How do you evaluate the working capital and cash flow projections of the target company?

3 Validate assumptions

The third step is to validate the assumptions that underlie the target company's working capital and cash flow projections. You want to check how realistic and reasonable the assumptions are, and how sensitive the projections are to changes in key variables, such as sales growth, margins, capital expenditures, and working capital requirements. You should also test the scenarios that the target company has used to forecast its working capital and cash flow, and see how they reflect the expected market conditions, competitive environment, and strategic objectives.

4 Identify adjustments

The fourth step is to identify any adjustments that need to be made to the target company's working capital and cash flow projections. You want to account for any differences in accounting policies, reporting standards, or business practices between the target company and your own company, or between the target company and the industry norms. You should also consider any one-off or non-recurring items, such as restructuring costs, litigation settlements, or asset impairments, that may affect the target company's working capital and cash flow.

5 Assess risks and opportunities

The fifth step is to assess the risks and opportunities that arise from the target company's working capital and cash flow projections. You want to identify any potential issues or challenges that may affect the target company's ability to meet its working capital and cash flow targets, such as customer concentration, supplier dependency, currency exposure, or regulatory changes. You should also explore any potential areas or initiatives that may improve the target company's working capital and cash flow performance, such as inventory optimization, receivables management, payables negotiation, or cash flow forecasting.

6 Communicate findings

The final step is to communicate your findings and recommendations to the relevant stakeholders, such as your management team, the target company's management team, or the deal advisors. You want to present your analysis and conclusions in a clear and concise manner, and highlight the key drivers, risks, and opportunities of the target company's working capital and cash flow projections. You should also provide your input on the valuation, deal structure, and integration plan of the target company, and address any questions or concerns that may arise from your evaluation.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?