What happens if you can’t make payroll?
Cash flow management is a delicate art, especially for small businesses. For any company, large or small, the ability to predictably manage money is essential. At the center of it all is payroll. Your business’ accounting orbit has many moving parts.
There’s always a risk that cash will leave a company’s bank account faster than it gets deposited. Companies of all sizes have the potential to lapse on payroll for this reason. Very few organizations have the financial resources to preserve deep pockets.
So, what happens if you can’t make payroll? The more lead time you have to explore this question, the more creative you can become in orchestrating a solution. Whatever you do, don’t stress out. You need to be able to think clearly and tactically to find potential solutions. Here are some recommendations to guide you:
Expect to miss payroll, even when you’re stable
One of the biggest reasons why companies miss payroll is that they are unprepared for a downturn—it’s impossible to fully prepare for everything that could go wrong with your business. What if a key member of a company is in an accident? What happens if a teammate quits?
In business, there are so many variables that you can’t control. As a leader and business owner, you need to confront these challenges in the eye and understand that you are brave enough to face them. If you’re facing a financial emergency, business stress has the potential to become overwhelming and destabilizing.
As Stoic philosophers say, if you expect the worst—whether or not the worst actually happens—you’ll be ready to confront it.
“With anticipation, we have time to raise defenses, or even avoid them entirely,” writes DailyStoic.com, in an article about Stoic practices applied to business. “We’re ready to be driven off course because we’ve plotted a way back. We can resist going to pieces if things didn’t go as planned. With anticipation, we can endure.”
Let’s say that you don’t have a backup plan by the time you’re reading this article. You can still take steps to stabilize your operations and remedy the consequences. Here are some steps that you can take:
If you can’t make payroll, follow these steps
Here are some ideas for steps you can take to increase your cash supply and avoid lapsing on payroll altogether:
1.Ask your vendors for longer payment terms. Humans are the heart of business, and if you explain your situation to a fellow finance team lead, he or she is likely to understand. Being forthcoming reinforces your trustworthiness. Be transparent about solutions, and provide a due date if you are able to pinpoint one.
2.If you’re onboarding new customers, offer a discount for prepaying services. Explain to your customers that you are using funds to make improvements in your business. Your customers will appreciate both the positive discussion and financial benefit.
3.Consider financing your invoices. Invoice financing, also known as “accounts receivable financing” or “invoice factoring,” is one resource in a business owner’s credit portfolio. You use your invoices as collateral for cash. That means you can collect invoices immediately rather than waiting 30, 60 or sometimes 90 days for your customers to pay you. This provides a great solution to cash flow problems. Be prepared to pay a high interest rate and ask your customers to sign a contract. You can learn more about the process of obtaining invoice financing in this article, here.
4.Ask your bank for an overdraw. This option may not be possible for retail banks that serve smaller customers, for instance.
5.Talk to your investors. If you work with a venture fund, board of advisors or network of angel investors, explain your situation. These individuals care about the success of your business, and good partners will have your back. They may be able to provide a bridge loan or financing to help you through your crunch. Smart investors know that short-term challenges have the potential to come up.
6.Get creative in your payroll processing and how you deal with payroll taxes. For instance, it may make financial sense for you to process an individual’s payroll on a different day each week.
7.If the situation appears to be persistent, you may need to layoff some employees. If this is the case, make sure to be as supportive as possible. Explain why you’ve needed to terminate the position, and ensure that the individual knows that he or she will be eligible for rehire.
If there’s no way to avoid making payroll
8.Talk to the entities involved in your payroll. If you work with an outsourced payroll provider, for instance, be sure to communicate that your business is experiencing challenges due to lack of funds. Talk to your health insurance carriers to guarantee that your employees will keep their coverage and plans. Work with your network of partners to create a move-forward plan.
9.Explain to your team that they are not going to get paid. Be transparent about the reason why. Offer a solution. Be a human being, and offer the option to talk to people 1:1. If you can, provide the option to take time off. Keep in mind that many people live paycheck to paycheck. The consequences of missing a payday can be devastating. Continued missed payrolls have the potential to hurt your company by disrupting morale and making your company a target for lawsuits.
10.Make up for the lapse in payroll to your teammates at a later date. As soon as you are able, offer bonuses, raises and other tangible forms of acknowledgement for the support that your team offered.
11.In the worst-case scenario, if your business begins to demonstrate the beginning of a decline, you can begin to explore other sources of funding, such as applying for one of many business loans or seeking grants. Keep in mind, however, that fundraising is a long-term process, and you may need to step back from your operations to recover from a decline.
Avoid the stress
Don’t attempt handle this tough situation alone. Payroll has the potential to get complicated, and there are experts who specialize in processing services and strategic financial services. Seek out these professionals to help you understand fines, penalties and other repercussions.Depending on the health of your business, these numbers may be insignificant to your long-term financial trajectory.
Act as quickly as you realize the depth and extent of your problem. Payroll hiccups are a common source of woe for small business owners—and are also resolvable.
With the right attitude, strategy and support system, you’ll get through it. Remember that many small business owners have been exactly where you are—and have made it to the other side.