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Working Capital Forecasting at FreshHarvest AG

Case information

Difficulty: Intermediate

Interviewer-led

5.0

< 100 Ratings

Times solved: 400+

Operations strategy Valuation

You’re advising FreshHarvest AG, a fast-growing food distribution company based in Germany. They operate on tight margins, high volumes, and have recently secured several new retail partners. The CFO wants to better understand how working capital decisions and seasonal dynamics impact their free cash flow profile and ultimately their valuation.

Your task is to assess how working capital evolves over the forecast period, how payment term shifts affect cash flow, and how to reflect seasonality in a dynamic forecasting model.

This case will test your analytical skills, cash flow understanding, and judgment around operational finance levers.

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1) Working Capital Drivers

The CFO shares this high-level data for Year 1:

Revenue: €400 million
COGS: €280 million
Inventory Days: 50
Receivables Days: 30
Payables Days: 40

How would you calculate the net working capital investment required in Year 1?

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To assess the impact of working capital on cash flow, you need to quantify how much cash is tied up in receivables and inventory and how much is freed up by delaying payments to suppliers (payables).

This is typically done by converting days outstanding into absolute euro values using revenue or COGS as a base.

Let's go through the calculation step by step.

Calculation of Receivables

Receivables = (Receivables Days / 365) × Revenue
= (30 / 365) × €400M ≈ €32.9M

Calculation of Inventory

Inventory = (Inventory Days / 365) × COGS
= (50 / 365) × €280M ≈ €38.4M

Calculation of Payables

Payables = (Payables Days / 365) × COGS
= (40 / 365) × €280M ≈ €30.7M

Calculation of Net Working Capital

Net Working Capital = Receivables + Inventory – Payables
≈ €32.9M + €38.4M – €30.7M = €40.6M

This means the company needs to invest approximately €40.6M in net working capital in Year 1, which represents a cash outfvlow.

If revenue grows by 20% per year and all working capital days remain constant, how will working capital evolve over the forecast period?

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What effect does this have on Free Cash Flow?

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2) Payment Terms & Negotiation Levers

The Head of Procurement says they’re renegotiating supplier terms to improve payables days from 40 to 60 over the next two years. How would this change affect the company’s free cash flow profile in the short term?

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Would the change in payables affect the valuation of the company?

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3) Seasonality & Cash Flow Timing

The business is highly seasonal. 40% of annual sales occur in Q4. Inventory is built up in Q3, often straining cash flow. How would you reflect this seasonality in your monthly or quarterly cash flow model?

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Would you expect working capital to be a net inflow or outflow in Q3 and Q4?

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How would this seasonality affect the company’s need for a credit facility or cash buffer?

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4) Operating vs. Investing Cash Flows

The CFO believes all working capital changes should be excluded from Free Cash Flow to the Firm (FCFF), calling them "short-term timing issues."

Do you agree with the CFO’s view? Why or why not?

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In a transaction or due diligence setting, why is it important to analyze changes in working capital separately from EBITDA?

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