Food businesses can be fraught with financial challenges that are unique to the industry and the landscape it operates in. Here, a laundry list of things that any aspiring food entrepreneur should watch out for when setting up and expanding a fledgling food business.
1. Start small
“If you are just starting out, you can’t afford to be too ambitious,” reminds Arturo Benedicto Ilano, assistant professor at the Virata School of Business of the University of the Philippines Diliman. “The higher you aspire, the harder you can fall, and it will take you a much longer time to recover.”
Instead, start small and focus your strengths on a small diner or bakery, which highlights a signature product that you do exceptionally well. If you start small, it will also be easier to scrape together the required business capital, especially through personal savings.
“A food business is a profit-driven business. Sometimes, it is difficult to judge a business when what you see are just cash in the bank,” says Henry C. Ong, president of financial consultancy firm Business Sense, Inc.
In the early years, “what you will be after is building a name and a reputation to make your market grow,” says Ilano. “Prove yourself in a small-scale setting such as a food cart, food truck, tiny bakeshop, or hole-in-the-wall. Then, build up your cash flow.”
2. Get backers
Most food businesses are the result of partnerships between those with the vision and those with the financing, says Ilano. “This means that the aspiring restaurateur would partner with a financial backer who would then take a significant share of the business.”
This is only fair—after all, these financial partners are risking their money on pure potential rather than guaranteed success. This also means that, at the start, “the restaurateur must also learn how to become a salesperson, pitching their idea to the potential backers.”
However, if your business is just starting out, it might be a tougher sell for banks and other financial backers with deep pockets. As such, it’s best to start closer to home. “You may be better off seeking financing from friends and family,” adds Ilano. Still, refrain from overestimating and overpromising returns to them once you decide to make them your business investors or partners.
3. Consider loans
Taking out loans to finance your business is always an option but also take it with a grain of salt.
On the plus side, “borrowing money allows you to leverage on other people’s money and expand your capacity to generate higher returns on investment,” says Henry C. Ong, president of financial consultancy firm Business Sense, Inc. “Of course, this will be possible only if you are confident that the business can generate good cash flows for the duration of your loan.”
However, Ilano is quick to remind that, if you have a startup or have no prior business experience, you cannot easily take out loans from financial institutions. Loans are also financial obligations you must pay back, and even provide interest for, even if your business fails. As such, loans can become an encumbrance, especially if cash flow remains uncertain.
“If things go south, loans can lead to your financial ruin as you try to pay back something you no longer have the means of repaying,” reminds Ilano.
If you have a startup or have no prior business experience, you cannot easily take out loans from financial institutions. Loans are also financial obligations you must pay back, and even provide interest for, even if your business fails.
Still, Ong maintains that taking out loans from banks and other financial institutions are a viable and reliable means to finance your business as long as you enforce measures to ensure healthy cash flow and profitability of your fledgling food business.
You can also save this for the long term, adds Ilano. “Work first towards having three to five years of profitable operations so that you have something to show the banks,” he says. “Then, you can ask for a credit line, which will be useful because this represents access to instant financing as you need it.
4. Monitor cash flow
“A food business is a cash flow business,” says Ong. As such, it doesn’t come as a surprise that one of the most common problems a growing business faces is cash flow.
This usually happens when the entrepreneur uses cash flows to expand the business by opening another outlet, for example. This is reasonable if the business is profitable and generates excess cash. However, the practice becomes a problem when the entrepreneur uses the cash from the working capital of the business, explains Ong.
It is important to enforce good internal controls, such as proper financial statements, to ensure that all business sales and expenses are accounted for properly. This also helps the entrepreneur identify areas where excess cash can be withdrawn to finance another outlet without affecting the overall health of the business, reminds Ong. Additionally, make it a point to do regular cash flow forecasts that account for conservative and worst-case scenarios for your revenue streams.
5. Stay profitable
The best way for your food business to overcome any financial hurdle is to always stay profitable. “A food business is a profit-driven business,” says Ong. “Sometimes, it is difficult to judge a business when what you see are just cash in the bank. It is important that you have a proper financial report about the business, so you can constantly assess and evaluate your profitability.”
On top of continuing to market and upsell your food business, there are other considerations to look to ensure profitability. Some of the key questions would be, what level of sales does your business need to achieve every day to break even? How many people do you really need to hire considering the peak and off-peak hours and seasons of your business?
“There are many things you need to look at when you review your financials, but the key is making sure that the business always remains profitable,” concludes Ong.
Originally published in F&B Report Vol. 15 No. 6