1. Home
  2. Blog
  3. 212 best farm names

How to Get a Vending Machine Business License

February 9, 2023

How to Get a Vending Machine Business License

One of the most challenging aspects of starting a business is navigating the complex regulatory environments in the United States. A new vending machine business may need to get a vending business license, seller’s permits, local health department permits, and inspections, and comply with additional federal government regulations. Don’t worry! We’ll show you how to get a vending machine business license.

Here’s what you’ll discover by reading this article (Click any of the links below to jump to each section):

  1. Vending Machine Regulations
  2. Getting Licenses for Vending Machines
  3. How to License Your Vending Machine Business
  4. Whether You Need Permits for Your Vending Machines
  5. Popular States to Get Vending Machine Licenses 

We interviewed Adam Hill, the founder of Hill Vending. He provided insight on how he turned a $60K investment in a vending business into $750K of annual revenue, read about it here. Fortunately, he’s provided information about the details of entering the vending machine industry to help you succeed faster.

Start off by listening to our interview with Adam:

1. What Regulations Impact Owning Vending Machines?

A vending machine owner will need to comply with a variety of local, state, and federal laws. We’ll provide resources for each level of government and how they impact vending machine companies. 

Local Laws

Local inspectors checking the vending machines

Many counties and cities require business licenses to operate a vending machine business. Some locations will also have a local health district. If your location has a health district, they may require:

  • An opening inspection
  • Routine inspections
  • Inspections after a complaint

These inspections are normally easy to pass as long as you:

  1. Take care of your machines
  2. Maintain proper temperatures for food items and drinks
  3. Ensure all products are within the expiration date
  4. Don’t have evidence of bugs or rodents in the machines

If you have to comply with a local health district, you may also need a food handler card. Check with your local department for more accurate information.

State Laws

Depending on the law in your state, you will need to:

  • File for an LLC or Corporation with the Secretary of State.
  • Apply for relevant state business licenses (if applicable).
  • Get a seller’s permit.
  • Comply with labor laws.
  • Get a permit for each location.

Each state is different. We recommend consulting with a lawyer who has experience in business law.

Federal Laws

Small business owners may need to comply with federal laws regarding vending machines including:

  • Get an Employer Identification Number from the IRS.
  • Comply with the Americans with Disabilities Act (ADA). You’ll need to collaborate with the owner of the vending machine location.
  • Post nutritional information if required by the Food and Drug Administration (FDA). 
  • Comply with Tobacco Laws if running tobacco vending machines.

2. Do You Need a License to Own a Vending Machine?

Any vending machine that is used to generate sales will need a business license and sales permit to operate and file taxes. Some people use vending machines, slot machines, or arcade games as a way to have cool memorabilia in their homes and save money in the process. You do not need any business licensing in that scenario because there are no customers.

3. How to Get a Vending Machine License

Man working on a laptop

To get a vending machine license, you’ll need to:

  1. Get an LLC.
  2. Apply for business licenses. Learn how.
  3. Get sales permits.
  4. Apply for a food or beverage license if needed.

We walk you through the process of applying for these in our business hub.

How Much Is a Vending Machine License?

The fees for a vending machine license will vary by state, but you can expect costs of up to $3,000. Contact your local Small Business Administration office. They’ll help you determine what you need to start selling food and drinks to customers for money.

4. Permit for Vending Machine Business

Screenshot of municode website

You will most likely need a separate permit for each vending machine location or even one for each machine based on your county or local government’s laws. Small businesses should research their city and county machine regulations to make sure they are in compliance. The fees in most places are inexpensive to sell food or drinks out of a machine. For example, the North Las Vegas code requires a semi-annual fee for each piece of equipment based on the following prices:

  • $10: Vending machines dispensing anything that costs over $.25
  • $15: Tobacco vending machines
  • $25: Pool tables, jukeboxes, and other amusement machines

Just search “Vending machine permits in (Insert Your County or City)” to determine the proper fees and where to pay them. Alternatively, you can contact your local Small Business Administration office. They’ll help you determine what you need to start selling food and drinks to customers for money in your region.

How Much Is a Vending Machine Permit?

The cost of a vending permit will vary based on your state’s regulations. Most states require you to obtain seller’s rights based on the right equipment. A permit to sell tobacco products ranges from $15 to nearly $1,000, with most being under $200, while a permit for selling foods or milk products often costs between $100 and $300. You may also need to pay a per-device fee with your local government. Contact them to find out the fee per device or location.

5. State Licensing for Machine Vending

Texas, California, and Florida are where the majority of our traffic for vending machine businesses originates, so we’ve added a little extra information for you. We’ll add other locations as justified.

How to Get a Vending Machine License in Texas?

To get a license for vending machines in Texas:

  1. Create an LLC on the Secretary of State website.
  2. Get a sales tax permit from the Texas Comptroller of Public Accounts. 
  3. Check to see if you have any local requirements.

How to Get a Vending Machine License in Florida?

Screenshot of ods.myflorida.com website

To get a vending machine license in Florida, you should:

  1. Create an LLC from the Florida Department of State.
  2. Get a business license from the Florida Department of Business and Professional Regulation (DBPR).
  3. Get a vending machine permit for the Florida Department of Agriculture and Consumer Services. The closest permit I can find is the retail food establishment. Call the department of Agriculture before applying.  
  4. Obtain a sales tax permit from the Florida Department of Revenue.
  5. Check with your local government for requirements in your area.

How to Get a Vending Machine License in California?

Getting a vending machine license in California will require these steps:

  1. Go to the California Secretary of State. Use the business startup to create an LLC or corporation.
  2. Obtain a seller’s permit from the California Department of Tax and Fee Administration. It should be accessible from the wizard under “My Work Queue.” 
  3. Check with your local government for requirements in your area.

More Vending Machine Resources

Check out our other blogs about machines vending:

Check out our other blogs about vending machines including:

  1. Start A Vending Business
  2. Vending Machine Types
  3. Best Vending Machines
  4. Vending Locations

Then sign up for our Vending Machine Bootcamp.

Build Your Vending Machine Business 

Now that you know how to get your vending machine business registered with the government, make sure to sign up for our free vending machine training to help you get started.


What challenges have you had while creating a vending machine business?

  • Finding vending machine financing
  • Finding good deals on food and drinks
  • Finding new locations

80% of businesses fail... Learn how not to.

Learn from business failures and successes in 5 min or less. The stories, frameworks, and tactics that will make you a 10x better founder.

