Finance

Financial Insights -- Restaurant Industry
Monthly Report: February 2006
By Raymond Zale

Negative Working Capital (NgWC) is a financial performance metric common to the chain restaurant space. NgWC is realized when a company can quickly raise cash from operations (customers generally pay real-time for their products / services) but also finds it has received and moved any required inventory before actually having paid for it in the first place.

What we see then is that restaurants generally run a cashbased operation as accounts receivable is generally nothing more than the result of credit card sales. The only major working capital investment is inventory, which is largely composed of perishable foods and hence, has a shorter shelflife. In general, the average inventory turnover is five to ten days; shorter turnover period (e.g. three days) for perishable food and a longer period for paper products.

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