# Profit over Working Capital ## One number, understood by everyone, that forces self-financed growth The Bergman & Beving system, introduced in **1981** by Anders Börjesson with Torsten Fardell, and still running across every company spun out of that sphere forty-plus years later (REQ, Jul 2025, p.117–121). The rule: **EBITA / net working capital > 45%.** Every krona in working capital must return more than 45%. Where 45% came from: a higher-tax era, and a split of *one-third tax, one-third dividends, one-third growth* — with growth targeted at **15% a year over a business cycle**, half organic, half acquired. Clear it and the business funds organic growth, acquisitions and dividends out of its own cash, without issuing shares or leaning on debt. > [!info] The arithmetic > `Profit ratio = (EBITA / Sales) × (Sales / Net Working Capital)` > > Six levers: three in the numerator (sales, price, cost base) and three in the denominator (inventories, receivables, payables). > > REQ's calculation: to move P/WC from 45% to 60%, a company can either **raise margins by 3.0pp (10%→13%)** or **cut NWC/sales by 4.5pp (21.5%→17%)**. Margin improvement contributes more to cumulative cash flow than an equivalent gain in capital turnover (p.121). Worked example from the deck: a trading business at 9% margins with NWC of 20 sits at 45%. A newly acquired company running 73 receivable days discovers the group norm is 50 — cutting to it takes P/WC to 65% (p.119). ## The Focus Model The prioritisation tool applied to every operating company in the group: | EBITA/WC | Instruction | | --- | --- | | Above 45% | **Grow revenue** — organically and by acquisition | | 25–45% | Increase margins *and* working capital turnover — "proof of concept" | | Below 25% | **Increase margins.** Nothing else. | ## Why working capital and not invested capital Because a value-add distribution business runs on working capital, not fixed assets — production is largely outsourced. P/WC is the right proxy for that shape of business, and a poor one for a capital-intensive one (p.118). > [!tip] The real innovation is legibility, not the ratio > Addtech ships every employee an ~80-page internal book, *The Mind and the Soul*, explaining the culture and how each person moves P/WC. Momentum Group's equivalent runs 45 pages. Everyone is incentivised on the ratio. The recurring lesson from the best operators is **avoid unnecessary complexity** — build an internal language that lands with a small-business owner who has an engineering background and no finance vocabulary (p.121). ## The same idea elsewhere - **Danaher Business System** — kaizen, seven KPIs at every level, "red is the new green": hit the target and the target moves. Culp's insight was that DBS works better on high-gross-margin businesses with a wide gross-to-operating spread; low margins usually mean customers see the product as low value (p.122). - **Roper's Cash Return on Investment (CRI)** — zero-cost budgeting and profit goals rooted in cash, replacing annual-budget-and-forecast management (p.123). ## Why it matters A business system is how a decentralised group stays coherent without integrating. It is the substitute for control. Screen for one; its absence in a fast-acquiring company is a gap where the accounting will eventually go wrong. ## Related - [[Acquisition-Driven Compounders MOC]] - [[Financial Targets as a Business System]] - [[Self-Financed Growth and the Balance Sheet]] - [[Decentralization Is the Constraint]]