- Employers are required by law to pay their employees, but unexpected circumstances may leave you with too little cash to make payroll
- Communicating the situation is essential, after which you can pursue one of several potential solutions
- An inability to meet payroll may be a warning sign that you need to make changes to your business strategy
Your employees are an essential part of your business, and are crucial for completing the work necessary for the company to succeed. So it can be extremely stressful to discover that you don’t have enough cash on hand to meet payroll. Not only is this situation a sign that your company is struggling to make ends meet, but it also puts the workers you’ve entrusted to support your venture in a more difficult situation.
Cash shortages can occur for many reasons, including the departure of a major client or an overall slowdown in the economy. However, employers are still required under the Fair Labor Standards Act to pay their workers as promised; if the shortfall is dire enough, an employer may need to make staffing cuts to continue meeting the payroll of the remaining workforce.
Employers will naturally be reluctant to implement layoffs. Thankfully, they have several options available to get them through a challenging financial time.
Communicate the situation
Don’t let the payroll challenge be a surprise to your employees. Be open about the situation, including what steps you’re taking to address it and what your workers should expect.
You should also get in touch with any professional services that assist your business. An accountant or bookkeeper can guide you through potential solutions. Contact your payroll and insurance providers to figure outa plan that lets you move forward and allows your employees to continue receiving benefits.
Look for funding sources
You may be able to find ways to improve revenues or cut expenses in the short term to increase your cash flow enough to meet payroll. Some options include asking suppliers to extend their payment terms, offering discounts to customers who can pay in advance, calling in any money owed by employees, or invoice factoring (where you sell invoices at a discount to a third party).
You might contact your bank to see if they may allow an overdraft on your business’s account, but this strategy may not be advisable if it will result in a considerable fee. Another option is to dip into your business’s emergency account or your own personal funds to help your company through its rough patch.
Consider applying for a bridge loan, business loan, or other financing. However, the time required to process a loan may make it an untenable solution. “Hard money” loans let you acquire funds more quickly, but usually come with onerous terms.
Pay cuts or reduced hours
Instituting temporary pay cuts or reducing hours allows you to keep paying employees without laying off staff. It’s advisable to reduce your own pay as well to show employees that you’re making sacrifices along with them. Once your business recovers, you may want to give out bonuses to offset the lost wages.
Look into programs that can help you respond to payroll challenges. For example, Connecticut’s Shared Work Program lets employers reduce their employees’ hours while the employees are able to collect temporary unemployment benefits.
Revise your business strategy
If you can’t meet payroll for several pay periods, you’ll be forced to cut staff or even declare bankruptcy. The first time you can’t pay your employees should serve as a warning sign that you may need to update your business strategy and improve your cash flow.
Thoroughly review your expenses, payroll, sales, and other financial data to see where you might make improvements. You can also do a market analysis to see where you can improve your operations and put greater focus on building (or rebuilding) your business’s emergency account.