Author

Brandon Boushy

Related articles

S-Corp vs LLC: Which is Right for My Business?
Did you know an S-Corp can create considerable savings compared to an LLC? An S-Corporation (S-Corp) and a Limited Liability Company (LLC) are both excellent choices for business structures, but once you hit $100K net income, an S-Corp might reduce your tax load. UpFlip is here to help you choose between an S-Corp vs an LLC. We’ll explain what to consider when choosing one business structure over another, what LLCs are best at, what S-Corporations do best, and what they have in common. We’ll also explore frequently asked questions between an S-Corp and an LLC. 

What is a Limited Liability Company?

According to the National Small Business Association’s (NSBA) 2017 Year-End Report, an LLC is the most common business entity. Thirty-five percent of businesses opt for this business structure. The primary reasons people choose an LLC include: 
  1. Separation of business and personal assets
  2. Ease of forming an LLC 
  3. Separation of personal and business liabilities
  4. Ability to choose your tax structure
  5. Pay self-employment tax
Keep reading to learn what an S-Corporation is and why people use it.

What is an S-Corp?

An S-Corporation isn’t a business entity but a tax filing status. Despite this technicality, 33% of small businesses are S-Corps, according to the same NSBA report.  An S-Corp files taxes using Subchapter S of the Internal Revenue Code. Click the link to view the current version of the S-Corporation tax code. You must meet the following requirements to form an S-Corp:
  1. Have less than 100 stockholders
  2. Run an LLC or C-Corp
  3. Be a U.S. resident
  4. Maintain one class of stock
  5. Pay the business owner a reasonable salary
  6. Pay half of the 15.3% payroll taxes
S-Corporations are predecessors to LLCs, according to Law Shelf. People also call an S-Corp by the names:
  • Sub S-Corporation
  • Small business corporation

Difference between LLC and S-Corp

There are a handful of differences between LLCs and S-Corporations. Some of the most important differences include:
  • An LLC is a business entity. At the same time, an S-Corp is a tax filing status.
  • An S-Corp treats business income differently than a default single-member LLC.
  • An LLC provides more tax options than an S-Corp.
  • LLCs have fewer compliance requirements.
  • LLC owners pay self-employment taxes, but S-Corps use payroll taxes.

LLC vs S-Corp: Entity Status

Because an S-Corp is a filing status as opposed to a type of business formation, an LLC is by far the more efficient business structure unless you want to take advantage of the S-Corp dividend abilities. That means you’d need to go through creating an LLC or a C-Corporation before you can even start an S-Corp. S-Corporations were heavily used before LLCs became a business structure because of the limited liability protection to professionals without the far more significant complication of C-Corp status.

LLC and S-Corp: Business Formation

The formation of Limited Liability Companies and S-Corps can be relatively similar. Let’s look at the requirements for each to understand the differences and similarities.

Forming an LLC

A man holding an iPad and taking notes An LLC will have several main requirements to create and maintain it. You’ll need to:
  • Pay the filing cost
  • Pay ongoing fees
  • Write an operating agreement
  • Submit the articles of organization
  • Get an EIN
We’ll look at the filing costs, operating agreement, and the articles of organization because they are unique to an LLC.

Filing Cost and Ongoing Fees

To form an LLC, you need to register with the Secretary of State (SOS) in the state you plan to operate. You can find your state’s SOS by using the government agency finder on USA.gov. Paying the filing cost will require a fee at the state level. None are over $500, and most are under $300, but you’ll also have to pay ongoing fees that range from $0 annually to $500 annually. The lowest fees to maintain an LLC are in Pennsylvania, which typically costs $70 every ten years.

Operating Agreement

An operating agreement states how the business will function. When you file this document with the SOS it provides the benefits of:
  • Personal liability protection
  • Making verbal agreements legally enforceable
  • Setting rules that are different than your state's default rules for LLCs
An operating agreement is mandatory in California, New York, Delaware, Missouri, and Maine. Others may give you the option to include one, but those states require one. An operating agreement includes:
  • The creation date
  • Location
  • Owners and percentages
  • Management and voting interests
  • Investment in business
  • How profits, losses, and assets, are distributed
  • A succession plan
  • A dissolution plan
  • And anything else required by your state.
You’ll need to sign and notarize the operating agreement. Create an LLC through our partner BetterLegal to save $30.  Let’s look at the Articles of Organization next.

Articles of Organization

The Articles of Organization are very similar to the operating agreement, but you must submit the document to the Secretary of State’s office. They include:
  1. Company name
  2. Description of the company
  3. Mailing address
  4. Name and address of the registered (or statutory) agent
  5. Information about company owners, managers, and officers
The most common reason for rejecting an LLC application is that someone else is using the name.

Forming an S-Corporation

A man holding an S-Corp checklist An S-Corporation will first require starting a business entity with your state’s SOS. You may opt to create an LLC or C-Corp as your business entity. Then you’ll need to file Form 2553 with the IRS to opt to be treated as an S-Corp. There should be less than 100 stockholders, and they can’t be foreign residents or several types of legal entities. UpCounsel explains which legal entities can and cannot hold S-Corp shares, but each one may need to be considered on a case-by-case basis. These restrictions are significant drawbacks of an S-Corp.  Unless some of the following sections impact your company, I recommend starting with an LLC and opting for an S-Corp when the benefits outweigh the costs. 

LLC or S-Corp: Treatment of business income 

How LLCs and S-Corps treat taxable income varies dramatically. Significant differences include:
  1. Owner employee classification
  2. Profit treatment
  3. Treatment of Fica
  4. Tax code(s) used
We’ll look at each in more detail.

Is the owner of an LLC required to pay self-employment tax?

By default, the government classifies an LLC owner as self-employed, which means the owner:
  • Claims the profit or losses as personal income, which is called pass-through income.
  • Pays the full 15.3% Federal Insurance Contributions Act (FICA) taxes.
  • Follows the same tax code as a sole proprietor or partnership.
  • May choose to file taxes as an S-Corp or C-Corp and file based on their tax codes.
An S-Corp owner will treat their income differently. Their income is treated two ways depending on whether they are actively involved in the company. Let’s look at each.

How is an S-Corp owner’s income treated when they run the business?

If you actively work in your S-Corp, there are three types of income.
  1. A reasonable salary: Must pay comparable to the Bureau of Labor Statistics Median Income or higher for your role. Find the appropriate wage.
  2. Losses: Treated as pass-through income, reducing your net income.
  3. Profits: Profits are treated as dividend income and have three tax brackets: 0%, 15%, and 20%. You don’t pay FICA on dividends.
The salary will be subject to 7.65% payroll tax taken out of your paychecks and 7.65% that comes out of the S-Corp revenue and is considered an expense, which reduces dividends. You’ll be following a different tax code and filing different forms.

