Struggling to Pay Employees? 6 Tips that Will Help You Make Payroll On-Time

The first sign that any business is in trouble often comes in the form of missed or late payroll. But missing payroll doesn’t always spell doom. In small business, cash flow is king and it can be quickly compromised by late receivables from tardy customers, seasonal lows, and of course, a general economic downturn.

However, excuses aside, not paying your employees and associated payroll and employment taxes should be avoided at all costs. Here’s why:

• Unpaid employees can file a wage claim against you with their state.
• If your business is unable to pay its quarterly payroll taxes and is still operational you can incur hefty fines and penalties from the IRS.
• If you can’t meet minimum wage, the Department of Labor may impose penalties for violation of the Fair Labor Standards Act (FLSA). FLSA requires that “an employer must pay covered non-exempt employees the full minimum wage and any statutory overtime” each work week.

But what are your options? If cash flow is tight or your ability to meet payroll is completely compromised, how can you quickly act to ensure that you are able to pay your employees promptly and make sure you don’t get in this hole again?

Here are some suggestions that can help you pay employees on time today and in the future:

Collect Receivables

The quickest way to access cash is to expedite the collection of receivables or late payments. If you are chasing unpaid bills, focus on these as a priority. For tips on how to do this, read Getting your Customers to Pay-Up: Tips for Collecting from Non-Paying Clients. If that’s not enough, give customers on extended payment terms an incentive to pay you ASAP by offering a 25 percent or higher discount for payments wired immediately. 

Use All Available Resources

What assets or lines of credit do you have that will give you quick access to cash? Can you liquidate high value inventory? Do you have a sufficient line of credit on your business card to tide you over once your cash flow issue is resolved? What about personal savings or investments?

Cut your Salaries Strategically

You may think that employees would find it acceptable if, at the very least, you paid a portion of their paycheck. Before you take this step, talk to a lawyer, since the legalities of payroll vary by state and your good intentions may get you into hot water. Instead, cut your salary first. If this isn’t enough, seek the confidence of your highest paid managers and ask them if they will forgo their salary for a few days so that lower-paid workers will be paid on-time.

Borrow Funds

While it’s unlikely that you will be able to get approval on a business loan in time to make your payroll commitments, could you borrow from family or friends? In extreme cases, hard lenders or payday loans might be an option if you have the confidence that you can repay against their extremely high interest rates.  

When You Can’t Pay Your Employees – Be Sure to Communicate the Fact

So many small businesses close their doors and leave employees hanging in the lurch with no idea whether they will receive their last pay check. If you are unable to make your next payroll or need to delay it by a few days, being honest and sharing this knowledge with your employees is often the best policy.  

Communicate the bad news to your senior management team first and present a plan for addressing your finance issues. Then communicate top-down to your employees and give everyone an opportunity to digest the news and ask questions in the presence of their line managers.

Being the bearer of bad news isn’t easy and it will no doubt create anxiety and cause some employees to seek employment elsewhere. But keeping your problems secret only puts off the inevitable.

Make Sure it Doesn’t Happen Again

If you’ve survived this hurdle without losing employees or your business, you’ll need to take several steps to ensure this doesn’t happen again. Consider the following:

• Reduce your operating expenses.  Minimize unnecessary outgoings (rent, utilities, wages, etc.).
• Review your pricing policies. You may be undercharging and missing an opportunity to boost your cash flow, and, consequently, your profits.
• Review your collections policies so you get paid on time.
• Reduce employee hours or furlough employees.
• Free up cash flow with a revolving line of credit (RLC). An RLC is a flexible method of borrowing cash for your small business. It is very similar to a credit card in the sense that an RLC has an established credit limit that you can borrow up to, only without a plastic card. Read more about The Basics of Revolving Lines of Credit.

Related Blogs

• What to Do When a Customer Won’t Pay
• Six Tips for Rewarding Employees When Cash is Tight
• Getting your Customers to Pay-Up: Tips for Protecting Yourself from Non-Paying Clients

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley