The ability to pay your employees on time is extremely crucial: not only does it make your workplace a far more attractive place for employees, but it also has legal repercussions in many jurisdictions. This is all not to mention that it is an important signal on the health of your business: what kind of message are you sending your investors if they learn you’re not managing to even pay your employees’ salaries on time?
While avoiding salary payments is extremely crucial, it can also be extremely difficult: when you’re a small business strapped for cash with no dedicated financial team, it can be really hard to manage to consistently pay salaries on time. Thankfully, there are some proactive steps you can take to make the process easier, and we’ll go over some of the more prominent and effective ones in this article.
#1 Concrete Salary Payment Figures
The first thing you need to do as an SME (small and medium-sized enterprise) is to come up with concrete figures regarding how much you need to pay out in salaries, bonuses, and contracts each month. Unlike large corporations, salary payments can fluctuate wildly from one month to the next in SMEs. By clearly laying out your operational business expenses (rent, contracts, salaries, etc.) is the first step to managing to regularly make salary payments on time.
Sadly, business accounting can be extremely complex, and there are a lot of things to keep track of. Without competent software or a paystub template, you might create a completely inflexible model that you can’t update as your business evolves and grows.
It is hard to stress this enough, but owners and managers need to do research and choose a proper software or template to keep track of their operational expenses. Once you choose something, your company will likely depend on it for years, and it is really hard and costly to migrate the data once your company grows beyond a certain size. You should keep these factors in mind before making the final decision.
#2 Concrete Cash Flow Figures
How much you need to pay in operational business expenses is one side of the equation, the other side is your business’s cash flow. Most of what we said about your business operational expenses applies to your company’s cash flow as well:
- Cash flow can be highly variable in SMEs. It is very important to be very accurate in accounting to properly assess your business’ health.
- Cash flow can come from a lot of irregular sources when you’re an SME, so it is important to have a system that properly accounts for all the sources, validates and cross-references the data, and does the heavy lifting for you.
After properly assessing your cash flow figures, you’ll be able to tell just how capable you’re of paying your employees on time. The fluctuation in both your cash flow figures and operational expenses figures allow you to determine how much cash your company needs to hold as a buffer.
#3 Re-examine Your Contracts & Readjust Payment Agreements
One of the major reasons why late payments are a problem is the legal complications. Under typical circumstances, you might get sued if you’re consistently late on your payments. This is a major risk factor that you need to mitigate.
And, thankfully, one way you can do that is by re-examining your contracts and renegotiating them to be on terms more favorable to your business’s particular circumstances:
- You can negotiate contracts that give you more flexibility regarding the acceptable window of payment.
- You can negotiate contracts that make payments more sporadic, which makes planning for them easier.
- You can negotiate contracts that allow you to pay for specific tasks instead of hourly-basis. This helps your company only pay for the specific tasks it needs during a specific month.
These are just three examples. There are thousands of ways you can renegotiate contracts. What you need to do depends on your company’s financial situation, income statements, cash flows, and operational costs. There’s no specific one-size-fits-all specification regarding how a company should approach its contracts.
#4 Seek Outside “Help”
When you are a startup, a lone entrepreneur, or a small business owner, you learn to rely on yourself for everything: many business owners supply both the capital and the labor required to start up the business entirely on their own. This is understandable: when you are starting, you need a self-reliant mindset to survive. Most banks won’t extend enough credit to your business. Investors won’t touch your venture because they deem it “untested” or “too risky”. You can only rely on yourself to not only make your business survive but also grow and thrive.
But as your business slowly grows and gets bigger, things slowly start to change. You realize that not only is it more effective to delegate some tasks but that your business has the cash flow to do it. You might even start hiring a permanent employee or two. Before you know it, your company is now much larger.
But, sadly, despite the company’s newfound success and larger size, a lot of owners remain stuck in their old ‘self-reliant’ mindset during this stage using as little outside help as possible. This has to change. When you’re in a position to worry about timely salary payments, your company has already reached a critical mass. You’ll find many outside investors that will be interested in what your company has to offer. You now actually have some business collateral, and banks could extend credit to you.
Whether you decide to loan money from a bank or sell shares of your company to investors, it is largely irrelevant. What’s relevant is for you to know you have the option to do both. And if you find yourself strapped for cash being unable to pay salaries on time, you should explore both options and see if you find a suitable offer. Don’t hesitate to seek outside ‘help’.