What to Do When You Can’t Make Payroll

Payroll is one of your most significant business expenses and one of the first things you struggle to pay during cash flow dips. You may need help paying employee payroll for several reasons, like unpaid client invoices or spikes in costs for the materials you need to run your company. Businesses can also struggle with payroll when they are low on staff and must cut operating hours.

The best solution for making payroll is to keep a careful record of your business expenses to avoid situations where you can’t pay. On pay periods when this strategy doesn’t work, you can consider more extensive measures.

How to Stay on Top of Payroll

Maintaining consistent employee pay begins with managing your finances. This strategy allows you to plan for weeks or months when your funds might be tighter than usual. When you know in advance, you have more time to develop a plan to get the money you need. There are several strategies you can use to manage your finances.

Calculate Important Business Metrics

Business metrics are numbers you can use to track and monitor business processes. By comparing metrics to previous measurements, you can determine where your business stands and whether you are on track to meet particular goals. For employee payroll, the most critical metrics relate to your finances. Here are a few you should monitor:

• Day sales outstanding (DSO): This number represents the average days your business must wait to receive payment after making a sale. A high DSO means you may need to change your money collection methods.
• Accounts receivable turnover: Like the previous metric, this measurement relates to your receivables. It measures how often you convert receivables into cash. To determine your ratio, divide your net credit sales by your average accounts receivable.
• Net income and profit: Net income measures your total money earned, and profit is your earnings after paying expenses.

How To Use the Accounts Receivables (AR) Turnover Ratio Calculator

1. Fill in the sales revenue.
2. Fill in the accounts receivable amount.
3. Press Calculate.

Monitor Your Bank Account

Another way to ensure you have the necessary funds to cover payroll is to monitor your bank account. Each month, determine how much you make and how much you spend. Also, take note of upcoming bills and expenses so you know what you need to pay and whether you will have enough money to cover them.

An accountant can help with this process if you need more time to focus on other business operations. They can alert you about upcoming expenses or low-income months where payroll might be more difficult.

Create a Cash Flow Forecast

While tracking past metrics and monitoring your current financial situation provide information you can use today, what about one month or a year from now? A cash flow forecast predicts your future incoming and outgoing funds, giving you advanced notice of situations where you may need help meeting payroll. Here’s how to set up a cash flow forecast:

1. Decide on the period you want to forecast, usually monthly, and look at data from the last year to predict trends.
2. Estimate your cash inflow from sources like repaid loans, sales of assets or government grants.
3. Estimate expenses like buying assets or paying off a loan.
4. Compile your estimates and deduct or add them to your current bank balance to determine what your funds might be at the beginning of the next period.

Creating this forecast gives you an idea of how monthly cash flows might change and provides advance notice for low funds.

Why Paying Employees on Time Matters

Your employees are vital to your business. Paying them on time and in full demonstrates that you respect their commitment to your organization. Employees trust you to deliver their paychecks so they can afford their expenses. When you consistently pay your employees on time, you build their trust and increase the chances that they will continue to work for your business rather than seek work elsewhere.

The Fair Labor Standards Act also requires timely payroll. Failing to pay your employees according to a promised schedule violates labor laws and could lead to legal trouble, leaving you in an even more difficult situation. You will be required to pay missed payroll plus fines, and you will damage your business’s reputation.

Steps to Take When You Can’t Make Payroll

While tracking your expenses and predicting future cash flow can help you keep money on hand to cover payroll, you may encounter unavoidable situations where you can’t afford to pay employees. In these instances, here are a few steps you can take to support your employees and get the funds you need.

Define Your Payroll Requirements

Your best first step when you can’t make payroll is defining your payroll requirements. Determine how much you owe for payroll and what you can cover without assistance. This calculation leaves you with a specific number you still owe. When seeking funding options, having this number readily available helps you avoid getting more or less than you need to cover the expense.

Keep Employees Informed

As soon as you know you cannot make payroll, you should inform your employees. While this may seem daunting, it is better than facing angry, confused workers who want to know where their paychecks are. When you tell employees early about your struggles to meet payroll, they have time to seek alternative funding or even find another job if necessary before they need to pay their expenses.

When telling your employees, you can reassure them by outlining the alternatives you plan to take to ensure they get paid. Let them know how long these measures might take so they know when to expect their wages. Keeping your employees informed helps maintain positive relationships. Your team members will see that you care and are more likely to remain with your business through the difficult financial situation.

Consider Asset Liquidation

After determining how much you owe and informing your employees about the situation, your next step is to find funds to cover payroll expenses. Asset liquidation is an excellent place to begin. This process involves selling your assets to get cash, and though it is commonly tied to businesses ending operations, you can also perform liquidation without disrupting your core business. Salable assets may include:

• Raw materials
• Manufacturing supplies
• Existing inventory
• Office equipment
• Technology
• Machinery or vehicles

When liquidating assets, ensure that you can still operate without whatever you sell. In most cases, it’s best to liquidate only the amount necessary to cover your payroll.

Seek Alternative Funding Options

If liquidating assets isn’t enough, you can seek alternative financing to avoid delayed payroll. You have several options in this category. Which you choose may depend on your particular business. Here is a bit more detail about the three financing options:

• Invoice factoring: Invoice factoring can cover cash flow for companies with many outstanding accounts receivable. This option allows you to access up to 90% of the cash value of pending invoices.
• Line of credit: A line of credit works almost like a credit card. You borrow money from your business equity and pay the money back in the months afterward.
• Short-term loan: With a short-term loan, you borrow money to cover expenses. The only downside is that you often have to pay higher interest rates as you pay it back.

Porter Capital Can Help Finance Your Payroll

Porter Capital has alternative funding to cover your payroll on weeks and months when your cash flow is slower than usual. Our invoice financing services allow you access to large sums to ensure your employees get paid on schedule. With over 30 years in business and many trustworthy lending partners, we are here to provide financing for all the ways you do business. Get in touch today to learn more.