Kestrel Industrial: Releasing $15 Million of Working Capital Without Breaking the Revolver
Kestrel Industrial is a $240 million revenue, privately held US manufacturer. Days sales outstanding is 62 (industry 45), DPO is 28 (industry 40), and inventory is 95 days. Cost of goods sold is 70% of revenue. The company has a $40 million revolver, $22 million drawn at a 7.5% all-in rate; the fixed charge coverage covenant leaves roughly $8 million of usable additional availability. The CFO wants $15 million of cash released within 12 months without losing strategic accounts, and proposes offering customers 1.5%/10, net 60. The controller prefers simply stretching supplier payment terms, but procurement warns that two key suppliers are financially stressed and already asking for early payment. The board reviews treasury policy annually; the current policy says nothing about supply-chain finance.
1. Which working-capital levers should treasury recommend, and how much cash can each realistically release? Show the arithmetic and rank them.
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Size each lever on a daily-flow basis.
- Daily sales = $240M / 365 = $0.658M. Cutting DSO from 62 to 52 days releases 10 x $0.658M = $6.6M.
- COGS = 70% x $240M = $168M; daily COGS = $0.460M. Going from DPO 28 to 35 releases 7 x $0.460M = $3.2M.
- Inventory at 95 days on COGS = 95 x $0.460M = $43.7M. Getting to 85 days releases 10 x $0.460M = $4.6M.
- Total = $14.4M, essentially the CFO's target without any financing-cost spend.
Rank by cost of capital, not by ease. Collections discipline and inventory are free; extended terms cost a little supplier goodwill; the discount costs real money.
Price the discount before offering it. 1.5/98.5 annualized over the 50 days of acceleration = 1.5228% x 365/50 = 11.1%. That is above the 7.5% revolver, so buying receivables speed with a discount destroys value unless capacity is the binding constraint. Here it partly is: only $8M of availability exists.
Recommendation: lead with collections (segmented dunning, dispute root-cause, credit-limit enforcement, invoice-at-shipment) to take DSO to 52 at zero cost; pursue inventory through SKU rationalization and vendor-managed inventory; negotiate terms selectively with the healthy suppliers only. Offer the discount as a targeted, time-boxed program to the 10-15 largest, highest-credit-quality customers only if the revolver headroom binds, and model the discount as costing ~3.6 points versus borrowing.
2. What risks and governance issues arise from stretching supplier terms and from adopting supply-chain finance?
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Stretching terms is not free capacity - it is a transfer of financing cost to suppliers. The two stressed suppliers are the concrete risk: extending them from 28 to 35 days could trigger a supply interruption whose cost (expediting, line downtime, requalifying a new supplier) dwarfs $3.2M of released cash. Carve them out explicitly and consider shortening their terms or paying them early.
Supply-chain finance (reverse factoring) is an accounting and disclosure decision, not just an AP tactic.
- The payable may need to be reclassified as borrowings depending on terms, tenor extension beyond normal commercial terms, and whether the bank has recourse to the buyer. Rating agencies and auditors now scrutinize this closely; getting it wrong restates the balance sheet.
- It concentrates credit exposure on one SCF bank and creates a dependency that is hard to unwind.
- Supplier communication must be honest: suppliers should not be told terms are changing when they are being sold a financing product.
Governance: because the current policy is silent, treasury should bring the board a revision covering permissible working-capital instruments, delegated approval limits, maximum SCF program size, counterparty limits, and quarterly reporting of DSO/DPO by segment. Documenting the rationale for taking DPO above industry norms matters as much as the number itself.
3. How would you monitor the program, and what would make it fail?
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Monitoring: a rolling 13-week direct cash forecast by entity and driver; DSO/DPO/DIO reported monthly with a rolling 12-month trend and by customer segment; aged receivables stratified by days past due; covenant headroom recalculated monthly with a stress case (e.g., DSO stalling back to 60); and a one-page board dashboard tying each lever to realized dollars, not to plans.
Failure modes to name up front:
- Sales teams override credit holds to protect revenue - fix with an escalation path that requires CFO sign-off, not AP discretion.
- DSO improvement is booked by tightening credit to customers who then leave; track revenue attrition among targeted accounts.
- Invoice disputes, not slow payers, drive most of the aging - measure dispute volume and days-to-resolve, not just cash collected.
- Inventory reduction becomes a stockout problem; track fill rate alongside DIO.
- The discount is extended permanently and quietly becomes a price cut.
A strong answer ties every KPI to a decision owner and a review cadence, and states the trigger at which the program is paused.