Making payroll every two weeks can be a challenge if you’re using the money from one paycheck to pay off debt. But what happens if you’re having trouble making payroll? Maybe you’re still trying to pay off a loan for inventory that won’t last longer than the season. Maybe you’ve got an outsized mortgage payment for that new one-room building you just bought. Or a cash advance could start pulling money from the account before invoices have been collected. Either way, the result is the same: the debt gets paid first, and there isn’t enough left for the people who work for you.
A business that misses payroll breaks a fundamental promise to its team. Employees depend on that money. Their rent, their families, their plans—they all rely on payroll hitting the account on time. But the more serious consequence is that without those workers, there’s no business. Not only that, but without the workers, there’s no way to pay down the debt. No sales, no service, no orders—that means no money flowing in.
When a business misses payroll, it doesn’t just put employees at risk. It can also damage the company’s reputation. If employees are not paid on time, they may start to lose faith in the company and begin looking for other opportunities. If you don’t pay them on time, if you don’t have the money in your bank account, they’re out the door. They won’t wait around for you to get it sorted. Then what? Will you get your best people back? Without paychecks, a business’s team can vanish in an instant. Missing payroll can bring legal trouble as well, so act the moment you see the shortfall coming. When it comes to cash management, it’s better to get in front of the problem than behind it.
You Can’t Miss Payroll
Start with what you owe. You might have to choose between keeping your staff and meeting your debts. It’s a tough decision, but if you really value your people, you have to put their needs first. You can delay payments to your vendors for a while, but you can’t miss payroll. Call your lenders and suppliers and ask for longer payment terms. If you end up paying a late fee, what’s the harm? It’s a temporary hurt. Stretched terms and late fees do far less damage than employees who didn’t get paid. And what about the employees? Where does that get you if you pay them last? Good luck keeping your team.
Then turn to the money coming in. You can’t pay your bills with uncollected debt. There’s no money there. Go through your receivables list and see who’s a mess and who’s paying on time. Then make sure you have a system where you’re actively following up on those delinquent customers. You can’t count on your customers to pay on time, so you have to work hard to get every check you’re owed. And don’t extend more credit to customers who are already slow to pay.
Next, look honestly at the payroll itself. Is each person spending their time on work that brings something back to the business, or just filling the hours? Plenty of small companies hire ahead of growth they expect, for a contract or a busy season, and before the project even starts or the season even gets moving, they’re hamstrung. If that new business doesn’t come, if the contract doesn’t get awarded, if the season is slow, they don’t have the cost structure for that reality. New employees who aren’t pulling their weight make the company’s life and budget harder, not easier. Be ruthless. You don’t need to pay someone a full salary to do two days’ worth of work. Reallocating the work can bring payroll back to something you can manage.
Before you accept that you’ll miss a payday, it’s important to make sure all your other avenues are exhausted. If you can swing it, you can get your hands on cash from your family, friends, your own savings or outside financing. Take stock of what the business owns, too. That includes your inventory, old equipment, equipment you don’t use, and any other assets. Be careful with emergency borrowing, though. A borrowed payday won’t solve your business issues – it’s only kicking the can down the road. Money raised at the last minute tends to come with steep penalties and high interest, and if debt payments are what put you here, more expensive debt can make the next payroll even harder.
One place not to look for cash is the payroll tax payment. So, if you’re struggling, cut expenses. Do not tap into your payroll taxes. Delayed tax payments bring penalties, and those penalties eat into the money you need for the next payroll. If you use a payroll provider, talk to them early and see what options they can offer you.
If none of that closes the gap, tell your people. Communicate the situation as soon as possible – and act on it. There’s no reason to leave your people in the dark. They will find out, and it won’t be good for morale if they do. You’re going to have to deal with their disappointment and maybe even anger, and the last thing you want to do is make it worse. So if you know payroll isn’t going to get done on time, you should just be up-front and tell the team. It’s important to be completely clear about why there’s a problem, and what you’re going to do to solve it. Keep them updated as the plan moves along, and understand if some of them start looking for other work; that’s their right. The worst-case scenario is a significant delay with no communication from management about when the employees will be paid.
Plan Ahead
Once you’re through this payroll, ask yourself one question: What will you do differently so that you never get in a position like that again? Start with a reserve. It’s your safety net. Get on autopilot. Automatically transfer a fixed amount from your main checking account to your reserve account every month. At first, your buffer won’t be big enough, and the transfers will have to be small. Don’t try to save up all the cash you want right away. Next, set up a line of credit to cover unexpected costs. Use it only in a real emergency. This isn’t a green light to spend more. Know what it takes to cover your payroll for a month. Then keep that money in a separate account, away from the one your loan payments come out of.
A business that can’t pay its people won’t stay open long. A last-minute scramble for cash, with no assurance that things will turn around, is avoidable if the business has a solid strategy in place. Your people are the heart of your company. Plan ahead, have more than one fallback, and when the debt payments start crowding out wages, deal with the debt before it deals with your team. It’s not just your livelihood, it’s their livelihood.
