How to Address the Problem of Not Making Payroll

Ask any business owner what their most valuable resource is, and there’s a good chance you’ll hear that it’s their employees. No matter the industry and no matter how large or small your company, you rely on the people who work for you to keep things going. That’s why one of the most frightening things for an entrepreneur to realize is that there isn’t enough money in their account to make payroll.

Not being able to cover your employees’ paychecks is a nightmare for you and for them. Just like you, they have bills to pay, but the difference is that they are relying on the compensation that you provide to care for, feed, and shelter themselves and their families.

Whether your cash flow problem is a result of poor management, overdue accounts receivables, a seasonal dip in revenue or anything else, it doesn’t matter to them — they have the right to expect payment for their service to you.

It’s More Than Disappointing: Possible Legal Issues

When you fail to pay your employees, you’re doing far more than disappointing them. You’re also running the risk of facing legal action. That’s because employees who haven’t received the compensation that they’re owed have the right to file a state wage claim against your company with their local wage and hour district office. If your employees are non-exempt and you’re not paying them the minimum wage or overtime, you could be penalized by the Department of Labor for violation of  the Fair Labor Standards Act (FLSA). And of course, if your cash shortfall means that you’re behind on your quarterly payroll taxes, then you could also be in trouble with the IRS.

Quick Ways to Address Your Cash

It’s hard to say whether the potential legal problems you face present more of a problem than having unhappy employees who lose faith in you. The latter poses the possibility of them failing to give you their best — and some may not even show up. Coming up with the cash that you need to make payroll has to be a top priority. Here are some proven methods for turning your situation around.

• Shore up your collection efforts. It’s never a pleasant task to contact clients who are behind in their payments, but you can’t let their delinquency impact your ability to keep your business operating and your employees paid. If you’re having a hard time getting traction, try offering an incentive of a discount for immediate payment. For those who agree to make a payment, ask for the money to be wired to you so that you get it quickly and don’t run into a “check’s in the mail” situation.

• Contact your clients who are not behind and offer them a discount for paying immediately. 

• Monetize the monies you’re owed. You can take advantage of one of the many services that will purchase your accounts receivable. You’ll end up losing some of your revenue to the percentage you have to pay the service, but you’ll have the cash you need to take care of your payroll obligation. 

• Use your line of credit. At some point in your business’ history, you may have established a line of credit. Take advantage of the availability of those funds.

• Call on your personal resources. It’s hard to ask friends and family for help, but it will be harder to watch your business fall apart, or know that you’re responsible for a shortfall to your employees. Asking those closest to you for temporary assistance is likely to get a much faster response than applying for and getting approved for a traditional line or a line of credit. Make sure that you put the terms of the loan in writing and then be diligent about paying it back.

• Investigate other types of funding. In addition to traditional loans and lines of credit, there are other ways of raising funds, including cash advances against future sales and loans for small amounts from microlenders.

• Monetize your inventory. Plenty of businesses fail to recognize that they have the equivalent of cash sitting in their warehouses in the form of surplus inventory. Instead of pursuing your normal sales process, place your inventory on websites such as Amazon or Ebay. Liquidation companies are also good alternatives for getting an infusion of cash from existing assets.

• Consider slowing your payments to the vendors from whom you purchase. If you have established a good reputation with your suppliers by paying in a timely way, then there’s a good chance that they will allow you to delay their payments in the short term to give you time to get your feet back under you. The key is to contact them and ask for this forbearance rather than simply discontinuing your payments.

If None of This Helps…

The ideas provided here have proven successful for many organizations that have found themselves in the same position that you are now. Unfortunately, they don’t always work. If you find yourself with no place to turn, consider the following suggestions:

• Be honest and upfront with your employees. Don’t keep your shortfall a secret from them. The more notice that you give them of your difficulties, the more opportunity you give them to address the repercussions on their own lives. At the same time that you tell them, assure them that you are doing everything you can to find an answer and remedy the situation.
• Make sure that the pain that you’re inflicting is pain that you share. If you’re asking your employees to forego receiving a paycheck, make sure that you’re taking a pay cut yourself. The same is true for your management team. You will go a long way towards acceptance from your lower level employees if they see that everybody is sharing the pain.

• If you don’t see an end to this problem, don’t make it worse by keeping staff working. Though this won’t eliminate the money that you owe them, laying people off or cutting their hours will keep you from making the situation worse for yourself and for them.

Employees being paid for an honest day’s work is the backbone of business. Make sure that you do everything that you can to maintain your ability to do that.

Frank Jenkins, CPA writes for CountingWorks, an accounting news and advice website. Reach him at [email protected].

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All Articles by Frank Jenkins Jr