A receivables project is worth one day of revenue per day of DSO, plus what shorter terms save on growth and interest, and it is valued once, never at the exit multiple.
Cash released by cutting DSO is annual revenue divided by 365, times the days removed. On an illustrative portfolio company with 129.6 million of revenue, taking DSO from 75 to 60 days releases 5.33 million of cash once, and because the business keeps growing on shorter terms, the gap reaches 7.25 million by exit. With the interest saved, the improvement adds 8.51 million of equity at exit, not the 53.3 million you get by putting the release through the exit multiple.
Worked in full in The Private Equity Operating Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Receivables are the working capital line an operating partner can move fastest without touching the customer proposition: invoice on delivery rather than at month end, chase the disputed items, enforce the terms already in the contract. The question a board asks is always the same: how much cash, and what is it worth to the exit? The answer has three parts, and only the first one is usually computed.
| Input | Value |
|---|---|
| Revenue at entry | 120.0 |
| Revenue growth per year | 8% |
| DSO at entry | 75 days |
| DSO target, reached by the end of year 1 | 60 days |
| Hold period | 5 years |
| Cost of the debt the cash repays | 7% |
| Tax rate | 25% |
| Exit multiple of EBITDA | 10.0x |
| Equity cheque at entry | 100.0 |
At entry, receivables stand at 120.0 × 75 ÷ 365 = 24.66 million. All the cash released is assumed to repay acquisition debt, which is what happens under a typical cash sweep.
DSO = trade receivables ÷ revenue × 365
Cash released = revenue ÷ 365 × (DSO before − DSO after)
Equity gain at exit = receivables gap at exit + after-tax interest saved over the hold
In Excel: =Revenue/365*(DSO_old-DSO_new) for each year's gap, and =SUMPRODUCT(Gap_prior_year,Rate)*(1-Tax) for the interest.
One day of DSO is worth revenue divided by 365: 0.355 million in year 1, rising to 0.483 million by year 5 as revenue grows. Fifteen days in year 1 is therefore 129.6 ÷ 365 × 15 = 5.33 million: receivables fall from 26.63 million at 75 days to 21.30 million at 60.
| Year | Revenue | AR at 75 days | AR at 60 days | Gap | Interest saved |
|---|---|---|---|---|---|
| 1 | 129.60 | 26.63 | 21.30 | 5.33 | |
| 2 | 139.97 | 28.76 | 23.01 | 5.75 | 0.373 |
| 3 | 151.17 | 31.06 | 24.85 | 6.21 | 0.403 |
| 4 | 163.26 | 33.55 | 26.84 | 6.71 | 0.435 |
| 5 | 176.32 | 36.23 | 28.98 | 7.25 | 0.470 |
The gap is not a one-off. In every later year the business absorbs less cash to fund its growth, because each new unit of revenue ties up 60 days of receivables instead of 75. That is 0.43 million in year 2, rising to 0.54 million in year 5: 1.92 million over the four years on top of the original 5.33. Interest is saved on the prior year's gap at 7 per cent (simple, not compounded), 1.68 million before tax over years 2 to 5, or 1.26 million after tax.
| Component | Amount |
|---|---|
| One-off release in year 1 | 5.33 |
| Lower working capital absorption, years 2 to 5 | 1.92 |
| After-tax interest saved | 1.26 |
| Equity gain at exit | 8.51 |
On a 100.0 million equity cheque, 8.51 million is 0.085 turns of money multiple, from a project that changes neither price nor volume nor cost. Interest is 15 per cent of the gain; the rest is the receivables gap itself, which at exit is simply less debt in the enterprise-to-equity bridge.
| Days cut | Year 1 release | Gap at exit | Interest, after tax | Equity gain |
|---|---|---|---|---|
| 5 | 1.78 | 2.42 | 0.42 | 2.84 |
| 10 | 3.55 | 4.83 | 0.84 | 5.67 |
| 15 | 5.33 | 7.25 | 1.26 | 8.51 |
| 20 | 7.10 | 9.66 | 1.68 | 11.34 |
| 15, drifting back to 70 days by exit | 5.33 | 2.42 | 1.26 | 3.68 |
The result is linear in days, so the per-day figure is the one to carry into a hundred-day plan. The drift line is the one to worry about. If the collections discipline slips and DSO is back at 70 days in the exit year, the business has to rebuild 4.83 million of receivables out of cash just before the sale, and 57 per cent of the gain disappears. The interest saved in the middle years is kept, but the balance sheet the buyer sees has given most of it back. A buyer's working capital peg, set on trailing balances, will then price the business on the worse number.
Check the denominator. In many jurisdictions receivables include sales tax and revenue does not, so a DSO computed on net revenue overstates the days. Whatever convention the company uses, keep it constant between the baseline and the target, or the improvement is partly a change of formula.
The common mistake is to value the release at the exit multiple. 5.33 million of cash is not EBITDA, and multiplying it by 10.0 gives 53.3 million, more than six times the real effect. Buyers pay a multiple for earnings that recur. A working capital release recurs only in the small sense shown above, as lower absorption on growth, and it reaches equity value once, as less net debt at exit.
The opposite mistake is just as common in reporting. Because the cash repays debt, a standard value creation bridge files the whole 8.51 million under deleveraging, the bucket nobody credits to operating work. The companion files for the book work a receivables case of the same shape, 75 to 60 days, on the book's own bridge, with their own figures: the receivables project quietly becomes part of the deleveraging line unless someone splits it out. If the operating team earned it, the bridge should say so, on a line of its own.
Price one day of DSO as revenue over 365, multiply by the days removed, and then add what the shorter terms save on growth and interest over the hold. Value it once, as net debt, never at the multiple, and keep it there until the sale: the exit balance sheet is the only one the buyer pays for. The receivables case is one of the three worked in the free companion files for this book; for how the buyer's peg treats the same balances, see how to calculate a net working capital peg, and for the pricing lever that sits beside it, how much volume a price increase can lose.
One day of DSO is annual revenue divided by 365. For an illustrative company with 129.6 million of revenue it is 0.355 million of cash, rising to 0.483 million as revenue grows to 176.32 million. Multiply by the number of days removed to get the release: 15 days is 5.33 million in the first year.
No. A receivables release is cash, not earnings, and reaches equity once as lower net debt at exit. Valuing a 5.33 million release at 10.0x gives 53.3 million, more than six times the real effect of 8.51 million, which includes the lower absorption on growth and the after-tax interest saved over a five-year hold.
The business rebuilds receivables out of cash just before the sale. In the illustrative case, a 15-day improvement that drifts back to 70 days by the exit year keeps only 2.42 million of the receivables gap plus 1.26 million of interest saved: a gain of 3.68 million instead of 8.51, so 57 per cent of the value is lost.
This article is one calculation from The Private Equity Operating Partner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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