The Restaurateur Insights
How to Manage Working Capital in Your RestaurantJune 10, 2016
Making sure your restaurant has enough capital to manage day-to-day activities takes patience, strategic planning, and attention to detail. Learn more.
Profit-making in the restaurant business is a difficult and challenging process for employers, and starting a restaurant knowing this hard fact is a tough pill to swallow. Rather than finding passion from making a phenomenal profit, restaurateurs instead must rely on their devotion to food and hospitality to find the drive to start and sustain a new establishment. Making sure your restaurant’s working capital starts strong and is built up as much as possible is a key part of ensuring that your business stays afloat.
What is included in ‘working capital’?
Working capital, by definition, is the money used to fulfill day to day operating expenses.
A few more things you should note about working capital:
- It is calculated by subtracting current liabilities from current assets
- Ideally, enough should be available to pay off current debts
- It represents the cushion or margin of protection you can give your short-term creditors
- The working capital ratio (current assets/current liabilities) represents whether or not a company has enough short term assets to cover its short term debt. A ratio between 1.2-2.0 is said to be ideal.
Managing working capital
Ensuring that your restaurant will not fail in three years or less rests on your strategic planning and attention to detail. A few tips:
- Expect the unexpected- Probably the most important thing to remember, especially in a start-up restaurant, is there will be times when maintenance issues pop up unexpectedly. You need to ensure that you have enough cash on hand to deal with spontaneous repairs for your equipment, building, etc.
- Prioritize your bills- Those handling the outgoing bills in your business should know which bills must be immediately paid off, and those that can stand to be put off for a few weeks.
- Look to private investments for funding- Reaching out to private investors will help your business sustain itself and grow, too. Private investments offer a greater benefit much of the time over funds provided by angel investors and venture capitalists because family and friends giving private loans to help support your business are generally not looking to make money off the deal.
- Know your breakeven point- It helps to be aware of exactly where your business stands financially. The break-even point is the point at which, after covering all the day-to-day expenses, your sales allow your restaurant to make a profit.
What happens if you run into a situation of negative working capital?
Experts say that when starting out, all restaurants should have funds that will cover six months of expenses. If your restaurant happens to run into a situation of insufficient working capital, the best thing you can do to stay afloat is pay your bills, look for help from private investors, and realize above all else that your situation could very well be merely a temporary setback. Many restaurants run into negative working capital because customers pay upfront, allowing the restaurant to pay off their accounts payable with the cash generated in this immediate way (rather than keeping a large cash balance on hand).
Developing a system of managing your business’ working capital can make a world of a difference. Read our blog, “4 Ways to Solve Common Cashflow Problems in the Restaurant Business” for further guidance on tackling the ebb and flow of your restaurant’s financial resources.
Questions? Contact any member of our Hospitality Services Group.