Module I· Working Capital & NWCAdvanced
Question
How do you distinguish a structural NWC improvement from year-end window dressing?
Answer
Mechanics
window-dressing indicators — typical in audit DD:
- Q4 AR significantly lower than the Q1–Q3 average — an indicator of aggressive collections before year-end or an AR sale (factoring) only in Q4.
- Q4 DPO significantly higher than the average — supplier payments deliberately pushed past year-end.
- Q4 inventory lower than seasonally expected — deliveries accelerated into Q4.
- Jumps in 'other current liabilities' specifically in Q4 — catch-all bookings.
- Reverse factoring activated specifically at year-end.
Deep diveShow more details
Structural improvement indicators (by contrast):
- Consistent DSO reduction over 4+ quarters, not just at year-end.
- Inventory turnover rising every quarter, not just in Q4.
- DPO extension with documented supplier contracts, not through late payments.
- NWC/sales ratio falling monthly, not just at December 31.
Pitch tip
in the QoE analysis, show the 'reported year-end NWC vs. 12-month average' spread — a >20% difference is a classic red flag that can move adjusted net debt at larger targets by $50–150m.