How does working-capital improvement show up in returns disaggregation?
Working-capital improvement is usually a one-time cash effect, not a recurring EBITDA lever. In the disaggregation bridge it appears as de-leveraging acceleration — not as an EBITDA component.
- One-time WC reduction: cash inflow on day 1, reduces net investment or accelerates de-leveraging.
- Ongoing WC-ratio improvement: an annual cash effect, raises CFADR.
- WC build with growth: cash outflow, reduces CFADR, delays de-leveraging.
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Day 0: WC $45m (15% of revenue). Year 1: WC $35m (12% of revenue).
| Item | Value |
|---|---|
| WC Day 0 | $45m |
| WC Year 1 | $35m |
| One-time cash release | +$10m |
| Sweep to Senior Debt | −$10m debt |
| Equity effect in the bridge | +$10m |
Where does the effect show up in the bridge? Not in the EBITDA-growth component (no run-rate effect), but under "de-leveraging" or "other operational" — the cash release flows straight into paydown.
WC optimization is typically 5–10% of the total equity build. In the middle market it is often a day-1 quick win, because the PE sponsor brings working-capital discipline. But it is sustainable only with an operational process change (DSO tracking, supplier payment terms, inventory management).
- WC improvement counted as "EBITDA growth": wrong. It is a cash lever, not a P&L effect.
- DSO/DPO improvement is often modeled only for Year 1–2: after that it disappears as a driver without the model showing it.
Question: "How much of your returns comes from WC?"
Answer: "WC optimization is typically 5–10% of the total equity build. In the middle market it's often a day-1 quick win, but sustainable only with real process change. In the bridge I show it under de-leveraging, not under EBITDA growth — that's the clean separation"