Working Capital Forecasting at FreshHarvest AG

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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. 

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

If working capital days (receivables, inventory, payables) remain constant, the absolute values of working capital will grow in line with revenue and COGS. 

For example, if revenue increases by 20%, receivables will increase by roughly 20% as well. The same applies to inventory and payables. As a result, net working capital grows each year, even though the relative efficiency of working capital management stays the same.

Since growing working capital requires additional cash to fund receivables and inventory, this creates recurring cash outflows each year. These outflows reduce Free Cash Flow to the Firm (FCFF), which lowers the company’s intrinsic valuation in a DCF. Even with strong revenue growth, free cash flow may lag if working capital needs grow at the same pace.

When Payables Days increase, the company holds onto cash longer before paying suppliers — effectively freeing up working capital, which results in a cash inflow and a positive impact on Free Cash Flow.

Let’s do the calculation using:

• COGS = €280 million
• Original Payables Days = 40
• New Payables Days = 60

This means the company frees up €15.3 million in cash by extending payment terms – a one-time working capital inflow that boosts Free Cash Flow in the year the change is implemented.

Yes, extending payables can affect the valuation – mainly through its impact on short-term Free Cash Flow. The key effects are:

• Short-term uplift in FCFF: Delaying supplier payments frees up cash, leading to a temporary increase in Free Cash Flow to the Firm (FCFF).
• DCF impact: Higher near-term cash flows result in a higher present value in a Discounted Cash Flow (DCF) model, which can slightly increase the Enterprise Value.

However, the long-term impact may be limited or even negative:

• One-time effect: Unless the new payment terms are permanently sustainable, the cash flow benefit is non-recurring and doesn't enhance the company’s long-term cash-generating ability.
• Potential downside risks: If suppliers respond with worse pricing, fewer discounts, or reduced flexibility, this could hurt margins and reduce future cash flows, potentially lowering valuation in the long run.

To capture the impact of seasonality, the forecast should be built on a monthly or quarterly basis rather than annual figures. Since 40% of sales occur in Q4, you’d model:

• Inventory buildup in Q3, leading to a working capital outflow
• A spike in receivables in Q4, creating further cash strain
• Cash inflow in Q1, when receivables are collected

This time lag between revenue and cash affects liquidity. Reflecting it in the forecast helps assess short-term funding needs, plan credit lines, and ensure the company can manage through peak working capital cycles.

In Q3, working capital is typically a net outflow due to inventory buildup ahead of the Q4 sales peak. The company ties up cash in stock before generating revenue.

In Q4, even though sales are high, receivables increase, as customers often pay on credit, leading to another net outflow.

So despite strong revenue, both quarters can strain cash. This highlights the importance of cash flow forecasting that captures timing differences, not just profit trends.

Seasonal cash gaps increase the need for short-term liquidity planning. The company should consider:

• A revolving credit facility to cover Q3/Q4 outflows
• A cash buffer to handle timing mismatches between expenses and collections
• Proper sizing and timing, ensuring liquidity is available before peak sales

Even with strong annual performance, liquidity pressure in key quarters makes proactive financing essential.

No, working capital changes should not be excluded from FCFF. They are a core part of operational cash flow. Specifically:

• Working capital ties up or releases cash needed to run the business
• Even if timing-related, these changes affect actual cash available to capital providers
• Ignoring them would overstate free cash flow and distort valuation

While fluctuations may reverse over time, they still impact liquidity and should be reflected in any proper DCF analysis.

Because EBITDA doesn’t capture cash tied up in working capital, which can materially affect the true cash-generating ability of a business. In M&A:

• Buyers often set a “normal” working capital target and adjust the purchase price if actual working capital deviates at closing
• A business with growing receivables or inventory may look healthy on EBITDA, but generate less cash
• Ignoring this can lead to overpaying or missing hidden liquidity risks

So, analyzing working capital trends helps assess sustainability of cash flows and supports better valuation and deal structuring.