If I had to choose one — just one — finance concept that every business owner should master deeply, I'd choose working capital. It isn't the most glamorous, since talking about accounts payable or average inventory days hardly sounds sophisticated. But it's what separates, day to day, the company that sleeps soundly from the one always chasing its overdraft.
Mistakes in managing working capital are the ones that hurt companies most — and frequently break them. Most small businesses, and a good share of mid-sized ones, don't have a CFO with a real "F." They tend to leave operational cash management to the feeling of the main manager, or to the tug-of-war between the purchasing and sales teams. That's where the danger lies.
Working capital is treacherous because the balance-sheet numbers can look healthy while the company, under the surface, is quietly drying up. Let me show you how this happens and why the topic sits at the heart of any serious valuation in an M&A deal.
A mistake doesn't always break you. But it always destroys value
There's a point I keep repeating to my clients: not every working-capital mistake breaks the company. But every mistake destroys value. And destroyed value is money leaving your pocket when it's time to collect dividends or sell the business.
Here's a case I followed closely. A client watched the business grow year after year and, proudly, distributed 100% of the profits. The problem is that growth consumed a lot of cash: more sales require more inventory and more receivables. Since all the profit went into the partners' pockets, that growth was financed by bank loans.
The rising debt went ignored for years, in the comfort of the idea that "the company is growing, so everything's fine." Until the day interest payments simply swallowed the cash. The result? The client was forced to sell the business in a hurry and received a fraction of what it was worth. The company was growing in revenue and withering in value — at the same time. It's the famous scissors effect: the need for working capital rises faster than financing from the company's own resources, and the business gets squeezed between the two blades.
In M&A, working capital can turn lemonade into a lemon
In an M&A deal, the investor's analysis of working capital is essential. The logic is simple, even if few people notice it: if a low variation in working capital across the growth projection drives the company's value, a high variation erodes it. More money trapped in operations means less money available to investors. Period.
And what's the challenge? The challenge is that the accounting numbers can hide bombs that are invisible to a purely financial analysis. During due diligence, the good advisor's job is precisely to defuse these bombs before the buyer steps on them. Three cases illustrate this almost like a textbook.
Kmart: the inventory nobody turned over
Kmart, the American retail giant, filed for Chapter 11 bankruptcy protection in January 2002, surprising much of the market. It was, at the time, the largest retailer in history to seek protection from creditors. What caught analysts off guard wasn't just the fierce competition from Walmart and Target — it was the fact that the working-capital readings being made were, in practice, wrong.
The company carried enormous, low-turnover inventories that inflated its working-capital needs without outside analysts being able to gauge the fragility. On paper, inventory is almost cash. In real life, idle inventory is cash trapped on a dusty shelf. When you only look at the balance sheet and don't understand the turnover of that inventory, the picture lies. (EBSCO — Kmart Corp. becomes the largest retailer in U.S. history to file for Chapter 11.)
Americanas: when a liability disguises itself as operations
The most painful case for us Brazilians is Americanas. The infamous reverse factoring (risco sacado) fraud — an arrangement in which the bank advances payment to suppliers and the company pays the bank later — wasn't recorded as financial debt. Instead, it was hidden inside operational accounts payable, as if it were normal supplier breathing room.
Why did the maneuver fool the market for so long? Because analysts only had access to the financial statements provided by the company itself. Those who blindly trusted the printed number paid dearly. The lesson is uncomfortable: working capital can't be audited from a distance. (CVM — investigations related to the fraud at Americanas S.A.)
Lojas Americanas, Sears, and the rule that never fails
To round out the trio, it's worth recalling Sears in the United States — another century-old retailer that, for years, kept up an appearance of solidity while its inventory and supplier dynamics deteriorated silently, until its bankruptcy in 2018. The pattern repeats in sector after sector: the problem almost never shows up overnight. It builds up, slowly, hidden in line items that look routine — inventory, customers, suppliers.
That's why I insist with sellers: the time to organize working capital is not during due diligence. It's years earlier. The smart buyer will always open the black box. How due diligence works in an M&A deal.
What you can do starting today
I can't end this piece without the practical side. Well-managed working capital isn't financial magic, it's operational discipline. Three fronts concentrate almost everything that matters: the terms you grant customers, the terms you obtain from suppliers, and the speed at which inventory turns into cash. Tighten those three levers and you free up cash without selling a single share.
A KPMG study of 160 Brazilian companies estimated hundreds of billions of reais tied up in customers, inventories, and suppliers. Translation: there's a fortune sleeping in the working capital of Brazilian companies, waiting for someone competent to wake it up. This is often the cheapest source of financing there is — and it's already inside the house. Explore Biz Invest's management consulting services.
Companies live and die by cash. Good working-capital management is one of the greatest — if not the greatest — secrets to business longevity. It's like the phrase I love: "Revenue is vanity, profit is sanity, and cash is king."
Shall we talk?
If you're thinking of selling your company in the coming years, start treating working capital as a strategic asset right now — that's what separates a defensible valuation from a negotiation on the defensive. At Biz Invest, we help business owners spot these bombs before the buyer does. Talk to our team and find out how much value may be hidden — or leaking — in your operation's cash.
Revenue is vanity, profit is sanity, and cash is king.
Frequently asked questions
How to improve working capital management in practice?
Act on three fronts: negotiate better terms with suppliers, reduce the collection period from customers, and increase inventory turnover. Track these indicators regularly and avoid distributing profit without first securing the cash needed to sustain the operation and its growth.
Can growing fast be dangerous for cash?
Yes. Accelerated growth increases the need for working capital. If the company distributes all its profit and finances growth solely with debt, it can enter the so-called scissors effect, in which the need for cash exceeds the ability to finance it. Growth, in that case, becomes a trap.
How can working capital hide problems on the balance sheet?
Non-moving inventory, delinquent customers, and debt disguised as operational accounts payable can make a company look healthy on paper. That's what happened in cases like Kmart and Americanas. That's why working capital analysis requires going beyond the financial statements and understanding the real operation.
Why is working capital so important in an M&A transaction?
Because the variation in working capital directly affects the company's value. Operations that consume little cash to grow are worth more; those that devour cash are worth less, since less return is left for the investor. In due diligence, working capital is usually one of the first things an experienced buyer examines.
What is working capital, in simple terms?
It's the money the company needs to run day-to-day operations: paying suppliers, keeping inventory, and sustaining credit sales while the customer hasn't paid yet. In practical terms, it's the result of accounts receivable plus inventory minus accounts payable to suppliers. The larger that difference, the more cash the operation consumes.
Shall we talk?
If you're thinking of selling your company in the coming years, start treating working capital as a strategic asset right now. At Biz Invest, we help business owners spot these bombs before the buyer does. Talk to our team and find out how much value may be hidden — or leaking — in your operation's cash.
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