The Working Capital Playbook: How PE-Backed Companies Free Up Cash in the First Year

If you're a PE sponsor looking for quick wins in the first year post-close, working capital improvement is almost always the highest-return, lowest-risk option available.

The math is straightforward: every dollar of working capital you free up is a dollar of cash that can be used to pay down debt, fund growth, or return to investors. And unlike revenue growth initiatives — which take time to develop and carry execution risk — working capital improvement is largely within your control.

The problem is that most companies don't know how much working capital they're carrying unnecessarily. And most PE firms don't push hard enough on it in the first year, when the organizational receptivity to change is highest.

Working capital improvement comes down to three levers: receivables, payables, and inventory. Each has a different risk profile and a different implementation timeline.

Accounts receivable is typically the fastest lever to pull. In most middle-market companies, there's meaningful cash sitting in invoices that are past due, disputed, or simply not being collected aggressively.

A focused 60-day collections push — with clear accountability, daily reporting, and executive attention — can typically recover 5–15% of the AR balance. That's real cash, and it's available quickly.

Beyond the immediate collections push, the structural improvements that matter most are:

• Invoice accuracy: Billing errors are a leading cause of payment delays. Fix the root cause, not just the symptom.
• Payment terms standardization: Many companies have drifted into inconsistent payment terms across their customer base. Standardizing to net-30 (or whatever your target is) and enforcing it consistently can meaningfully reduce DSO.
• Early payment incentives: For large customers with strong credit, a 1–2% early payment discount can be economically attractive on both sides.

Extending payables is often the most controversial working capital lever, because it can feel like you're damaging supplier relationships. Done wrong, it does. Done right, it's a legitimate and sustainable source of cash.

The key is to be strategic about which payables you extend and how you communicate the change. Large, well-capitalized suppliers can absorb extended terms without material impact. Small suppliers operating on thin margins cannot — and pushing them too hard creates supply chain risk that costs more than the cash you freed up.

A tiered approach — extending terms with large suppliers while maintaining or even improving terms with critical small suppliers — typically captures 70–80% of the available benefit with a fraction of the relationship risk.

For manufacturing and distribution companies, inventory is almost always the largest working capital opportunity — and the most complex to capture.

The typical middle-market manufacturer is carrying 20–40% more inventory than they need. The excess is distributed across three categories:

• Slow-moving and obsolete SKUs that should be liquidated or written off
• Safety stock that's been set too high because the planning process doesn't trust the demand forecast
• Work-in-process inventory that's accumulating because of production scheduling inefficiencies

Addressing inventory requires fixing the underlying processes — demand planning, production scheduling, and supplier lead times — not just setting lower inventory targets. Companies that try to reduce inventory without fixing the process just end up with more stockouts.

In our experience, a well-executed working capital program in the first 12 months post-close can free up 8–15% of revenue in cash. For a $200M company, that's $16–30M — often enough to meaningfully change the leverage profile of the investment.

The companies that capture the most value share a few characteristics:

• They start the diagnostic before close, so they're ready to execute on day one
• They assign dedicated ownership to each lever, with clear accountability and weekly reporting
• They use data — real-time visibility into AR aging, inventory turns, and payables — rather than relying on monthly financial statements

One of the reasons working capital improvement is a core part of our practice is that APEX gives us real-time visibility into the metrics that matter. We can see AR aging by customer, inventory turns by SKU, and payables by supplier — updated daily — which means we can identify issues and course-correct before they become problems.

That visibility also makes it easier to hold the organization accountable. When the data is in front of everyone every week, it's harder to explain away underperformance.

Working capital improvement isn't glamorous. But it's one of the most reliable value creation levers in the PE toolkit. Use it.

Miles English is a Founder and Advisor at Chain Mountain.