Starting a food and beverage (F&B) business can be likened to running an endless marathon, often beset with unforeseen challenges. These challenges may seem daunting for an amateur entrepreneur, while an experienced entrepreneur is likely equipped with the necessary frameworks to navigate and overcome them. 

One of these challenges faced by entrepreneurs, especially for F&B and small businesses, is managing working capital. Maintaining adequate working capital ensures smooth operations, growth and sustainability. In this article, we’ll showcase the significance of the role played by working capital and its impact on the sustainability of growth of an F&B enterprise, as well as the ways of managing your working capital.

What Is Working Capital?

Working capital refers to the funds available to sustain day-to-day operations.  It is the difference between a company’s current assets and current liabilities. Unlike long-term capital which is used for investment and expansions or capital which is used to initiate and start a business, working capital is used to cover immediate expenses such as payroll, utilities and inventories. 

Challenges Faced By F&B Businesses

The F&B industry faces unique challenges that can significantly impact working capital needs. Here are some of the key challenges: 

i. Seasonality/On and Off-peak Seasons

The F&B industry often experiences fluctuations in customer demands due to seasonal variations. An example would be restaurants seeing higher sales during holidays and weekends compared to slower periods during weekdays and off-seasons. 

ii. Higher Operation Costs

Staffing is a major expense for F&Bs. Providing competitive salaries and benefits while also maintaining employee well-being can put a strain on the working capital. 

iii. Utilities

Utilities costs such as electricity, water and gas are unpredictable and can be substantial.

iv. Equipment and Facilities

Maintaining and upgrading kitchen equipment, dining furniture and other amenities requires a significant investment. 

v. Rent

Leasing for the venue can be expensive, even more so if the venue is in a prime location. Furthermore, rent is a fixed cost and must be paid regardless of business performance. 

vi. Growth and Longevity

Franchising the business to new locations or adding new items to the menu can increase revenue streams but also demands a substantial amount of working capital.

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Determining and Managing Working Capital

Calculating and managing working capital is essential for the financial health of an F&B business. Here is the formula and explanation of it:

Working Capital = Current Assets – Current Liabilities

Current Assets refer to the assets that a business can convert into cash within a year. Examples such as cash, accounts receivable (money owed by customers) and inventory. On the other hand, Current Liabilities are debts that a company must pay within one year. Examples like accounts payable (money owed to suppliers), short-term loans and accrued expenses. 

By dedicating current liabilities from current assets, you’ll get a sense of the business’s short-term financial health. A positive working capital number indicates the business has enough assets to cover its current liabilities. 

Optimising Working Capital

Effective management and optimisation of working capital can enhance the financial stability of F&B businesses. Here are some ways of managing working capital that you can employ in your small F&B business: 

  • Optimising Inventory Management: Implement inventory tracking systems to reduce waste and overstocking. Efficient inventory management ensures that capital is not wasted unnecessarily. 
  • Maintain Supplier Relationships: Building strong relationships with suppliers can lead to better payment terms and discounts, easing the pressure on cash flow. 
  • Employee Management: Efficient scheduling and management can reduce overtime costs and improve employee efficiency which directly impacts operation costs. 
  • Use Financial Tools And Services: Investing and using financial management software to monitor cash flow, automate billing and manage expenses effectively. Consider using alternative financing solutions like Funding Societies Singapore to help short-term cash flow needs. Funding Societies Singapore offers a variety of loan plans meant to help SMEs. With different types of loans like Micro-Loans, Term Loans, Revolving Credit Lines and more, each of these loans is planned and created to help your business reach the next level.

Maintaining sufficient working capital to sustain operations for at least a year is essential for a business to survive in the current post-pandemic climate. With the global economy facing uncertainty and inflation rates constantly increasing, having enough working capital is critical to ensuring business survival.

For anyone contemplating to embark on the entrepreneurial journey, always remember that a journey of a thousand miles begins with a single step. On this long and arduous path, Funding Societies offer support in the form of SME financings. Join us today as we work together towards creating an F&B empire.

 

Disclaimer: The information provided to you in this blog post is intended only for general information purposes only and does not constitute legal or other professional advice on any subject matter. The materials and the information provided are not intended to be and do not constitute an advertisement or solicitation. In no event will Funding Societies be liable to any party for any direct, indirect, incidental, special, consequential or punitive damages for use of such information by you or any unauthorised third party. 

Dorcas Pang
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