Tuesday, January 5, 2010

The Working Capital Debate

Working capital is the money you keep in reserve in case you can't pay your bills with profit. The debate around working capital is whether to keep it around or not. When we set out to raise funds, we included in the amount the dollars we wanted to keep around just in case (we calculated the amount as three months of rent + extra for other expenses such as inventory and other fixed costs).

What we discovered was that most restaurants don't keep reserves. They respond to a lack of cash by paying vendors aggressively when times are good, and then delaying payments when times are rough. They borrow money when they have to, they send staff home for the day, etc. None of this is fun to do, but it's a measure that has to be taken sometimes.

But why set yourself up for taking such desperate measures when you could simply put a little bit aside for such times? Well think of it this way: you are a restaurant owner and after a couple months you finally make a nice profit - you're going to pay your bills, and then give the rest to your investors. At that moment, the logic is that the investors are more important. But what have we learned from the master (the master being Danny Meyer for those of you who don't know our team)? Investors should come last when making decisions, after employees, customers, community, and vendors. The idea being when you concern yourself primarily with employees, then customers, etc. etc. there is a positive ripple effect that will benefit investors.

Our concluding opinion: desperate times call for desperate measures, but cutting your employees or not paying vendors as a response to lagging funds should be avoided.

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