How Much Working Capital Does Your Restaurant Need?

Minyang Jiang

 

Calculating your need for working capital is of crucial importance for restaurants.

As the number of customers who want to dine out or take prepared food home increases day by day, food-service operations have rapidly increased from 155,000 to nearly 960,000 within the last 40 years (and expected to boom again as the COVID-19 pandemic fades into the memory).

But there’s still a lot of space in the market for your restaurant to succeed. Here are some things that restaurant owners have to know regarding working capital.

Working Capital Needs for Launching Your Restaurant

In simple terms, capital is the money to purchase supplies, equipment, and products, while working capital is the money spent to meet the daily operational expenditures of the business.

Think of capital as money to buy things and working capital as money to pay bills. When determining capital needs for a start-up, calculate the cost of the setup. For a running business, you should compute the costs of expansion and growth.

Working Capital Example for a Restaurant

Here is a small example of calculating the capital needs of a start-up business.

• Facility (building and land): $500,000
• Appliances (freezers, stoves, etc.): $150,000
• Furnishings (chairs, tables, décor, etc.): $75,000
• Plates, silverware, and glasses: $20,000

Subtotal: $745,000

While that’ll be enough to build and outfit your restaurant, you’ll require working capital to keep the business going. Your next step is calculating your working capital finances for the next 12 months.

• Salaries: $400,000
• Utilities: $25,000
• Groceries/supplies: $50,000
• Advertising: $15,000

Subtotal: $490,000

Adding up both subtotals, your restaurant will need a grand total of $1,235,000 to cover the first year’s business.

 

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Now let’s say your business does well in the first year and generates roughly $800,000 in revenue.

Even in this scenario, you’ll still be down $435,000 ($1,235,000 minus $800,00) for your first year. Note: Your projected $800,000 won’t be evenly distributed over those 12 months, either. 

For most restaurants, the first few months of revenue are lean, before word-of-mouth spreads and you build up a loyal customer base.

And what if your restaurant takes longer to catch on? Having another $200,000 as a cash buffer in case of a business failure is strongly recommended.

Set Your Funding Options in Motion

Most restaurant ideas start from the passion of cooking, but much more than culinary passion is required to open a successful restaurant. You need funding to make your dream come true and continue to expand.

 

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The problem is that most businesses wait until they require funding before applying, and at that point, they’re in a financially weak position. Once you’re in that position, it can be difficult to get a loan or the amount of funding you want even if you do get approved.

 

The solution is being proactive about your working capital needs. Here are three effective resources for obtaining the working capital you need.

1. Working Capital Loans: Businesses need access to working capital to continue day-to-day operations, which is obvious to businessmen, but not to banks. It becomes really difficult for a business owner to arrange working capital because the owner does not meet the stringent criteria of the bank. In such cases, you can get business working capital loans to meet your overall working capital needs.
2. Business Expansion Loans: Almost all business owners think of expanding their business at one time or the other. However, not everyone is fortunate enough to make that happen. Businesses are often denied access to funding that they need in order to develop. If you fall into this group, you can seek a business expansion loan.
3. Other Financing Sources: Finding the proper lender for meeting your working capital needs is often a tough job. This is especially so if you have been turned down previously. There are various ways to acquire capital loans such as alternative funding, traditional banks, venture capital firms, angel investors, and even from family and friends.

 

Rise Above the Cycle of the Busy and Lean Seasons

Don’t let the seasonal slowdowns and pricey suppliers make your business’s potential go cold.

Find financing options that will smoothen the lean periods while also allowing you to grow your restaurant.

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