In most businesses, the biggest uses of cash are payroll, inventory and debt service. Many businesses struggle every pay cycle to meet the cash needs of payroll. Sometimes this is because the business has more expenses than revenue. That’s a “going concern” problem and not a cash flow problem. However, if you are bringing in enough revenues to meet your expenses but still find it hard to make payroll, these hacks may help.
Before we get to the hacks, if you have issues with your sales and cash receipts cycle, this is your top priority! Solving issues such as late paying customers, delayed billing work flows or having one big customer tying up all your cash will probably help you a lot more than these hacks.
Also, the hacks below are very dependent upon your cash receipts cycle. For example, if you receive all of your cash from sales between the 1st and 10th of the month, setting a pay date of the last day of the month is not good. That’s probably when you have the least amount of cash.
- Consider paying employees weekly if your cash inflows are about the same each week. Blake Oliver has a great blog post about this, “Why You Should Pay Your Employees Every Week.”
- If you pay employees biweekly, consider paying half of your workforce in one week and the other half in the next week. You are paying half of your workforce every week, but employees are still being paid biweekly.
- If the 941 monthly payroll tax due on the 15th is a hardship, pay these taxes on the same day that you pay employees.
- Running payroll through a separate bank account than your operating expenses is a common hack. However, if these bank accounts are at the same bank, it’s too easy to transfer money between the accounts. If keeping payroll funds in a separate bank account helps you, keep the payroll and operating accounts at different banks.
- Paying employees biweekly when your cash receipts cycle is monthly may cause you a hardship in the two instances in the year when there is a third payroll in the month. If this is the case, consider paying employees on the 15th and last day of the month.
- If quarterly or annual bonuses are a hardship, consider paying them more often.
- Prioritize your vendor bills and do not pay non-urgent bills until you have saved enough for payroll.
- Create a cash flow planner just for payroll. First, map out payroll cash needs and timing. Then look at your expected cash receipts and earmark enough to cover payroll. When the earmarked funds are received, you’ll know exactly what to do – save them! This prevents you from using cash for a non-urgent item thinking you’ll somehow find funds for payroll.
- If you are a seasonal business, pay your fixed-salary, management employees a lower amount during off-season and a higher amount during peak-season. All their payments during the year will equal their agreed-upon annual salary.
- As a last resort, open up a line of credit to cover payroll shortfalls. If you do this, make a promise to yourself that you will never use it to pay vendors or other operating expenses. Before you use the line of credit, make a specific plan of how you are going to pay back the line before the next payroll. If you have to go into the line of credit to pay for inventory or operating expenses or you cannot pay it off before the next payroll, then you have serious cash flow and/or going concern issues that need to be addressed.
To help employees adjust to a change in the pay day schedule, consider implementing the suggestions below.
- Speed up your bonus schedule. If you usually pay only annual bonuses, try paying them monthly or quarterly.
- Speed up reimbursements. If you reimburse employees for mileage or travel only through payroll, consider paying them cash or check as soon as they present their expense reports.
- Offer short-term cash advances for the first three months of the new pay schedule.
If all fails and you cannot make payroll, this blog post has great help and advice, “What to Do if You Can’t Make Payroll.”