The fourth post in a new series focused on insights from the National Center for the Middle Market’s research initiatives, this article explores the importance of good working capital management practices and how creating a cash-conscious culture can pay off.

The Center’s Executive Director Thomas A. Stewart recently presented to a group of CFOs about M&A activity in the middle market as part of the CFO Connect conference in Las Vegas. Undoubtedly, some of the executives who attended currently have deals in the works. According to the 2018 Q1 Middle Market Indicator, 22% of middle market companies intend to make an acquisition over the next 12 months, and 9% believe they will be acquired or merge with another business in the year ahead.

But even companies not currently thinking about M&A should have an interest in the topic because there’s a good chance investors are thinking about them: The Probitas Partners' Private Equity Institutional Investor Trends 2018 Survey shows that 75% of private-equity investors are targeting U.S. middle market businesses, and they have an estimated $200 billion to spend.

Why be deal-ready?

This suggests that middle market companies should be ready to make a deal even if they have no specific intentions to sell anytime soon. Indeed, according to our recent Middle Market M&A report, 45% of sellers and 21% of buyers that engaged in a transaction in the past three years were not planning on doing a deal at all—until the right opportunity landed in their laps.

For this reason, combined with the fact that most middle market companies only do one or a handful of deals in their lifetime, many businesses say they lack adequate preparation and strategic planning to do a deal right. And that translates into unexpected challenges and obstacles that can impede the success of the deal or prevent a company from realizing the full potential value of a transaction.

Companies can improve their outcomes by always being ready to seize an opportunity. This includes taking steps such as getting the books in order, developing a solid operating plan with well-documented processes, and strengthening relationships with advisors including bankers, accountants, and lawyers. Perhaps most importantly, it includes improving working capital management—an effort that pays off whether or not a company buys or sells.

Prioritizing working capital management is key to better overall company performance.

Good working capital management—which is essentially about efficiently managing various business processes—gives deal-making companies access to additional money that can be used to fund acquisitions or to increase the amount for which they can sell their business. For companies that aren’t buying or selling, good working capital management is still critical. The Middle Market Indicator shows that executives’ concerns over costs are on the rise. Obviously, more cash can help cover cost increases. It can also be used for investments of all types, including reinvesting in business growth.

Plus, it’s just good business. As our Working Capital Management report shows, the fastest-growing middle market businesses are more likely to make working capital management a top business priority and to be strategic in their approach to it.

The report also reveals that most companies have room to improve in this area. Even if they don’t regularly run out of cash (i.e. they have enough money on hand to cover their bills), they could be unnecessarily tying up significant dollars in less-than-optimal working capital management practices.

What you can do now.

If you’re looking for ways to improve your bottom line, start by seeing how well your working capital management practices compare to your peers. Use our free working capital benchmarking tool to find out fast. Then download our full Working Capital Management report and Middle Market M&A report for more information and best practices you can use to improve your company’s finances. And take steps now to be well prepared for any opportunity that comes your way.


Others in this series
Middle Market Indicator Foreshadows Inflation Concerns
Cyber Attacks: What You Don’t Know Could Already Be Hurting You
How Universities Can Help Ease Your Talent Challenges