The importance of cash and working capital when going public

An IPO can represent an attractive opportunity for owners. Clearly, the potential to partially realise their investments and simultaneously capitalise on the market for new expansion capital is appealing, especially in the case of companies acquired prior to the financial crisis. Creating the opportunity for wider employee involvement and engagement via a staff share offer is similarly alluring.

With the bulk of recent listings in the UK involving retail companies, an interesting distinction between retail and non-retail companies is emerging. Retail businesses will float with a very different financial structure to a non-retailer. In retail companies, the profit and loss needs to be underpinned with a strong sales performance and like-for-like growth to counter the risks of high operational gearing generated by the retail footprint and lease costs. Cash and working capital is a further differentiation that can play a major role.

Cash and working capital is a highly visible indicator of operational performance and management effectiveness. It is also a significant lever for creating value, and can have a substantial impact on the valuation, debt-carrying capacity and, ultimately, exit value.

So why is cash and working capital even more relevant for non-retail companies?

Primarily, non-retailers have all three parts of working capital to leverage: accounts receivable, inventory, and accounts payable. Retailers generally don't have significant accounts receivable, so they only have two of the three levers to help drive value. Indeed, if retailers successfully manage their supply chain and supplier terms and push stock holding into the value chain, then it is possible that working capital investments could be very low.

By contrast, working capital can be a significant part of the balance sheet for businesses in other industries that make and sell products and services, and therefore requires much more investment. More working capital is required, which absorbs cash that could otherwise have been used to drive down debt and increase equity value.

Non-retailers often have other wider financing options available to fund working capital. Such options include asset-based lending or accounts receivable securitisations. Careful use of these can facilitate growth, provide dividend recaps or drive reduction in more expensive finance sources.

Responding to the cash and working capital challenge
With many non-retail private equity-backed companies eyeing market entry, cash and working capital can provide a springboard to a successful listing. If the end goal is materially improving shareholder value, certain actions need to be taken pre-listing. A real advantage can be gained by permanently reducing working capital and using the subsequent cash generated to either drive down debt or boost investment spending to drive future revenue and EBITDA growth.

Such an improvement in cash and working capital requires a systematic approach to establishing cash flow visibility and developing sustainable working capital improvements. This approach can be drilled down into five key areas:

Providing the business with an accurate picture of its current and near-term cash position

Developing and implementing cash-generating initiatives

Freeing up cash from operations through close management of the key working capital drivers

Establishing a strong cash culture in the organisation

Having treasury systems and processes that support measurement and reward management against cash-based targets

Managing cash is often a forgotten skill in many large companies. This is especially prevalent when centralised treasury functions and cash sweeps take or provide cash locally, as needed, and often without many business units or markets understanding their impact on the group.

Accounting policies allow judgement and interpretation, but following and understanding cash flow is a science by comparison. Greater focus on cash, and the drivers of it, is one certain way of driving shareholder value while simultaneously de-risking the business model. World-class working capital management will make any company – whether retail or non-retail – stand out from its peer group.

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• Exits
• UK / Ireland
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• IPO