What Happens If You Can't Make Payroll?

• Small businesses should avoid payroll mishaps because it can adversely affect business.
• To avoid missing payroll, keep track of where your money is being spent, pool all of your resources and, if all else fails, be honest with your employees about the situation.
• If you need some extra help to make payroll, use a payroll service, apply for a business loan or invest in a payroll tax service.

Your employees are one of your business's most valuable assets; without them, you wouldn't be able to provide services or products. As a small business owner, it's important to foster a positive work environment and ensure your employees are fairly compensated for their work.

As such, you should avoid missing payroll at all costs. If you miss it, not only will your employees look for job opportunities elsewhere, but you could face legal trouble.

"Small employers need to be looking several moves ahead before this problem is looming," said Susan Hosage, executive coach at OneSource HR Solutions. "The sooner a business owner recognizes that they are running low on cash, the more [they] can do to avoid this issue."

Once you realize you may have a cash flow problem, follow these steps to pay your employees.

1. Evaluate accounts payable and accounts receivable.

You need to track and understand your cash flow to stay successful. Part of cash flow is knowing whom you owe and who owes you. Hosage recommended evaluating your accounts payable because extending payment terms and paying late fees have less-harmful consequences than failing to pay employees.

In addition, stay on top of your accounts receivable, Hosage said. "The quickest way to run out of money is by failing to collect payments that are due or overextending credit to customers," she added. 

2. Assess your employees, and control hiring.

When you're short on cash, you need to evaluate where your money is going, and that includes the employees you are paying.

"Evaluate whether they are spending time on work that positively contributes to the business or are simply filling their time with work that doesn't have a return," Hosage said.

Some small businesses overhire in anticipation of new business. But if that business doesn't materialize, owners don't have the money to keep up with the salaries. Hosage recommended reallocating work to ensure payroll is manageable.

3. Look at every source available.

Before you accept defeat and miss payroll, look at every source available. Take inventory of your equipment and employees, and ask loved ones for help.

"When faced with the reality of not being able to make payroll, a small business owner has no choice but to turn to every source possible: family, savings, financing or liquidating assets," said Brock Blake, CEO and founder of Lendio.

4. Be honest with employees.

If you can't come up with the cash, be honest with your employees.

"Be 100% honest and tell them that you are working to remedy the situation as soon as possible," said Mark Mandula, chief marketing officer at United Capital Funding. "Get a plan, and then communicate with them along the way."

Blake agreed. "It's crucial to inform your employees as soon as you're aware of the cash shortage, and give them the freedom and understanding to look for new employment." 

Tips for making payroll

Of course, it's even better not to miss payroll in the first place. Here are some tips for making sure missed payroll doesn't become a problem:

1. Plan. "Plan ahead, and always work to maintain a reserve or rainy day fund," Mandula said. "Also consider setting up a line of credit that you would only use in emergency situations."
   
   
2. Communicate with your provider. "If you can't make payroll, communicate with your payroll provider and see what options they might be able to provide you," Mandula added.
   
   
3. Use a payroll service. There are many payroll services that make it easier to meet payroll. These services can automatically calculate what each employee should be paid, which makes it easier to plan for payroll.
   
   
4. Apply for a loan. If you're short on money, you have a few options until the cash comes in, such as applying for a loan, applying for a line of credit, delaying payments to vendors and liquidating assets.
   
   
5. Invest in a payroll tax manager. Rather than handling payroll personally, invest in a payroll tax manager who can help you stay on track. Hiring a professional ensures that your payroll will be processed more efficiently.
   
   
6. Switch to a monthly pay schedule. This makes the payroll process much easier and can reduce the amount of time and resources spent on payroll.
   
   
7. Set up direct transfers or payroll taxes. Typically, payroll tax payments are transferred from your company account directly to a government account. If not, know that delaying tax payments results in penalties. These penalties can be quite costly and hurt your ability to meet payroll.
   
   
8. Create a separate account for payroll. This method is especially helpful for smaller companies; it's vital to set aside money to pay your employees.
   
   
9. Plan for employee benefits. To keep your employees for the long term, you will likely want to offer benefits. Nevertheless, these benefits can be costly and disrupt your ability to make payroll. By setting funds aside and planning how you will provide these employee benefits over time, however, you will avoid these issues.