S-Corp Owner as a Stockholder Only

A man at his desk searching online If you are not actively involved in the management of an S-Corp, you do not have to include a reasonable salary. You only have to include losses and profits based on the following:
  • Losses: Treated as pass-through income, reducing your net income.
  • Profits: Profits are treated as dividend income and have three tax brackets: 0%, 15%, and 20%. 
This strategy can be beneficial if you pay others to run the company and do not want to be taxed based on FICA and personal income brackets. Depending on your role in the business, net income, and other factors, an S-Corp can have considerable benefits over an LLC. The benefits become tremendous once you have reached a net income greater than the median wage for a comparable position. All profit from the S-Corp will be dividends, reducing your tax load. We’ll discuss tax benefits next.

S-Corp vs LLC: What Are the Tax Benefits?

Both an LLC and an S-Corp have benefits that create tax savings depending on your company's profits and the number of business owners. The table below shows an S-Corp’s tax savings over an LLC assuming $500,000 income before taxes.
Comparisons Using Operations Manager Median Pay of $180,000
LLC (Default) Working in S-Corp S-Corp Dividends Only
Net Income/Salary $500,000 $180,000
Minus FICA $18,228 $9,114
Minus Income Tax $148,753 37831.5
Dividends 0 $320,000 $500,000
Minus Dividend Taxes 0 $41,749 $70,761
After Taxes $333,019 $411,306 $429,239
Effective Tax Rate 33.40% 17.74% 14.15%
We’ll discuss the benefits of each now.

What are the tax considerations of an LLC?

An LLC owner has several considerations for taxes if using the same tax code as a sole proprietorship or partnership, including:
  • 15.3% self-employment tax is broken into 12.4% for social security and 2.9% for Medicare.
  • Pay personal income tax rates of up to 37%.
  • Benefits like Health care are tax-deductible in pass-through taxation.
  • Pass-through LLCs can deduct 20% of net income before being taxed.
An LLC can also file as a C-Corporation or an S-Corporation by filling out the appropriate documentation. Please read up on LLCs on the IRS website to learn about their tax treatment. From a tax standpoint, the benefit of an LLC is the ability to choose whether filing like a sole proprietor or corporation is best for the business owner. Choose the one with the least tax consequences. When you own an LLC, pass-through taxation is easier because you only pay personal taxes to the Internal Revenue Service. However, business entities can see even more benefits through the S-Corp election. Let’s look at that now.

What are some tax considerations when electing S-Corp status?

S-Corporations have more tax requirements than an LLC, but less than a C-Corp. S-Corps don’t pay corporate taxes, but they do have to file a tax return. The requirements for an S-Corp include:
  • 1120S: Documents income, gains, losses, deductions, and credits.
  • 1120W: Estimated tax form that is required if a corporation elected S-Corp status.
  • Employment taxes: The company will collect and pay payroll taxes, which are the same rate as self-employment taxes, but the company and employee split the cost. They are also responsible for federal unemployment tax.
  • Excise taxes: Charged on industries like energy, gambling, and tanning booths.
Meanwhile, stockholders will have special requirements for their personal tax returns, including:
  • 1040: This form is to claim income and losses from S-Corps, estates, trusts, etc. 
  • 1040SR: Alternative form 1040 for those over 65 filing their personal tax returns.
  • 1040ES: Quarterly estimates for business owners' personal tax returns.
I suggest reviewing Schedule E and other S-Corp requirements with a licensed tax professional. Information in this blog should not be considered income tax advice. While there are more requirements for S-Corp tax status, the S-Corp tax rate is zero. That means you get most of the benefits of a corporation without the corporate income tax.  If you have to pay taxes, an S-Corp tax treatment definitely beats an LLC once an LLC is taxed at the 25% tax bracket or higher.

LLC vs S-Corporation: Operations

The operation of an LLC or a business electing S-Corp status is similar, except 
  • An S-Corp has to manage payroll taxes.
  • An S-Corp has more legal requirements, which take time.
  • An LLC taxed for self-employment tax is done on a personal income tax form unless the LLC has other employees. 
Which is better, LLC or S-Corp? A small business will have fewer operating requirements as an LLC vs corporation requirements. You’ll want simpler operations when starting a business because there is a long learning curve.

LLCs and S-Corporations: Compliance

A man pointing to his iPad LLCs have a much easier time complying than an LLC elected as S-Corp. Unfortunately, the tax classification is the main reason for selecting S-Corp status, but it is also the cause of increased compliance requirements. If you consider having your LLC taxed as S-Corp, I would recommend getting several estimates from licensed accountants of how much it will increase your costs. If the tax savings are more significant than the additional costs, you can save a lot of money on taxes. Use the formula above to determine whether the transition makes sense for you. An S-Corp is one of the types of businesses that makes the most after-tax-profit as long as you plan on staying under 100 stockholders.

Frequently Asked Questions about LLCs and S-Corps

The following sections answer some of the most commonly asked questions about S-Corp and LLC business structures.

Is an LLC a corporation?

An LLC is not a corporation. A corporation can sell stock in the company, while an LLC cannot. An LLC may opt to file taxes as either an S-Corp or a C-Corp. LLC owners can file with the IRS to opt into one of the tax structures. The forms to file are:

Can an LLC be an S-Corp?

An LLC can be an S-Corp by filing Form 2253 with the IRS.

What is an S-Corporation?

An S-Corporation isn’t a business entity but a tax filing status. Despite this technicality, 33% of small businesses are S-Corps, according to the same NSBA report.  An S-Corp follows Subchapter S of the IRS Tax Code. To become an S-Corp, your company must:
  • Have less than 100 stockholders.
  • Be a C-Corporation or LLC.
  • Be wholly owned by U.S residents.
  • Have one class of stock.

Can an S-Corp own an LLC?

Yes. LLC owners can be any combination of people or legal entities in most states, but some states may have restrictions. You can view the requirements on their Secretary of State (SOS) website. Use USA.gov to find the link for your state’s SOS office.

S-Corp vs LLC for real estate?

Real estate professionals may want to file as an S-corp instead of an LLC because tax benefits can reduce your tax rate. As an employee of an S-Corp, you have to assign yourself a reasonable salary, but the S-Corp pays profits as dividends, which have a lower tax rate.  You’ll want to use an S-Corp vs LLC calculator to establish whether it makes sense to create an S-Corp.

How does an LLC become an S-Corp?

An LLC becomes an S-Corp by filling out Form 2553 and filing taxes using guidance from the IRS.

How to revoke an S-Corporation election?

A man holding a big white envelope To revoke S-Corp status, you’ll need to send a statement of revocation to the IRS. You can find more information about revoking S-Corp status on the IRS website.

S-Corporation vs LLC: So Which Should You Choose?

