Payroll and Cashflow Problems: Business Success that Leads to Failure

There are times when a rapidly growing business is so successful that it suddenly finds itself in real trouble. As one success follows another, management becomes too risk-oriented and before long, the company discovers that its growth has outstripped its financial resources. The result is a negative cash flow position that makes it virtually impossible to operate.

In the glow of success, some growthminded entrepreneurs tend to create their own cash flow problems. They offer overly generous credit to customers who don’t deserve it. They fail to realize that current expenses – such as payroll – won’t wait and are sometimes payable before sufficient receivables have been collected.

The faster the growth, the greater the cash shortfall, and the “successful” company may soon find that it can’t pay its bills. If the business is not able to get additional financing, it may be forced to close its doors.

Rapidly growing companies should take steps to prevent this situation before it happens. The impact of extended credit terms should be carefully measured against expenses before credit is granted.

Cash flow projections should be reviewed constantly. Receivables should be closely monitored and strong collection procedures should be consistently enforced. Payment schedules should be negotiated with vendors. And additional sources of capital should be explored before a cash crunch hits, so that operating funds are available when they’re needed. Without these safeguards, rapid success can mean unexpected failure.

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