By Patrick O’Neil, Vice President
ButcherJoseph & Co. 

In the first article in this series, we discussed why M&A preparedness begins years before a transaction, and how CFOs build the financial discipline, reporting infrastructure, and credibility that underpin a successful sale process. The progression was sequential: build a reliable financial reporting framework, use that framework to develop and monitor the key performance indicators (KPIs) that explain business performance, then use those KPIs as the foundation for a detailed, defensible forecast.

This article picks up at that third step and extends it to the balance sheet. Even companies with strong historical performance face valuation pressure when their forecast and their working capital profile do not align with buyer expectations. Preparation here shifts from foundation-building to value optimization.

From Reporting Framework to Forward Look

A forecast is not a standalone exercise. It is the output of everything built beneath it. The reporting framework produces clean, consistent, and timely data. KPIs translate that data into the operating drivers that explain why results move — volume, price, mix, customer retention, capacity utilization, conversion. The forecast carries those same drivers forward in time.

When that chain is intact, every projection ties back to a metric the company already tracks and can already explain. When it is broken, the forecast becomes an assertion, and buyers treat assertions as risk. CFOs who attempt to build a buyer-ready forecast without first establishing the framework and KPIs beneath it end up defending numbers they cannot substantiate.

Forecasting as a Credibility Test

That distinction, substantiated versus asserted, is what buyers are testing. They are not reviewing historical results so much as underwriting the future, and the forecast is the lens through which they assess risk, growth, and ultimately valuation.

The most common misstep is building the forecast for the wrong audience. An internal budget sets targets and holds managers accountable, and is often deliberately conservative or aspirational for reasons that make sense internally. A forecast prepared for buyers answers a different question: what will this business actually earn, and why. Both can be legitimate, but they are not interchangeable, and experienced buyers can tell the difference.

Strong CFOs forecast with discipline. Revenue assumptions tie to identifiable drivers, such as unit volume and pricing trends, customer retention and churn, contracted or recurring revenue, market share, and demonstrated conversion rates, rather than a growth percentage applied to a prior-year base. Margin expectations rest on specific operational changes rather than optimism. Capital expenditures align with the growth and capacity assumptions embedded elsewhere in the model. Buyers will test all of it against historical trends, KPI reporting, and management commentary, and any disconnect erodes confidence quickly.

A well-constructed forecast does not just tell a story. It holds up under pressure.

From Internal Budget to Buyer-Ready Forecast

Holding up under pressure requires a deliberate step that many companies skip. Most enter a sale process with a budget that was never designed for external scrutiny. Well-prepared CFOs close that gap early: they make the underlying assumptions explicit and documented, supported by KPI history rather than institutional knowledge, and they develop a clear view of where the forecast is most sensitive, like which assumptions, if wrong, would meaningfully change the outcome.

That sensitivity work matters more than the number of scenarios presented, because buyers will build their own cases regardless. What they are evaluating is whether the CFO understands the levers well enough to answer in real time, and whether the answers hold as the questions get harder. The exercise also surfaces issues before a buyer raises them; is  growth concentrated in a handful of customers, are margin gains dependent on initiatives not yet implemented, are cost assumptions inconsistent with the headcount the plan requires? This allows the CFO to control the narrative rather than react to skepticism during diligence.

Extending the Same Discipline to the Balance Sheet

The same framework-to-KPI-to-forecast logic applies to the balance sheet, and this is where most companies’ preparation thins out. Working capital is measured through KPIs, such as days sales outstanding, days inventory on hand, days payable outstanding, and the cash conversion cycle that combines them. These are operating metrics no less than revenue growth or gross margin, and they must be forecast alongside earnings rather than treated as a residual.

Seasonality deserves particular attention. Many businesses build inventory or extend receivables well ahead of a peak selling period, which means working capital measured at one balance sheet date can look materially different from the same business measured a quarter earlier or later. A CFO who understands that cycle can explain the swings, forecast the peak funding requirement, and distinguish a deliberate seasonal build from a deterioration in collections or inventory discipline. One who cannot will find buyers drawing the less favorable conclusion.

It is also worth separating two disciplines that are frequently conflated. Working capital management is the ongoing operating work of converting revenue into cash efficiently, and it runs continuously whether or not a transaction is ever contemplated. The working capital target is a transaction mechanic, a negotiated benchmark, typically derived from trailing averages so that seasonal swings are smoothed rather than penalized, used at closing to determine whether a purchase price adjustment is owed.

Management drives the target, not the reverse. A company that has genuinely improved its cash conversion over several years arrives at that negotiation with a stronger factual position and a better business. One that encounters working capital for the first time when the purchase agreement is drafted is negotiating over a history it can no longer influence.

Managing Working Capital, Not Just Measuring It

That management work is operational rather than analytical. Tightening collections requires understanding which customers pay late, why they pay late, and whether stated terms are enforced. Optimizing inventory requires distinguishing stock that genuinely supports service levels from stock that reflects poor planning or obsolescence. Improving payables requires negotiating terms without straining supplier relationships or forfeiting early-payment discounts worth more than the float.

Each of these takes time to appear in the trailing averages buyers examine, which is why the work belongs in the multi-year preparation window rather than the months before a process launches; improvements made under deal pressure tend to be visible as such. There is a practical diligence benefit as well. A company with clean monthly working capital reporting can support its position with data, respond quickly to recalculation requests, and avoid the last-minute disputes that stall momentum.

Forecasting Working Capital Alongside Earnings

This is where the two halves of the discussion converge, because the relationship between forecasting and working capital is ultimately about cash flow, and growth consumes cash. A credible forecast must therefore carry a corresponding view of cash generation: how revenue growth will affect receivables, how inventory requirements will evolve with both volume and the seasonal cycle, how payables will be managed through that growth, and what all of it means for the cash available to fund the plan.

Less-prepared companies struggle most visibly here. A forecast may show strong top-line growth, but without a corresponding view of the working capital that growth requires, buyers see either an unfunded plan or an incomplete one, and neither supports valuation. By contrast, a CFO who can link earnings, working capital, and cash flow, and trace each back to the KPIs and reporting framework beneath them, demonstrates control over the financial engine of the business. Buyers value that control highly, because it narrows the range of outcomes they have to price for.

Conclusion

Aligning forecasting and working capital management with buyer expectations is among the most important and most overlooked elements of M&A preparedness. It requires more than accurate numbers: a reporting framework that produces reliable data, KPIs that explain what that data means, and a forecast that carries both forward in a way that withstands scrutiny. For CFOs, this is an opportunity to move beyond reporting and shape transaction outcomes directly. Those who do are not simply preparing for a sale, they are positioning the company to maximize value when the time comes.

In the next article in this series, we will focus on how CFOs can prepare for financial diligence, including quality of earnings, data readiness, and the most common pitfalls that disrupt a process.