You can’t go wrong choosing to form an LLC or electing S-Corp tax classification. Both are highly beneficial to small business owners because they each offer liability protection for business owners' personal assets. The main difference between the two is income taxes once company profits pass median income for a comparable position. While I am not licensed to give legal advice, I would personally start with a single-member LLC, then move to an S-Corp after reaching a level where the income taxes are reduced S-Corp status. If you still aren’t sure which structure to use, I suggest reading our other blogs about choosing a formal business structure.
Business ideas

How to Start a $500K/Year Auto Repair Shop (2024)
Are you great with cars but have no idea how to open a mechanic shop? Don’t worry! We’re going to show you how to open a mechanic shop. Lucky Sing started his car repair business, Lucky’s Auto Repair, with $20,000 in 2016 and earns twice that every month. He shared business advice, technology costs, unique marketing strategies he uses, and how to delight your customers. Get ready to learn how to start a mechanic shop.

Develop Repair Shop Knowledge

Before you start an auto repair shop, you’ll want to learn about the mechanic shop business. You’ll need to develop both industry knowledge and technical skills. We’ll look at each of them to help you prepare to open your own auto repair business.

Industry Information

You’ll want to understand how auto repair shop owners operate, what types of challenges they face, and the financial considerations that go into running an automotive repair shop. We use IBIS World for our data on industries because it provides all the information you need for competitor analysis in one place. You can find auto mechanics under the report for NAICS code 81111.

Major Players

Automobile repair shops have a lot of competition. They have seven major competitors that operate in their field.
  1. TravelCenters of America 
  2. Monro 
  3. TBC Corporation
  4. Love’s Travel Stops & Country Stores, Inc.
  5. Meineke Car Care Centers, LLC
  6. The Boyd Group Inc.
  7. NationaLease
In addition, they may also compete with:
  • New car dealerships
  • Oil changes services
  • Used car dealerships
  • Automotive part supply shops
These major players account for over 7% of the market share and $5.6 billion of the $78.4 billion industry revenue and $417.7 million out of the $4.9 billion revenue. The highest profit margins for the companies are approximately 7.7%.  The rest of the revenue and profits are shared by approximately 278,000 businesses.

Automobile Repair Shop Revenue

The average auto repair shop makes $261,870.50 per year, while the revenue per employee tends to be between $115K and $132K per employee. Assuming you start by yourself, you might make about $10,000 per month. Check out the breakdown of what services generate the most revenue: Screenshot of IBISWorld website You should also be aware that businesses and consumers under 45 years old generate the most revenue. Lucky Sing told us he was on track to make over $500,000 with three employees in 2022. That means he was making around $125,000 per employee (including himself).

Operating Expenses

The operating expenses for auto repair businesses break down into the following:
  • Other Costs: 46.7% (includes taxes, IT, professional services, repairs, and miscellaneous). Based on my reading of the entire report, it appears that parts are the majority of this. You should expect parts to be $1 out of every $3 earned on parts, but if you can reduce this to $1 in every $4, it will increase profits to triple the market average. That’s why an auto repair shop needs to call multiple vendors for the best price.
  • Wages: 28.1% (Lucky says more like $40K per mechanic)
  • Purchases: 9.5% equipment and tools
  • Rent: 4.7%
  • Marketing: 1.9%
  • Depreciation: 1.6%
  • Utilities: 1.2%
Industry expenses breakdown pie chart That is how car repair shops make 6.3% after tax profit.

Profit Margins 

Profit margins for automobile businesses tend to be around 6.3%, but excluding the seven major players decreases to 6.16%. That means you are looking at $6,160 for every $100K in revenue. That’s consistent with what Lucky told us: [su_quote](My profits are) around 10%. We could pull higher, but we are investing a lot in the business.[/su_quote] Check out our interview with Lucky below: [su_youtube url="https://youtu.be/chhmCdYt0iQ"] He collects a salary now, but he didn't for the first few years. He told us [su_quote]Profits started coming in during years three and four. I live on the property, so I Iived under my means.[/su_quote] He also told us he aims for no profits because: [su_quote]I was taught by an accountant that you want to get as close to zero profit as possible to avoid taxes.[/su_quote] Obviously independent shops can beat the industry average profit margin. Later, we’ll share some of the strategies Lucky uses to get his high profit margins. Next, we’ll discuss what he does with the profits from his automotive repair shop.

What do you do with profits?

Man working in an auto mechanic shop When we asked what mechanic shops do with business profits, Lucky told us: [su_quote]Reinvest in (the) business and hiking and camping.[/su_quote] He also told us that his auto repair shop's busiest months are June, July, and August, and the winters are slower. He warned that there were years he had to pay for payroll out of savings: [su_quote]I had to pull out of my slush fund for payroll during some years.[/su_quote] So don’t spend it all on a fat bonus after you pay quarterly taxes.

Educate Yourself

There are three ways to educate yourself on how to repair cars and provide maintenance services:
  1. Teach yourself to repair cars with YouTube videos.
  2. Attend technical school.
  3. Get a job at an auto mechanic shop.
No matter which you choose, Lucky emphasized the importance of getting your hands in the vehicle and learning to do it firsthand.

YouTube Videos About Cars

Screenshot of 1A Auto from YouTube website There are a ton of tutorials about engine repair, transmission repairs, auto-body repair, and anything else you could possibly want to know before opening a mechanic shop. There are more than 19,000 videos created by the top five channels when I search auto repairs on YouTube. I’m particularly impressed with 1A Auto’s playlists grouped by type of car. Lucky told us: [su_quote]Just keep pushing your boundaries. There are so many tutorials.[/su_quote]

Technical School

Lucky had a lot to say about going to a tech school. He went to one and told us: [su_quote]Going to the tech school really honed my fundamentals with electrical fundamentals.[/su_quote] He emphasized that he developed car repair and maintenance skills that would have been much more difficult to learn if you took the do-it-yourself shop approach. [su_quote]I would push school quite a bit. You can do it without school, but you won’t get the knowledge of the more sophisticated tech.[/su_quote] His repair shop even invests in ongoing education for his mechanics. He told us: [su_quote]We’re constantly going to classes…We go to out-of-town shops and train our auto mechanics on new tech and customer service.[/su_quote] He even recommended a company he suggests mechanic shop owners use: [su_quote]There’s a company called Elite Worldwide that we use.[/su_quote] If the investment in education doesn’t sound like the route for you, you can consider developing experience as an employee of an auto body shop, becoming an oil change mechanic, or finding a tire place to start developing experience. It will get your foot in the door, but it’s quicker if you go to technical school to learn more about the auto mechanic business.

