Module I· Working Capital & NWCAdvanced
Question
How do you model NWC for a fast-growing company — without creating distortion?
Answer
Growth trap
if you simply extrapolate NWC as a % of sales, NWC grows linearly with revenue — which understates the fact that fast-growing firms often tie up proportionally more NWC (DSO rises as the customer base diversifies). Methodical approach:
- Model NWC components separately — DSO, DIO, DPO individually, not as a bulk % of sales.
- Customer-mix effect: when growth comes from large customers, DSO typically rises to 75–90 days (large customers pay more slowly).
- Geographic mix: growth in emerging markets raises DSO and inventory because of longer logistics routes.
- Mix adjustment: at 30% growth, stress DSO by 5–10 days vs. steady state.
Deep diveShow more details
Example
European Industrial Co grows from 100 to 200 in sales over 3 years. Naive method (NWC 25% of sales): NWC rises from 25 to 50 → Δ NWC = 25 of cash tied up. Realistic (DSO rises from 60 to 75 because of large customers, DIO rises from 90 to 100): NWC rises to ~58 → Δ NWC = 33. An $8m difference.
Pitch tip
in the pitch model, show a DSO stress case — 'NWC requirements in the aggressive-growth scenario tie up an extra $15m of cash, reducing equity value by ~3%'.