Having enough working capital is vital for keeping things moving in a positive direction as you round the corner after your first year or two in business. 70% of restaurants that make it past the 1-year benchmark close their doors over the next three to five years, as growth-related expenses climb and traffic doesn’t. But, there’s a light at the end of the tunnel for persistent and dedicated entrepreneurs: 90% of restaurants that make it past five years will stay in business for a minimum of ten years.
Because of the importance of staying on track with your finances as you move forward, you need to familiarize yourself with the operational costs and expenses involved in running (and growing) a restaurant. These are the numbers you need to calculate your current working capital, make projections for the future and decide whether a loan is the best option to help cover expenses.
Beyond the expenses of starting a restaurant, you’ll quickly discover that operational and growth-related costs can add up:
Proper working capital management in restaurants starts before the restaurant even opens, during the initial planning and building phase. But making reasonable and informed sales projections (and considering the above expenses) can help you to determine financing needs.
Working capital is just a formal term for the amount of cash or potential cash you have on hand compared to your overall expenses. In financing, it’s defined as the difference between the assets and liabilities of your restaurant business. Assets are actual money and anything you could reasonably sell for or turn into money within one year or one business cycle. Liabilities are payments you’re required to make during the same period of time.
This leads to a basic formula:
Working capital = current assets/current liabilities
At the minimum, you want a result of one, which shows you’re breaking even at the minimum. The higher the ratio, the better equipped you are to handle known and unexpected expenses.
If your restaurant has been open for a year, approach your working capital calculations by:
Adding all of your annual revenue, and any other funding you might have to put toward your business.
Adding all the operational costs from the past year, along with anticipated costs related to sustaining and growing, like wage increases, new employees, and more equipment. Don’t stop there, though: consider every possible cost along the ladder.
Then, compare the first number to the second to determine how much more capital you need to move your business in the right direction. If you fall far short of this number or want a cushion to fall back on, you might want to consider a working capital loan. Many businesses require working capital to finance ongoing changes, growth costs and to purchase new equipment.
Restaurant owners have several financing options to bring in more working capital:
Aspiring or established franchisees have another option: franchise-specific financing. These loans are designed to cover the costs associated with purchasing and meeting the strict requirements of running a franchise location, which can sometimes reach into the millions of dollars. But the expense might be well worth it: franchising and/or expanding is one of the fastest ways to grow your business to 5 million in sales.
If your current working capital isn’t enough to sustain operations or grow, National Business Capital and Services can help. Funding is available from a network of sources for all types of business expenses, and on-staff financing advisors are available to guide you in choosing which working capital loan option can best meet your needs.
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Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.