Get a Job as a Mechanic

Screenshot of auto mechanic job from Indeed website Small businesses across the country are suffering from an employment shortage. In fact, there are nearly 285,000 automotive jobs available on Indeed. You just have to reach out to auto mechanic shops and find one that will let you start. You are sure to find one looking for local car mechanics.

Do you need a mechanic license to open a shop?

You’ll need to get state and local business licenses. Still, if you’re wondering about a specific certification that states you know about car repair, most states don’t require that to start a small mechanic shop. Next has an article with state-by-state shop mechanic and repair shop certifications required for licensing. You might want to consider some of the certifications for your mechanic garage because they certify that you know how to perform repairs. Car repair certifications are normally through three agencies:
  • Automotive Service Excellence Certification (ASE): The ASE offers 58 Certifications for techs. They also offer a Blue Seal certification for shops with at least 75% ASE-certified techs and at least one ASE technician for each service. This gives you a high-quality backlink to your website, marketing materials, and more.
  • I-Car Gold Class Certification: Shop owners might want to consider I-Car Gold certification if their car repair shop wants to be an automobile repair center. The certifications are a multi-year process that requires the majority of employees to be trained in specific vehicle repair shop knowledge.
  • AAA Approved Auto Repair Facility: Triple A has really high requirements to become a certified repair shop for cars. You’ll need ASE certified technicians, a high Better Business Bureau rating, a 94% customer satisfaction rating based on a survey of mechanic garage clients, and more. Given each AAA site is different by region, this link or this one by region might be more direct. I got my information from RepairesHub.
Next, let’s look at planning a new business.

Business Plan for an Auto Repair Shop

You’ll have lots to keep track of, so it helps to write an auto repair shop business plan. The business plan helps you organize your thoughts and present them clearly and convincingly. The document shows:
  1. Services Offered
  2. Business Structure and Licensing Needed
  3. Startup Costs
  4. Ongoing Expenses
  5. Pricing Strategy
  6. Location
  7. Marketing
The business plan should guide you to success in the future and help you keep track of everything you have to accomplish. Check out our business plan template to help you write a more formal business plan.

What services will you offer?

mechanic guy working on a car brakes Small business owners have a variety of services they can offer when they open their own car repair shop. Some of the auto repair services to consider offering potential customers include:
  • Routine Maintenance: Every new car has a maintenance schedule, which is 31% of revenue for the industry.
  • Powertrain Repair: These focus on engines, transmission, axles, and wheels. They generate 18.1% of industry revenues. Lucky told us these are the highest profit margins. 
  • Brake Repair: Brakes must be replaced every 10K to 20K miles and rotors every 70kK. 17.4% of industry revenue is from brake work.
  • Alignment Repair: Alignments focus on parts like wheels and axles that help the vehicle drive in a straight line. Makes up 8.1% of industry revenue.
  • Electrical Repairs: Electric work focuses on the electrical system like alarm equipment at 6.4%. 
  • Heating/AC Repairs: This work involves components that keep the car warm or cold, and 4.9% of revenue comes from these services.
  • Muffler and Exhaust Repairs: These services repair parts regarding the emissions system. These may also include government required inspections. Without these parts, a car will be polluting the environment more than necessary. These repairs are 3.5% of industry revenue.
  • Other Services: If it doesn’t fit neatly in one of the other categories, the service is thrown in here. It makes up 10.6% of revenue industry wide.
Lucky told us: [su_quote]The highest margins are on the biggest jobs like engine swaps.[/su_quote] Some other options for a car repair shop include:
  • Mobile Mechanic Business: Go to people’s sites and fix their cars.
  • Mechanic Workshop: This term is normally a synonym for a repair shop, but you could also turn it into a classroom environment or space where D-I-Y mechanics can go to work on their cars.
  • Parts Supply: Sell automotive parts to other shops and D-I-Yers.
  • Collision Repair: Specifically focus on fixing cars that were in wrecks.

How Much Does It Cost to Open a Mechanic Shop?

Automotive shop with tools and equipment You’ll need to invest some money in purchasing equipment and business licenses to start a car shop. Lucky has an interesting story about how he started his business: [su_quote]Got my lifelong goal of owning a Skyline GTR. I got the car, drove a few years. Something was lacking in my life, I wanted to start a business, and I kept thinking about how to get the funding. I kept coming to selling the car, and finally decided to do it.[/su_quote] While the way he started his business with a unique source of funding, he estimated the cost to start today would be: [su_quote]$20K, but I’m also on my own property. Probably twice that because of inflation.[/su_quote] He also told us: [su_quote]Having good credit is huge.[/su_quote] Let’s look at the startup costs.

Breakdown of Startup Costs

You’ll need to invest in the following items before starting an auto repair shop:
  • Limited Liability Company (LLC) or Corporation: $1,000 or less in most states. Both an LLC and a Corporation separate personal assets from business assets as long as you have a business bank account. Check out our blog about business structures to learn more.
  • Business Licenses: $200 to $3,000. You’ll have to check with your state, county, and city governments for exact pricing and licensing requirements. Learn how to get a business license.
  • General Liability Insurance: $500 to $3,000 per year. Alternatively, you can choose the next option:
  • Business Owner Policy: $500 to $3,000 per year. Combines general liability and commercial property insurance. Make sure to purchase insurance. Check out Simply Business for easy to purchase plans.
  • Workers Compensation: $500 to $4,000 per year, median $1,667. 
  • Commercial Auto Insurance: Median cost $778 per year. (All insurance pricing is based on this Insureon blog.)
  • Specialty Tools: Rates vary, but you can rent many tools from Autozone until you can afford to buy them.
  • Diagnostic Tools: $25 to $10K+. Used to test the vehicles to see what codes and issues they are having. It can also be used for tuning. High end or Affordable options are available. Obviously the high end ones have more features and precision.
  • Professional Lift: $5,000 to $40,000 depending on height and weight requirements.
  • Parts budget: Rates vary, and new parts can cost from $15 for brake pads to $20,000+ for some engines. 
  • Shop: $1,750+ a month for rent and utilities.
  • Total: $10,753 to $100K+ for all items as shown here.
  • How to start a mechanic shop at home
Some states may allow you to start auto repair shops from home, but you’ll need to check state and city rules in your area. More often than not, apartment complexes have specific rules against it, as do many homeowners associations. You can cut the cost down to probably $5K for those wondering how to start a mechanic shop from home.

What permits do I need to open a mechanic shop?

