When a business misses payroll, it endangers the relationship between the company and its employees. The business likely can’t function without its employees’ labor. Inability to make payroll can also damage a business’s reputation. Here’s how businesses can avoid this serious problem and what they should do if it happens.
Your employees are one of your business’s most valuable assets; without them, you wouldn’t be able to provide services or products. As a small business owner, you need to foster a positive work environment and ensure your employees are fairly compensated for their work.
As such, you should avoid missing payroll at all costs. If you miss it, not only will your employees look for job opportunities elsewhere, but you could also face legal trouble.
“Small employers need to be looking several moves ahead before this problem is looming,” said Susan Hosage, senior consultant at OneSource HR Solutions. “The sooner a business owner recognizes that they are running low on cash, the more [they] can do to avoid this issue.”
Once you realize you have a cash flow problem, follow these steps to pay your employees.
You need to track and understand your cash flow to stay successful. Part of cash flow is knowing whom you owe and who owes you. Hosage recommended evaluating your accounts payable because extending payment terms and paying late fees have less harmful consequences than failing to pay employees.
In addition, stay on top of your accounts receivable, Hosage said. “The quickest way to run out of money is by failing to collect payments that are due or overextending credit to customers,” she added.
When you’re short on cash, you need to evaluate where your money is going, and that includes the employees you are paying.
“Evaluate whether they are spending time on work that positively contributes to the business or are simply filling their time with work that doesn’t have a return,” Hosage said.
Some small businesses overhire in anticipation of new business. If that business doesn’t materialize, owners won’t have the money to keep up with additional salaries. Hosage recommended reallocating work to ensure payroll is manageable.
Before you accept defeat and miss payroll, look at every source available. Take inventory of your equipment and employees, and ask loved ones for help.
“When faced with the reality of not being able to make payroll, a small business owner has no choice but to turn to every source possible: family, savings, financing or liquidating assets,” said Brock Blake, CEO and co-founder of Lendio.
If you can’t come up with the cash, be honest with your employees.
“Be 100% honest and tell them that you are working to remedy the situation as soon as possible,” said Mark Mandula, senior vice president at United Capital Funding. “Get a plan, and then communicate with them along the way.”
Blake agreed. “It’s crucial to inform your employees as soon as you’re aware of the cash shortage, and give them the freedom and understanding to look for new employment.”
Of course, it’s best not to miss payroll in the first place. Here are some tips for making sure missed payroll doesn’t become a recurring problem:
Businesses that can’t make payroll won’t stay open for long. Last-minute efforts to pay employees in full and on time can result in steep penalties, high interest payments and other problems. The best way to get employees paid is to plan ahead and have one or more contingency plans.
Additional reporting by Alex Halperin.