The Forgotten Asset: Working Capital

<figure id="attachment_38388" aria-describedby="caption-attachment-38388" style="width: 226px" class="wp-caption alignright"><a href="http://laprensa-sandiego.org/stories/working-with-family-good-or-bad/at…; rel="attachment wp-att-38388"><img loading="lazy" class="size-medium wp-image-38388" src="http://laprensa-sandiego.org/wp-content/uploads/2017/01/Headshot-Profes…; alt="Eduardo Landeros " width="226" height="300" srcset="https://dev-laprensa.pantheonsite.io/wp-content/uploads/2017/01/Headsho… 226w, https://dev-laprensa.pantheonsite.io/wp-content/uploads/2017/01/Headsho… 773w" sizes="(max-width: 226px) 100vw, 226px"></a><figcaption id="caption-attachment-38388" class="wp-caption-text">Eduardo Landeros</figcaption></figure>
A few weeks ago, I met with a client who recently opened a new fitness studio in San Diego County. The studio is part of a franchise so one can assume that they’ll do well since they have a large company behind them. But that’s not always the case. Even though the backing of a brand helps, it’s not everything and one should still follow business principles to succeed.  Needless to say, my client was struggling and not sure if he was going to survive. 
Fitness studios tend to be good businesses if you have the right amount of members. But if you don’t, then you can struggle to even pay the rent.  The overhead for these businesses tends to be high because they are usually located in high traffic areas inside popular malls and the space is somewhat large.  They’re also expensive to set up because equipment costs and payroll are big expenses. 
It sounds simple to operate a gym, but it’s not just buying or leasing the equipment.  You have to have the right trainers, marketing strategy, ambiance, and prices to attract customers.  At the end of the day, there are still a lot of options out there, especially here in San Diego where customers can train outside with the weather and outdoor diversity we have;  it’s imperative that a gym offers something different. 
Nonetheless, you have to be prepared at all times for slow seasons and give the business enough time to survive.  Many business owners make the mistake of thinking they will be profitable right away or at least break even.  But the fact of the matter is that many start-up businesses do not see a profit or even a break-even point until they have been operating for at six to 12 months at the very least. 
I spent a few years in banking as a commercial banker and I’m currently working for CDC Small Business Finance, a company that offers financing to small businesses, primarily businesses that are not able to get loans with traditional banks like start ups and people with not so perfect credit.  And the number one reason for business owners to seek financing is working capital. 
Working capital is essential in any business.  This is the amount of money you have in the bank as an emergency fund or to operate smoothly without any hiccups.  One of the reasons why many businesses failed during the most recent recession was the lack of working capital.  When things go south and sales start to decline you need to have a reserve fund to survive. It’s the same with start-up businesses. 
And this applies to anybody’s personal financial situation as well.  Experts say you should always have about six months worth of savings or a line of credit that can help you survive a downturn; but savings is more conservative.  For some people and businesses three  months are sufficient, but conservatively speaking six months should do it. 
During the last recession we saw a lot of retail stores, real estate companies, manufacturing and wholesale companies close down but these were companies that did not enough working capital to survive. 
I used to have a real estate broker client who had to close down because of the recession.   He had many agents working for him but as soon as the real estate market died, he was stuck with a $25,000 a month lease and many people under his wing.  Needless to say, he closed down and had to start over; he lost a lot of money. 
The understanding of cash flow is also essential.  Any business owner needs to know the amount of cash that is coming in and the amount of cash that is going out.  Revenue (inflow) vs. Expenses (outflow).  Managing your cash is crucial to any business’ success and many business owners have forgotten how to do this. 
In the old days Banks would give you a “check book”, when you opened an account, to track your cash.  Nowadays, everything happens online so people have lost this habit.  Sometimes is good to go back to old habits because they worked. 
If you are going to start a business, make sure you have enough money to survive the first few months.  When you’re working on a start-up budget, make sure you also include realistic numbers.  Make calls, get at least two to three quotes, go online and compare prices.  Once you have a realistic budget on how much it will take to open the business (equipment, tenant improvements, permits etc.), make sure you allocate enough money for working capital to be able to survive at least six months.