You’ll want to consider the permits for starting an auto repair shop, too. You’ll want to get the following: Sales Tax Permit: A permit is required to pay taxes when you sell goods (and sometimes services. Some states do not tax services).  Resale Permit: A resale permit allows you to exclude taxes from your purchase price. Alternatively some states don’t make you pay tax if you paid the sales tax on the goods, but talk to an accountant to make sure. Hazardous Waste Permit: You may be required to get a hazardous waste permit or pay a fee for disposal. Even if you aren’t, you may need to keep documentation. Here is a 50 state guide to laws for mechanic shops. State and Local Business Licenses: There may be different requirements for different types of automotive businesses. Check with the local Small Business Administration (SBA) to find out what you need. You can find a list of SBA offices on the website.

Get a Business Bank Account

Get a business bank account to protect your business idea and personal assets, and get a bank loan. To raise money through loans or stock shares, you have to keep your personal finances and business finances separate. The best bank accounts to get will vary for each business, but small banks and credit unions tend to have better approval odds and customer service for business loans. As a business owner, it’s also important to consider their personal relationship with you. Learn how to open a business bank account.

Get Accounts with Suppliers

Screenshot of Advantage Parts Solution website Every vehicle that you repair will need parts, and you’ll often have to get them from local suppliers or dealerships. If there are none locally, you may have to order them from online retailers or larger wholesalers. Some of the larger scale parts shops that mechanic shops use include: Wikipedia has a list of 40 other potential suppliers. Like any industry, it’s a good idea to get bids from at least three places to get the best value.

Choose an Auto Repair Business Location

Lucky's Auto Shop location Automotive repair shops will normally need a location to repair cars. Before you start a mechanic shop consider:
  1. What is to be the amount of traffic around your car repair shop?
  2. Is there enough parking to handle existing and new customers?
  3. Does the car repair shop have enough space for the number of car ports you need? There are typically one to eight car ports in small businesses, but you may need drastically larger numbers if your automotive business contracts with:
    1. A local taxi company
    2. The police department
    3. A limousine service
    4. Car dealerships (which sometime have 24 to 36 of their own)
  4. The price of the space matters. Industrial and lower traffic areas tend to have lower rent.
Lucky told us: [su_quote]These days it’s not as important. With the internet, you can choose locations with less traffic as long as you provide great quality. If you are going for a big business, you should choose higher traffic areas.[/su_quote] He also told us that he is looking for a new space. He told us: [su_quote]The next location we choose will be a lot more space than we need so we don’t outgrow it.[/su_quote] Once you have the space, you’ll need to prepare your new business for the grand opening.

How to Open Your Own Car Repair Shop

In this section, we’ll discuss setting up your software, tools, and marketing, so that you’re prepared to start serving new customers

How to Open Mechanic Shop: Software Used 

You’ll need software to manage your own auto repair shop. Fortunately, Lucky gave us input on what he uses in his car workshop. He suggested the following software to start auto repair shop operations.

Website

Screenshot of Lucky's Autoshop website You’ll need a website with relevant pictures, your address, services, phone numbers, and appointment requests. Lucky told us: [su_quote]With auto repairs, you can’t let customers book their own appointment because they don’t know how long it will take. So we have our customer manager Rich approve it or contact them.[/su_quote] You can use a free website builder like Wordpress or Wix, but make sure you buy a custom domain so that everything isn’t branded with the website builders logos, which looks unprofessional. The following is a list of software running on https://luckyautoshop.com/:
  • OWL Carousel: For pictures
  • Google Tag Manager: For tracking what occurs on the site
  • Tawk.to: Customer support agents for $1 per hour
  • Google Analytics UA: Web Tracking
  • CloudFlare CDN: Provides fast access to content
  • CDN JS: Provides fast access to content
I’ve left off coding tools because you’ll find standard ones on most sites. If you love a specific site, check out WhatRuns to find out what they use. In addition to the website, Lucky Auto Shop uses additional software for customer support.

Mitchell1

Mitchell1 offers four main products:
  1. ProDemand® Optimized with SureTrack®: Diagnostic machine software helps diagnose cars including top 10 issues by vehicle, partners needed, and wiring diagrams.
  2. Manager™ SE: Custom Relationship Management software helps keep track of existing customers spending and prior work, pre-diagnosing the type of repairs needed to help technicians diagnose the vehicle, and manage invoicing and parts.
  3. TruckSeries: This is used for Medium and Heavy Duty Trucks. If your shop specializes in Class 4 to 8 trucks, you’ll need this to help reduce repair time and increase revenue.
  4. SocialCRM: Use this to manage the social aspect of running your own business. This includes customer reviews, preventive maintenance reminders, promotions, and other marketing automations.
Based on the interview, it appears that Lucky utilizes the manager SE and ProDemand®. He said: [su_quote]It will show the VIN, your personal information, and the repairs performed.[/su_quote] He also told us that Quickbooks was what he used until he could afford more sophisticated software. Screenshot of Quickbooks website He also use a program that helps tune up shops show repairs needed.

Bolt On Technology

Lucky uses software called Bolt On that helps with digital inspections that he connects to the estimates. They use Bolt On software to include images in the invoices. It helps auto repair shops increase ticket revenue by 39%, builds trust, and increases return visits. Lucky also told us how much he spends on monthly software subscriptions. [su_quote]We probably spend $1,000. The software is expensive, but it’s worth it.[/su_quote] Let’s talk about tools next.

Arrange Your Space

You’ll want to set up your mechanics workshop where it’s easy to bring a car for repair. In addition, here’s some business advice to help run a high performing shop:
  1. The tools should be convenient, but out of the way where technicians can move around the cars freely.
  2. Have a specific dock for oil changes, battery replacement, and other quick jobs. They shouldn’t have to wait while you are changing out an engine.
  3. Tool boxes should have locks and be locked at the end of the night.
  4. Always have an alarm system in case vandals or robbers break in.
  5. Make customer spaces comfortable. Provide a seating space, reading materials, a TV, a restroom, drinking water, and maybe a vending machine.

Marketing Your Car Repair Shop

Truck with Lucky's Autoshop branding You’ll need to have a marketing strategy in place to help increase your business. Part of the marketing strategy should include:
  1. Logo
  2. Building signs
  3. Vehicle signs
  4. Company letterhead for invoices and other communication
  5. Brand messaging guidelines
  6. Communication channels
  7. Brand colors and font specification
  8. Marketing analytics 
  9. Branded pens (These are a cheap way for any business to get their name out because people tend to take pens, plus you can get them for less than $1 per pen for less than $500.)
Most mechanic shops only spend about 2% on marketing to find potential customers. You have lots of options with your own business. You can: [su_note note_color="#dbeafc"]
  • Use social media
  • Partner with other businesses
  • Pay for leads on Google Local Ads
  • Create videos on how to fix cars
  • Use print ads in local papers and billboards
  • Try Lucky’s method:
[/su_note] [su_quote](We use) Box trucks parked throughout the city with giant banners. Make sure to get permission to park it…We do business with them (the places they park the trucks).[/su_quote] You can also try Broadly to build your online presence. They sponsored our interview with Lucky. In a year, the service increased Google reviews five- fold and increased revenues 5% based on a user testimonial. Next, we’ll discuss hiring employees.

