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How to Make Payroll When Times Are Tough

Chris Porteous
Chris Porteous
Co-founder and CEO at Framestr

Companies have options on how to meet payroll obligations when times are tough.

The pandemic led to economic decline in specific sectors of the economy worse than others, but small businesses took most of the hit. CNBC mentions that YELP data shows closures of up to 60% of small companies. For those that remain in operation, there may be some bleak times ahead. Even if they do manage to resume their operations, business owners will be hard-pressed to meet their payroll obligations.

In unstable economic times like these, a business is faced with difficult choices. With no income coming in for at least a few months after operation resumes, business owners need to start getting creative. Establishing fallback lines of revenue may not be possible in such a crippled economy, so businesses will need to look elsewhere for other funding sources. In this article, we'll delve into the options that companies have to help them make payroll during tough economic times.

Notify your employees

Workers typically plan on collecting paychecks at the end of the month. Some of them manage to have savings in case you're a bit late in paying them. However, it's bad faith to wait until the last week before payday to inform them that you can't pay them that month. Typically, small business owners don't engage their staff and tell them that they can't make payroll because they're ashamed of what the employee would say.

Ideally, if you're telling your employees about the upcoming lack of payment, you should use a top-down approach. In each department, there's typically a point-person that you can disseminate information to. It would be best if you told each employee yourself, and in smaller companies, this might be a proper approach. However, in larger businesses, this just isn't the case. Employers have to rely on the most experienced workers to deal with others. Some employers can even allow their workers time off as the business winds up to look for other employment.

Find alternative financing

If you can't make your payroll, you'll need some desperate action to make sure your business doesn't close down. Immediately, the business can start liquidating assets. Anything that the company owns that it doesn't need immediately can be sold to get money to pay off employees. This liquidation does have the side effect of putting the business down some assets, but the positive side is that it can ensure that employees stick around within the company. If you're not seeing income over a few months, however, you'll have to find some other way of getting the money to remain afloat.

Hard business loans are an option you can explore. Typically, if a business cannot meet the requirements for a regular business loan, they have the option of taking out a hard business loan. They use real estate as collateral and have high interest rates and fees. Businesses can look at these loans to tide them over, but they're best left as a last resort if there are no other options for financing the payroll.

Business owners can also leverage their own personal savings. In such a case, they're banking everything they've made and own to support their employees and their business. This choice isn't appealing to some business owners, but to others, who see their staff as family, it may be among the first considerations before resorting to layoffs.

Use available resources

If your business is product-based, you may have inventory that you can liquidate in a pinch. However, this also means that the business's ability to profit will be severely hampered depending on how much of its stock is liquidated. Alternatively, if the business has outstanding payments, it can contact debtors and ask them for a cash repayment. When a company does this, it would need to sweeten the deal. Several businesses offer reduced cash payments for immediate income that it can spend on its payroll obligations. Your overhead money will be lost, but you'll pay your employees. Both of these options are viable if you're running short on cash for your payroll.

Don't stagger your payroll

In tip-based businesses, employers might be able to ask employees to stagger cashing their checks or hold off on paying a salary because tips can cover much of employee expenses. Asking for the staggering of the payroll sets yourself up for future disappointment. Employees usually become disgruntled when they don't get paid on time, even if they get tipped to make up the difference. There's a way to avoid staggering the payroll, but it involves having the top-paid employees on board.

The income the company makes might be enough to pay for lower-level employees. Upper-level staff might be willing to live off their savings for a month, and you may have to give up your own paycheck just so that those lower down the hierarchy can get paid. Using this methodology can help to develop solidarity among the staff, rather than resentment. It's important to consult employees at the top before making this decision since it'll be partially their decision not to be paid as well.

Restructure the company

If you've reopened and found that you're not making as much as you used to before the lockdown, you may need to do some company restructuring. Companies often spend a lot of time trying to figure out how they can slice expenses to make the business profitable. Unfortunately, cutting makes the enterprise less manageable and more challenging to recover. Restructuring takes a hard look at what the company can do without and removing those things from the equation.

Permanently altering the business structure allows the company to deal with expenses more effectively. It also removes parts of the business that serve no purpose or are too much of a drain on incoming resources. Business owners may need to take up the slack and work alongside their staff to avoid paying extra employees. In this scenario, the business owner needs to make it clear that their presence ensures the health of the business. Employees shouldn't see this as a chance to give up some of their responsibilities. Business owners should show appreciation to their workers during these challenging times. Something as small as filling up a tank of gas or a free meal goes a long way towards inspiring loyalty.

Business owners are in the unenviable position of trying to meet payroll in an uncertain economy. With fewer people wanting to come out and do business, there are options that companies can explore that moves most of their processes online. There's still the thought of doing your best for the employees. Restaurants and other service-based industries still need to pay waiting staff if they open their doors. Even if they don't, those staff should get a minimum payment for being furloughed until the pandemic blows over. As it stands, it's still uncertain what will happen in the coming months. Employers need to take care to protect their most valuable asset, their workers.

Image Credit: AndreyPopov/Getty Images
Chris Porteous
Chris Porteous
business.com Member
I'm a serial entrepreneur and owner of three internet ventures, including My SEO Sucks. A contributor to ZeroHedge, Entrepreneur.com, Forbes, Inc.com, and dozens of other media outlets, I believe in SEO as a product. I developed a proprietary technology fueling the #1 rankings of My SEO Sucks clients. In guest speaking ventures across North American, I advocate for organic search traffic as the backbone of any comprehensive digital marketing strategy.