Working capital is the money you need tied up in the business to pay for ingredients, packaging and running costs while you wait to be paid for what you sold. Work it out like this: daily cash spending × days in your cash cycle. The cash cycle is the time between paying for ingredients and collecting the sale. The longer the cycle, the more money you need, even if you sell the same amount at the same price.
It is one of the pieces of cash flow for a small food business, and it explains why a growing business can run out of money just when things are going well.
The cash cycle in three stretches
Every dollar you put into the business goes through three stretches before it comes back:
- Inventory days. From buying ingredients to selling the finished product. It includes time in your dry store and time on the shelf or in the fridge once made. Buy too much and this stretch gets longer; see how inventory ties up cash.
- Collection days. From the sale to the money reaching your account. Cash sales are zero. A café on 30-day terms is 30, if it pays on time.
- Supplier days. The days your suppliers give you to pay them. This stretch is subtracted, because while you have not paid, you are using their money. At the start, it is almost always zero.
Cash cycle = inventory days + collection days − supplier days.
How to work out what you need
- Add up everything you pay in cash in a month to keep running: ingredients, packaging, labels, kitchen rent, utilities, fuel. Leave out one-off equipment.
- Divide by 30. That is your daily spending.
- Work out your cash cycle in days.
- Multiply daily spending by the number of days in the cycle.
If you also live off this money, add your monthly draw in step 1.
Worked example: granola for cafés and shops
You sell granola to cafés and independent shops on 30-day terms. Your monthly cash spending to operate:
| Item | Per month |
|---|---|
| Ingredients | $2,150 |
| Jars, bags and labels | $750 |
| Kitchen rent and utilities | $500 |
| Fuel and deliveries | $200 |
| Total | $3,600 |
Daily spending: $3,600 ÷ 30 = $120.
Your cycle:
| Stretch | Days |
|---|---|
| Oats, nuts and honey in your store before baking | 8 |
| Finished jars before delivery | 6 |
| The café pays | 30 |
| Minus: credit from your suppliers | 0 |
| Cash cycle | 44 |
Working capital: $120 × 44 = $5,280.
That means that before you collect your first sale, you will have paid out about $5,280 in ingredients, packaging and running costs. Start with $2,000 and you run dry around day 17, even though every jar you sell has a healthy margin.
What happens when you change the cycle
- Cafés pay in 14 days instead of 30. The cycle drops to 8 + 6 + 14 = 28 days. Working capital: $120 × 28 = $3,360. You need $1,920 less.
- Your packaging supplier also gives you 14 days. Packaging is $750 a month, or $25 a day. Fourteen days of credit on that part is $25 × 14 = $350 less. Working capital: $3,360 − $350 = $3,010.
- You sell at a farmers market for cash. The cycle is just inventory: 14 days. Working capital: $120 × 14 = $1,680.
The same granola, at the same cost, can need $1,680 or $5,280 to keep going. The payment terms make the difference.
How to need less working capital
- Collect sooner. Offer short terms, ask for payment on delivery for the first orders and deposits on large ones. Selling on credit to shops shows how to agree this without losing the customer.
- Buy for what you will make. Every day ingredients sit in your store is money standing still. A bulk discount has to be worth more than having that money locked up.
- Make closer to delivery. If the product keeps but will not be delivered for a week, do not make it yet.
- Ask suppliers for credit once they know you. Pay on time for a few months, then ask. Even if it is only on packaging, it shows.
- Mix channels. Cash sales at the market fund the terms you give to cafés.
Where the money comes from
Ideally it comes from what the business itself builds up, held in an account that belongs only to the business. If it is mixed with household money, you do not know how much working capital you really have, which is why it pays to separate business and personal money before you grow.
If you have to borrow to cover it, borrow for that purpose and for the length of the cycle, and compare the repayment with what the business makes each month. A working capital loan makes sense when the product has a margin and what is missing is time.
On top of working capital, keep a buffer for the unexpected: a customer who pays late, a fridge that fails. They are two different pots; do not use one as the other.
When to recalculate
- When you add a customer who pays on terms.
- When you change channel, for example from a market stall to cafés or delivery apps.
- When volume rises: sell twice as much on the same cycle and you need twice the working capital.
That last point is the one that catches people out. Growth costs money before it makes money. If you know how much, you can grow at a pace your cash can carry, and a cash flow forecast tells you week by week whether you are on track.
Do it with the calculator
Put your recipes into the food cost calculator to see what you spend on ingredients and packaging per unit. Multiply by what you make in a month and you have the main figure for step 1, the one that weighs most in your working capital.
Frequently asked questions
Is working capital the same as startup money?
No. Startup money is what you spend once on equipment, permits and first stock. Working capital is the money that has to keep circulating to buy ingredients while you wait to get paid.
Should my own pay be included in working capital?
If you live off what the business makes, yes. Add your monthly draw to the monthly spending before dividing by 30, because that money also goes out while you wait to collect.
What if I do not have that much money?
Shorten the cycle: ask for deposits, give shorter terms, hold less stock or start with customers who pay on the spot. If it is still not enough, grow more slowly until you have built it up.
How often should I recalculate it?
Whenever you change channel, payment terms with a customer or volume. Moving from a cash market stall to cafés on 30-day terms can triple the money you need.