How to Open Your Own Mechanic Shop: Employees

Lucky's autoshop employees A business owner can run a mechanic shop by themselves, but how many customers can they help? Will they be able to make a profit if they do everything in their own shop?  The average wages for employees at shops is only $37,000 according to IBIS and the revenue per employee is around $128K, so adding an employee would be a net gain of nearly $90K. That’s enough to make the difference between a profitable business and one that loses money. Lucky has three employees and told us: [su_quote]Starting pay is normally $40,000 but is going up because of inflation. We pay hourly plus a bonus system. There are a lot of companies that pay by the job. I don’t like them because the quality of work suffers.[/su_quote] Lucky also explained that he doesn’t have a formal training program because all his employees have experience, but he trains them as needed and invests a lot in ongoing education. [su_quote]We train them on new tools.[/su_quote] Now that you’re ready to start serving customers, we’ll walk you through the process.

Mechanic Garage Customer Service

Mechanic working on a computer An auto repair shop will have a process similar to the one below:
  1. Customer is added to the system
  2. Complimentary inspection (body, wheels, suspension)
  3. Get quotes for parts from vendors
  4. Provide an estimate
  5. Get approval
  6. Buy parts
  7. Put the vehicle on the lift
  8. Perform the work
  9. Accept payment and ask for reviews
Lucky added information about their CRM and how they prioritize customers who are waiting at the shop over those who leave while the car repairing takes place. He told us to always prioritize those who are at the business waiting. [su_quote]We mark cars that are waiting with a red flashing box because we care about your time.[/su_quote]

How to Start a Mechanic Shop: The Keys to Success

Lucky's Autoshop grand opening parade When we asked Lucky what he attributes his success to, he responded with:
  1. Hiring the right people
  2. Customer service
  3. Asking for reviews
Lucky emphasized you want to look for people who care about the business. They have to have the necessary skills, but it’s easier to teach someone technical skills than it is to teach them to care. This is what he said. [su_quote]Hiring the right people. You have to find people who don’t just view it as a paycheck. You can have the right technology, but if you don’t have people who can use it, the business will fail.[/su_quote] He also talked about the importance of including your team.  [su_quote]Go with the flow. Sometimes your team has better ideas than you. Incorporate your team in everything you do.[/su_quote] He also explained that customer service was hard at first. When he was less experienced, he would get upset when he had to pay for a misdiagnosis. Over time, he learned that giving great customer service is more important. He said that: [su_quote]Sometimes it’s better to put your pride aside and make the customer happy.[/su_quote] Finally, he told us his approach to quality control and customer reviews: [su_quote]Ask for Reviews at checkout, via text (the next day using an automated system), and randomly contact customers to verify satisfaction.[/su_quote]

Pay Your Bills

You’ll have to pay monthly expenses to keep your business operating. You’ll want to make sure to pay: [su_note note_color="#dbeafc"]
  • Lease payments
  • Payments on any bank loan for business assets
  • Utilities
  • Business insurance costs
  • Suppliers
  • Payroll taxes
  • State and federal taxes
  • Annual business license and business structure fees
[/su_note]

Live Mechanically Ever After…

That’s our journey. Now you know how to start a mechanic shop. Have you opened an automotive repair shop before? If so, how many cars did you repair per day? What mistakes did you make? For those who haven’t opened an auto repair shop, what do you look for in a mechanic shop?
Business ideas

Net Working Capital: Everything You Need to Know!
Have you ever wondered why some small businesses seem to thrive, while others fail even when they have plenty of business? Net Working Capital is one of the most crucial aspects of starting and running a small business. We’ll give you the knowledge to manage your working capital to keep your small business running smoothly. Net working capital is the liquidity an organization has to continue operations. Net working capital takes into consideration cash and cash equivalents, while excluding aspects of the business that cannot be easily redeemed for cash. The benefit of knowing the net working capital is you can tell whether the company is in danger of defaulting on payments, laying off people, having to sell machinery or property it owns, or requiring more personal investment in the business. We’re going to answer the most common questions about net working capital and provide you with resources and examples of how to manage a business using net working capital including:
  • How do you calculate net working capital?
  • How to find net working capital.
  • How to find the change in net working capital.
  • What is the difference between working capital and net working capital?
  • What is a good net working capital ratio?
  • How can a small business improve net working capital?
Keep reading for information on how to use net working capital to run or evaluate a small business.

How do you calculate net working capital?

Calculating net working capital Net working capital is calculated using the formula: Current Assets - Current Liabilities= Net Working Capital Let’s dig deeper into each of these terms for what they include.

Current Assets

Current assets are assets that are expected to be used, consumed or sold in less than a year. You will find current assets in a company’s balance sheet. Typical assets that are included in current assets are:
  1. Cash on hand
  2. Accounts receivable
  3. Stocks 
  4. Treasury bonds
  5. Inventory
  6. Pre-paid expenses
Different industries will consider different materials current assets. For example, A plumbing company might consider a water pump a current asset because they are reasonably certain they will sell it in a year, while that same water pump distributing water to the sinks in a restaurant would not be because they expect to continue using the pump. You will normally find the current assets listed on a balance sheet in order of liquidity. To calculate the current assets you would simply add them all together.  To learn more about current assets, check out Investopedia’s page that includes examples of major companies current asset calculations.

Current Liabilities

Current Liabilities are the expected expenses the company will incur in the next 12 months. You’ll also find these on a company’s  balance sheet.  Common expenses included in the current liabilities include:
  • Wages.
  • Payment of short term loans.
  • Current portions of work prepaid by customers that still need to be completed.
  • Payments to suppliers.
  • Current principal of long term debts 
  • Rent
  • Utilities
  • Income tax.
You can find the current liabilities on a company’s balance sheet. For more on current liabilities check out Motley Fool’s current liability page.

How to Find Net Working Capital

List of Fortune top 500 companies To demonstrate how to find net working capital, I’m going to use 2021’s Most Admired Company, Apple (stock ticker: APPL). To see the Fortune list of most admired companies, click . With a publicly traded company, you’ll go to the SEC Edgar Company Filings page and search the stock ticker. For privately owned companies, you’ll have to ask the owners. Franchisors will typically be able to give you the information for their average or median franchise financial performance. You’ll want to find the Form 10-K. Here is Apple’s. On page 25, you’ll see a comparison of 2018-2020 working capital. See image below, Row 5. To find the breakdown, view page 33, which is the balance sheet. As you can see, Apple had a working capital of $38.321 Billion in 2020, $57.101B in 2019, and $15.41B in 2018. Remember these, they’ll be discussed more later. Their working capital jumped around dramatically during those three years. When you see a company’s net working capital bounce around dramatically, it is worth investigating. In Apple’s case the drop between 2019 and 2020 would be traced to reduced cash on hand and accounts receivable, which is to be expected given the pandemic. People are less likely to upgrade a phone when finances are difficult.

