Why working capital finance is necessary for hotels and restaurants
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Why working capital finance is necessary for hotels and restaurants

  • Highlights

  • Working capital is needed to meet payment cycles

  • It is necessary to finance short-term business needs

  • It also helps overcome unpredictable revenues

  • Take a working capital loan to meet all costs easily

The Indian tourism industry is the fastest growing amongst the G20 countries. The hospitality industry is also the third largest source of foreign exchange earnings for the country, 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 large adding to the short-term capital requirement for hotels and restaurants. Keeping this mind, you should consider using working capital finance to fund your business’ 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, there are was a fall in the consumption of that wine. 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.

2. To meet short-term needs: Every hotel or restaurant has many short-term capital needs for the purchase of wine and liquor, vegetables and meats, crockery, table linen, etc., apart from frequent repairs to 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 much time it takes to generate revenue. External sources of working capital can thus keep your business running until you generate earnings.

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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 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 be the buffer in such 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.

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