Why working capital finance is necessary for hotels and restaurants

The Indian tourism industry is the fastest growing amongst the G20 countries. The hospitality industry is also the country's third-largest source of foreign exchange earnings, making it an important peg in the economic cycle. However, the industry has a long operating cycle from inventory purchases to sales and credit receipts. Further, the cost of inventories is also high, adding to the short-term capital requirement for hotels and restaurants. Keeping this in mind, you should consider using working capital finance to fund your business's short-term purchases and free up cash flow to run daily operations better.

Financing the working capital becomes necessary in hotels and restaurants for the following reasons:

1. To meet the operating payment cycle:

In the restaurant and hotel business, the operating cycles can be longer than other businesses. Consider, for example, that you bought 100 bottles of a popular brand of wine based on inside information that the wine was soon going to be in short supply. After the purchase, the consumption of the wine fell. It was three months before the wine was back in demand.

So, your restaurant had to wait for over six months to liquidate what was perceived as a popular selling item, increasing the operating cycle and blocking capital. In such cases, a working capital loan can help you meet expenses without affecting cash flow.

Additional read: Working capital cycle- Explained

2. To meet short-term needs:

Every hotel or restaurant has many short-term capital needs to purchase wine and liquor, vegetables and meats, crockery, table linen, etc., apart from frequent repairs to the kitchen equipment, furniture, boilers and washing machines. There are also many running expenses such as rent, gas, power and staff salaries. These expenses need to be met daily and on time, no matter how long it takes to generate revenue. External sources of working capital can thus keep your business running until you generate earnings.

Additional read: How to ensure that your business never runs out of working capital

3. To overcome unpredictable revenue cycles:

Some restaurants or hotels are preferred during certain months due to the season, weather, affordability of flights, changing trends, etc. Say your restaurant is located in the basement of a chic office building and offers quick lunch and dinner options for the working customers, has a delivery service and welcomes people to unwind after a long workday. As some of its meal offerings are excellent, the restaurant is a winter hotspot with locals. One winter, as the restaurant prepared for the large crowds, the management was surprised to find that the number of patrons had dwindled.

The weather was warmer in that season, and customers preferred to enjoy pleasant evenings in open-air watering holes. This caused a fall in revenues. Say you tried to overcome this by offering discounts and deals, but this still didn't match your earning expectations. Working capital finance can help buffer unpredictable market scenarios and keep your business from going under.

Working capital management can be tricky, especially for a restaurant or hotel, as incomes can be unpredictable, and sudden essential repairs can crop up. Ensuring you have adequate cash to support this will make the difference between success and failure.