How to find change in net working capital

To find change in net working capital there are two ways to calculate it:
  1. As a percent
  2. As a whole number.
Let’s look at how Apple’s working capital changed between 2018 and 2020 as both a percent and whole numbers. As mentioned above, Apple had a working capital of $38.321 Billion in 2020, $57.101B in 2019, and $15.41B in 2018. When we use subtraction to find the change, we get the YoY Pure Change, while when we use the formula (2020/2019)-1, we get the YoY % Change. What this tells us is that they had 33% less working capital going into 2021 than they did going into 2020, meaning they have to be more careful with their budgeting in 2021 than they were in 2020.

What is the difference between working capital and net working capital?

Working capital and net working capital are typically used interchangeably. There are other terms that are similar such as gross working capital, which is just the current assets and does not factor in liabilities. The gross working capital is not as effective for calculating the viability of the company because it does not consider the cost of the capital. Gross working capital is simply a step in the process to finding the net working capital.  You may also find a similar term, gross fixed capital, used in some methods of calculating the GDP. If you’d like to learn more about gross fixed capital check out the OECD explanation.

What is a good net working capital ratio?

Keyboard with the word current assets

The working capital ratio, more commonly called the current ratio, is simply: Current Assets/ Current Liabilities. It is a measurement of how easy it will be to pay the bills. Generally speaking a current ratio less than 1 is a business that is failing, while a business with a current ratio above 1 is at least sustaining itself. A current ratio of 2 is preferable according to accountingtools.com. When the working capital ratio is above 2, investigation is necessary. This could be for several reasons including:
  1. Too much inventory
  2. Difficulty collecting accounts receivable
  3. Large amounts of cash on hand
  4. Low to no debt
Depending on which of these is the cause, it could impact the valuation of the company. For instance, inventory would be included in a sale typically, while I would not expect the same for cash on hand.  Likewise, if the company is having difficulty collecting accounts receivable, future write-offs may be coming in the future. However, if the company has no debt and plenty of inventory, the business is in decent health assuming other aspects of the financial statements are doing well.

Quick Ratio

Another common ratio used is the quick ratio, which excludes inventory and prepaid expenses. This eliminates many of the complicating factors that are inherent in the net capital ratio. The  quick ratio formula is: (Cash + cash equivalents + accounts payable)/ (current liabilities) The quick ratio should be between 1 and 2 for a company to be in good health.

Cash Ratio

A man with calculator and papers on his desk The cash ratio is an even simpler ratio for measuring the liquidity of the business as it is the most restrictive. It only includes cash on hand and cash equivalents such as money market accounts, stocks, and treasury bills. The equation for the cash ratio is: (cash+cash equivalents)/ current liabilities It specifically does not include:
  • Accounts receivable
  • Inventory
  • Prepaid Expenses
  • Anything that can’t be accessed in a matter of a couple days
Like the other ratios, a cash ratio between 1 and 2 means a company is able to meet its obligations. To learn more about the cash ratio, check out this article by the Corporate Finance Institute.

How can a small business improve net working capital?

To improve the short term financial position of a small business there are several things that can be done including:
  • Converting short term debt into long term debt.
  • Inventory management
  • Penalties for late payments.
  • Completing pre-paid work.
Let’s dig deeper to see how each improves the net working capital of a small business.

Converting short term debt into long term debt.

By converting short term debt into long term debt, you impact the working capital by spreading the payments over longer periods of time. In the example below, we used a fictitious balance sheet to display the impact of reducing $15,000 in short term loans into $3,ooo in short term and $12,000 in long term, while keeping everything else the same. The end result is an increase of $10,800 in net working capital and the working capital increased from 1.45 to 2.11, giving the small business plenty of room to utilize capital for growth. It should be noted that the small business may incur more financing charges over the course of long term debt due to the interest on principal being spread out over a longer period. It’s recommended that you consult with a financial advisor before making these decisions.

Inventory Management

Man writing the words Inventory Management on a paper Inventory management is focused on having the proper amount of inventory at the right time. Too much inventory leaves you with less cash and cash equivalents, while too little inventory means lost sales.  There are a variety of ways to improve inventory management including:
  1. Implement an inventory management system (IMS).
  2. Utilize dropshipping and print-on demand services for online orders.
  3. Run promotions on products that aren’t selling well to turn inventory into cash.
  4. Use analytics to forecast demand and order accordingly. IBM offers useful insights here.
The primary goal with inventory management is to keep as little of the working capital tied up in inventory because once the inventory is sold the current assets will increase due to the profit and the current liabilities will decrease because the vendor can be paid. We have several videos on how to run a small business using LEAN principles you can find on UpFlip’s YouTube page.

Penalties for late payments.

Penalties for late payments are an option if you finance your customers. Penalizing late payments encourages people and businesses to pay on time. If they don’t pay, it increases the accounts receivable to help increase offset the inability to use the working capital and any interest fees you occur from suppliers.

Completing pre-paid work.

Completing pre-paid work removes a current liability, but also incurs costs. If you have an outstanding liability of $1,000 worth of work and you have to pay your employee $300, it will reduce your current liabilities by $700. If it requires other inputs the impact will be less. Using the same balance statement as before would create a $700 increase in net working capital and increase the current ratio from 1.45 to 1.48.

Conclusion

We’ve given you the information you need to effectively use net working capital to improve the operations of a small business. During this article, we covered the definition of net working capital as well as:
  • How do you calculate net working capital?
  • How to find net working capital.
  • How to find the change in net working capital.
  • What is the difference between working capital and net working capital?
  • What is a good net working capital ratio?
  • How can a small business improve net working capital?
Whether you’re running a small business, selling a small business, or looking to buy a small business, UpFlip has the information to help you be a better business owner. Sign up for our newsletter and follow us on YouTube to get more great information about small businesses.
Business ideas

Comments

Become a business owner in less than 90 days

Start your 10-day free trial of the UpFlip Academy and learn how to start your own business from scratch.

Get business advice straight to your  Inbox 

Learn from business failures and successes in 5 min or less. The stories, frameworks, and tactics that will make you a 10x better founder.

Subscribe

Join our 45,000+ entrepreneurs