppress the asset side. Post-close, you find yourself short on stock and scrambling to reorder at premium prices.
According to McKinsey’s 2022 analysis of post-close value capture, companies that conduct independent operational diligence on working capital, rather than relying solely on financial QofE, identify 15 to 25 percent more adjustments than those that do not. The lesson is clear: working capital normalization is not just a spreadsheet exercise. It requires someone who understands how the business actually operates.
Four operating levers that determine how much cash the business needs to run
Once you own the business, working capital is no longer a negotiation. It is an operating discipline. The four primary levers are DSO, DPO, DIO (days inventory outstanding), and billing cadence. Each one is controllable, and each one affects your cash conversion cycle directly.
DSO: Days Sales Outstanding
DSO measures how long it takes to collect receivables. Improving DSO means tightening credit terms, invoicing faster, and following up on past-due accounts with discipline. A company with $50 million in annual revenue and 60-day DSO has roughly $8.2 million tied up in receivables. Reduce DSO to 45 days, and you free up over $2 million in cash.
DPO: Days Payables Outstanding
DPO measures how long you take to pay suppliers. Extending DPO, within contractual limits, preserves cash. But there is a limit. Push too hard and you damage supplier relationships, lose early-payment discounts, or find yourself last in line during supply shortages. The goal is to match DPO to cash-flow timing without creating operational risk.
DIO: Days Inventory Outstanding
DIO measures how long inventory sits before it is sold. Excess inventory ties up cash and creates obsolescence risk. Too little inventory creates stockouts and lost sales. The balance depends on lead times, demand variability, and service-level requirements. For most businesses, reducing DIO by even a few days releases meaningful cash.
Billing Cadence
Billing cadence is often overlooked. If you invoice monthly instead of weekly, you add three weeks to your cash conversion cycle. If you wait until month-end to bill for work completed mid-month, you are financing your customer’s operations. Moving to milestone billing, progress billing, or even prepayment models can compress the cycle significantly.
These levers interact. Improving DSO while maintaining reasonable DPO and optimizing DIO can transform a cash-consuming business into a cash-generating one. According to a 2021 Harvard Business Review article on cash management, companies that actively manage working capital through operational levers, rather than financial engineering, generate 20 to 30 percent higher free cash flow over a five-year period.
What must happen in the first 100 days to establish working-capital discipline
The first 100 days after close are when working-capital habits are set or broken. If you do not establish baseline measurements, assign ownership, and create accountability, you will drift toward whatever the legacy team was doing, which may have been optimized for sale rather than ongoing operation.
Your 100-day plan should include the following workstreams:
Week 1-2: Establish the Baseline
Measure actual DSO, DPO, DIO, and cash conversion cycle as of close. Compare to the peg. Identify the gaps. If your actual DSO is 55 days and the peg assumed 48, you know immediately that you are funding a shortfall.
Week 3-4: Assign Ownership
Each lever needs an owner. DSO typically belongs to the CFO or controller, but improvement often requires involvement from sales (who set payment terms) and operations (who trigger invoicing). DPO belongs to procurement. DIO belongs to operations or supply chain. Without clear owners, no one is accountable.
Week 5-8: Implement Quick Wins
Run an AR aging review and collect the low-hanging fruit. Review payment terms with major customers and negotiate where possible. Audit inventory for slow-moving or obsolete items. Shift billing cadence where you can do so without customer friction. These moves often free up cash within weeks.
Week 9-12: Build the Reporting Cadence
Establish weekly or bi-weekly reviews of working-capital metrics. Tie these reviews to the operating rhythm you are building, which often connects directly to portfolio-company operating reviews. If working capital is not on the agenda, it will slip.
This 100-day window is also the time to integrate working-capital discipline into broader post-close planning. For a detailed framework on the commercial and digital integration priorities during this period, see the first 100 days after an acquisition.
The three reporting requirements that prevent cash surprises
Working capital is easy to manage when you measure it consistently. The problem is that most portfolio companies do not. They report monthly financials, which show balance-sheet snapshots, but they do not track the underlying drivers in a way that enables intervention.
Honest reporting requires three things:
First, you need real-time or near-real-time visibility into receivables, payables, and inventory. If you are waiting until month-end close to see your AR aging, you have already lost two to three weeks of collection opportunity.
Second, you need trend reporting that compares current performance to the peg and to historical norms. A single DSO number means nothing. DSO trending from 45 to 52 over three months tells a story that demands action.
Third, you need exception reporting that flags anomalies. A sudden spike in inventory, an unusual payables extension, a customer who has not paid in 90 days. These are the signals that require investigation.
When working-capital reporting is disconnected from operational cadence, cash surprises become inevitable. These surprises often manifest as EBITDA erosion that RevOps discipline can address, because the root causes are frequently process breakdowns in billing, collections, or procurement.
An Operator’s Working Capital Dashboard
Below is a working-capital dashboard designed for operators, not accountants. It includes the metrics that matter, targets that should be set during the first 30 days post-close, and assigned owners who are accountable for each lever. Use this as a starting point and adapt it to your specific business.
| Metric | Definition | Current Value | Target (from Peg) | Trend (Last 3 Months) | Owner | Review Frequency |
|---|---|---|---|---|---|---|
| DSO (Days Sales Outstanding) | Average collection period for receivables | [Enter actual] | [Peg assumption] | ↑ / ↓ / → | CFO / Controller | Weekly |
| DPO (Days Payables Outstanding) | Average payment period for payables | [Enter actual] | [Peg assumption] | ↑ / ↓ / → | Procurement Lead | Bi-weekly |
| DIO (Days Inventory Outstanding) | Average days inventory held before sale | [Enter actual] | [Peg assumption] | ↑ / ↓ / → | Operations / Supply Chain | Weekly |
| Cash Conversion Cycle | DSO + DIO – DPO | [Calculate] | [Target from peg] | ↑ / ↓ / → | CFO | Monthly |
| Net Working Capital ($) | Current assets – current liabilities (excl. cash/debt) | [Enter actual] | [Peg amount] | ↑ / ↓ / → | CFO | Monthly |
| NWC as % of Revenue (LTM) | Net working capital / trailing 12-month revenue | [Calculate] | [Industry benchmark] | ↑ / ↓ / → | CFO | Quarterly |
| AR Aging > 60 Days ($) | Total receivables past 60 days | [Enter actual] | [Target: minimize] | ↑ / ↓ / → | Controller / Collections | Weekly |
| Inventory Turnover | COGS / Average Inventory | [Calculate] | [Target based on model] | ↑ / ↓ / → | Operations | Monthly |
This dashboard should be reviewed in a standing working-capital meeting, ideally weekly during the first 100 days and bi-weekly thereafter. The CFO owns the overall number, but improvement happens only when functional owners are accountable for the components they control.
Working capital is an operating discipline, not a closing adjustment
The working capital adjustment matters most not at close, but in the months that follow. A peg set on unsustainable assumptions becomes a cash drain that erodes value before you have a chance to create it. An adjustment ignored becomes a pattern that compounds.
Operators who protect working capital treat it as what it is: a set of operating levers that determine how much cash the business needs to run. They assign owners, measure weekly, and intervene early. They connect working-capital discipline to the broader RevOps and commercial cadence that drives portfolio-company performance.
For PE-backed companies building this discipline, RevOps for PE-backed companies offers a framework that connects working-capital management to the broader commercial operating system. To stand up the reporting that keeps working capital on target after close, DevriX can build the cadence.
