Originally posted on CrowdFundInsider
I was recently asked, “What should a small business owner in a major cash crunch do to make payroll?” Well, honestly, my first response was to say, “Try to not get to that point in the first place.” As the old saying goes, an ounce of prevention is worth a pound of cure and in this case, a lot of dollars too. So before I answer the question, here is my advice on ways to keep such a situation from coming to pass.
All too often, business owners will focus on the monthly financials. Many will even make the wise choice to hire a CPA or full-time bookkeeper to do this. However, a monthly overview showing that a company is profitable can sometimes mask cash flow issues. Instead of relying solely on the financials, make sure you are looking at your cash flow on a weekly, if not daily, basis. This way you can keep on top of upcoming expenses like payroll and know what cash is on hand to cover commitments or what will be coming in at the right time to make sure you are able to meet all of your obligations.
Know when the alarm bells will sound
It is vital to know what your floor is, the level of cash on hand below which you start to worry. Don’t make the floor so low that by the time the klaxons go off, you’re in trouble. Instead, make it a point where you still have time to course correct. Perhaps that means a certain dollar amount in the bank, a point where you have enough to cover a few more payroll cycles, or some other metric that makes sense for your business. By having an early warning in place, you will allow yourself time to determine if there is regular cash coming in to cover your expenses or if it’s time to find alternate sources of capital; financing or friends and family, for example.
Being disciplined in your spending is never a bad idea. Take a look at expenses and see if there are places that can be cut. When finances are tight, frivolous spending needs to be the first thing to go, in order to preserve cash for necessities. Are there things employees are requesting to buy new that can be purchased used, or can they make do with the existing ones until the company’s cash position is better? Are there conferences that can be skipped? Maybe some of the office perks can be scaled down temporarily. Just don’t forget to reinstate when you’re able to or morale will take a hit.
Now that you know my top three tips for avoiding an 11th hour payroll crunch, here is my answer to the question of what to do should you find yourself in such a situation, also in a list of three.
It’s very easy to be consumed with the current crisis and fail to keep a broader perspective. It is imperative for you to take a deep breath and see what the ramifications of possible “solutions” could be. You don’t want to solve your cash crunch in a way that creates another, almost immediate problem. For example, if you take out expensive short-term financing that you are barely able to make payments on, the next payroll period you may find yourself needing another cash infusion. Which means another expensive short-term loan stacked on top of the original. These types of loan products can easily set a business into a crippling debt spiral. Sometimes, there are reasons to secure these types of loans, but for them to make sense, you need to be certain that stacking others on top of it will not become habitual. Do some research and see what other avenues of quick cash are open to you; can you qualify for a line of credit with an alternative lender? Do you have friends and family who can step in and help (knowing that there are definitely repercussions when doing business with loved ones)?
This is not the time to pretend that all is well. Instead, this is the time to be honest with your team. There are many instances of employees agreeing to put off their paychecks when the chips are down. Remember to reward them for their loyalty and flexibility. Perhaps a bonus when cash frees up, lunch every day until that time comes, or a team building activity. Your team may just surprise you with their commitment and heart. A caveat here, make sure you don’t abuse this gift if your team members choose to bestow it. Don’t offer this up unless you are absolutely certain things will turn around in a very short time and you can make good on back pay and the promises you made to your employees.
Know when to throw in the towel
If there is no foreseeing a change in circumstance, it may be time to call it quits. If a business continues to run into cash flow issues and has trouble making payroll repeatedly, there is something wrong. This doesn’t mean you’re not a good entrepreneur or a good person. It simply means that this business isn’t the right thing at the right time. Throwing good money after bad, racking up insurmountable debt, and unfairly keeping your employees from seeking stable employment elsewhere because you won’t face facts and be honest are not the right things to do.
Starting and running a business is hard. And keeping the lights on can sometimes be hard too. What all my advice boils down to is: plan and be prepared. Emergencies happen but do research ahead of time so you’ll know how to handle them when they arise because as we all know, nothing ever goes as planned.