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Grow Your Business Finances

What Happens if You Can't Make Payroll

Tips for Making Payroll
Credit: Shooting Star Studio/Shutterstock

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, it's important to foster a positive work environment and ensure your employees are fairly compensated for their work.

It follows, then, that 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 be facing legal trouble.

"Small employers need to be looking several moves ahead before this problem is looming," said Susan Hosage, executive coach 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 may have a cash flow problem, there are some steps to take to pay your employees.

Business owners need to track and understand their cash flow for a business to stay successful. Part of cash flow is knowing who you owe money to and who owes you money. Hosage recommends evaluating your account payables, because extended payment terms or paying late fees have less harmful consequences than failing to pay employees.

Business owners should also look at account receivables. "Ensure you're staying on top of your account receivables," Hosage added. "The quickest way to run out of money is by failing to collect payments that are due or overextending credit to customers." 

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. But if that business doesn't materialize, owners don't have the money to keep up with the salaries. Hosage recommends reallocating work to ensure payroll is manageable.

Before you accept defeat and miss payroll, look at every source available. Take inventory of your equipment, 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 founder of Lendio.

If you can't come up with the cash, be honest with your employees.

"Be 100 percent honest and tell them that you are working to remedy the situation as soon as possible," said Mark Mandula, CMO at United Capital Funding. "Get a plan and then communicate with them along the way."

Blake agrees. "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," he added.

Here are other tips for making payroll.

  1. Plan: "Plan ahead and always work to maintain a reserve or rainy day fund," Mandula said. "Also consider setting up a line of credit that you would only use in emergency situations."
  2. Communicate with your provider: "If you can't make payroll, communicate with your payroll provider and see what options they might be able to provide you," Mandula added.
  3. Use a payroll service: There are many payroll services available that make it easier to meet payroll. These services can automatically calculate what each employee should be paid, which makes planning for payroll easier.
  4. Apply for a loan: If you're short on money, you have a few options until the cash comes in, such as applying for a loan, applying for a line of credit, delaying payments to vendors and liquidating assets.
Saige Driver

Saige received her Bachelor’s degree in Journalism and Telecommunications from Ball State University. She is the social media strategist for Business.com and Business News Daily. She also writes reviews and articles about social media. She loves reading and her beagle mix, Millie.