Do profitable businesses ever struggle to cover payroll? Why?
The answer is “yes“
In fact, sometimes it’s because they’re doing so well. In this article, our partner PAYRO breaks down four reasons why even lucrative businesses sometimes can’t cover payroll.
1. Rapid Growth
In a rapid growth phase, businesses hire new employees to meet current or anticipated business growth. Often, the business will need funds to cover payroll short-term until revenue kicks in.
For example, during elections, a security firm doubled staff because they were hired for many polling stations, but government payment terms were 60-90 days. They needed funds for two weeks to pay additional employees until some of the payments came in.
2. Large Contracts
When businesses work with large contracts, payment terms are often extended. Particularly when dealing with government or insurance payouts.
A special needs therapy program in NY had much of its funding delayed during recent local shutdowns due to COVID-19. They needed cash to cover one partial payroll so they could pay staff until government funding came in.
3. Delayed Payments
Other times, it’s just due to the nature of the business. Businesses sometimes have a lag between when employees get paid and payments come in. But it’s not like organizations can just change their pay schedule to adjust for each new client they bring on board.
A very large insurance payment was due to come in one day after payroll for a nursing home chain. They borrowed $15,000 to cover payroll partially — and paid it back a day later when the money came through.
4. Seasonality
Finally, fluctuations at the beginning of a new semester or season, or even between seasons, can greatly impact a business’ cash flows for a short period.
A retailer reached out for a loan because he’d emptied his cash reserves on buying triple inventory for the holiday season. His sales peak at the end of December, so he could easily pay it back in two or three weeks.
Let’s Talk
Has your business ever struggled with cash flow right when payroll was due? (Doesn’t it always happen at the worst possible moment?!) If so, you’re not alone. As an SDP client, you can sign up today for pre-approval with our partner PAYRO finance for $20,000 in payroll funding with a max approval of $500,000–for when (and if!) you ever need it.
For more funding tips from PAYRO, check out their guide, How to manage cash flow and avoid loans. And don’t forget to follow us on Facebook, Twitter, and LinkedIn for even more business tips & news!
Photo by Tim Douglas from Pexels