Working capital management: 4 tips to optimize your restaurants' cash flow

What is WCR and how is it calculated?

To optimize your cash flow, it's essential to understand the key indicators you need to master. These indicators are calculated from the data on your balance sheet. But don't wait to receive the balance sheet calculated by your chartered accountant once a year, or you're in for a nasty surprise.

WCR, or working capital requirement, represents the difference between your restaurant's current assets and current liabilities. It reflects the cash required to cover your operating costs. The size of inventory, supplier payment times and any customer receivables (customer credits, delivery or click & collect platforms, events or BtoB offers) influence WCR. To calculate it, you can :

WCR = Accounts receivable + Inventories - Trade payables

In general, the lower the WCR, the better, as this means that your company is able to finance its short-term needs. In the restaurant business, working capital is very often negative. In fact, unless you have a considerable stock of raw materials, supplier credit is generally sufficient to finance inventory and customer credit.

Above all, a negative WCR represents a financing resource for your business. Negative WCR means that the operating cycle generates surplus cash and therefore liquidity to finance your business: either to repay existing loans, or to invest without recourse to external financing.

The expression "Cash flow is king!" is particularly relevant in the current inflationary context. Inflation has a considerable impact on the cost of external financing, as interest rates rise. In other words, with a negative WCR, you'll be able to finance the material investments you need to optimize your operating processes (such as a less energy-intensive oven or a new, more efficient fryer) or develop your offering (such as the purchase of an ice-cream machine).

However, the analysis should not stop there. A healthy WCR is above all a Working Capital Requirement that does not increase. It's vital to calculate it periodically - every week or month, for example - and study its evolution. Is it deteriorating? If so, why and how can you correct the situation? In the foodservice sector, it's important to take seasonality into account, as it can have a major impact on WCR.

Here are 4 essential tips to improve your cash availability:

1. Optimize your inventory management

With the exception of a few special cases - BtoB invoices for bakeries, delivery platforms, event offers and BtoB caterers - customer receivables are generally quite low in a restaurant chain. It is therefore mainly inventory management the key to a healthy cash flow! Just-in-time inventory management is ideal for your cash flow. Reducing excess inventory by ordering the optimum quantity of raw materials to ensure service over the next few days avoids unnecessary capital expenditure. The result is a negative WCR. Be particularly vigilant when ordering perishable goods, which should not be overstocked, and when ordering the most expensive products, which can quickly represent a major cash outflow.

2. Negotiate good supplier conditions

Negotiating favorable payment terms with your suppliers can considerably reduce the pressure on your cash flow. To do this, it's best to reduce the number of suppliers and take advantage of economies of scale by buying for your entire network. For a lasting supplier relationship, it's important to respect agreed payment terms, and therefore to agree on conditions that are tenable to avoid late payment penalties.

3. Improve your operational efficiency

Develop standardized operating practices to reduce costs. This standardization contributes to a healthier WCR. Implement regular reporting. Monitor the performance of each restaurant in your network to identify operational problems. Don't neglect financial training for your network's managers or or franchisees in your network and raise awareness of the importance of monitoring WCR.

4. Invest in the right tools

Invest in technologies that improve operational efficiency in the field and provide reliable data for rapid decision-making. Inventory management software, such as Inpulse, are indispensable tools for today's restaurateurs. What's more, thanks to Inpulse's artificial intelligence, your sales forecasts will be more reliable, and you'll get an accurate estimate of the quantities you need to order, with no risk of stock-outs, making just-in-time stock management possible.

In short, by standardizing operational processes, ordering as closely as possible to requirements and optimizing inventory management, you can reduce your WCR and avoid unnecessary cash outlays, thereby boosting your self-financing capacity.

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