Module IV· Operating ForecastAdvanced
Question
How do you model operating working capital (OWC) in an LBO, and which improvement levers do you see in the middle market?
Answer
Mechanics
OWC = receivables + inventory − payables (operating). Modeled as % of sales or via days (DSO, DIO, DPO).
`Δ OWC = OWC_year_t − OWC_year_t-1` → cash impact (increase = cash outflow)
Deep diveShow more details
Comparison (improvement levers in the middle market)
| Lever | Typical improvement | Cash effect (example $200m sales) |
|---|---|---|
| Receivables management (DSO) | 65 days → 55 days | +$5.5m cash one-time |
| Inventory turns (DIO) | 90 days → 75 days | +$8.2m cash one-time |
| Supplier terms (DPO) | 30 days → 45 days | +$6.8m cash one-time |
| Total OWC optimization | 8–12% of sales | $15–25m cash one-time |
Consequence
In the middle market, often a $20m+ cash quick win from professional working-capital management — typically a 'Day-1 initiative' for PE sponsors.
Common pitfalls
OWC optimization is often modeled as a one-time cash win, but it is only sustainable with operating effort. For DSO improvement: collections staff needed. For DPO extension: risk of supplier disputes.
Pitch tip
Seniors ask 'What would your 100-day plan for OWC be?' — a structured answer: Days 1–30 DSO/DIO/DPO baseline, Days 30–60 quick wins (DSO), Days 60–100 structural levers (DIO via SKU reduction, DPO via supplier negotiation).