What Happens If A Company Can't Make Payroll?

January 17th, 2024 by Felix Cheruiyot

What Happens If A Company Can't Make Payroll

The promise of a regular paycheque is why your employees turn up for work every day. Learn what happens if a company can’t make payroll.

Conventional theory will tell you that money is not the best motivator for most employees. But there aren’t many people who will keep working if pay does not come on time.

Even your most dedicated employees will struggle to stay motivated if payroll is erratic. Salary is the most important employment condition for most workers.

So serious problems will arise if a company can’t make payroll.

This article will discuss payroll challenges for employers, what happens if a company can’t make payroll, and what to do to avoid business disruption caused by a missed pay date.

What happens if a company can’t make payroll?

Your employees may stop working if they don’t receive their salaries on the published payday. On top of taking strike action, they may also sue you over their unpaid wages.

If you have no workers, you can’t provide products or services to your customers. The longer the stand-off with your workers continues, the worse consequences there will be for your business. These consequences may include loss of key clients.

Depending on how you communicate the payroll challenge to your employees, you may be able to convince them not to down tools. Even then, your best employees may feel their long term future lie at another employer. They will continue on while they seek employment elsewhere.

If the industrial action caused by your failure to pay workers on time does not do serious harm to your business, the bad publicity from it might. Bad news travel fast, and the last thing any business needs is a reputation for not paying workers.

A missed payroll is a major incident that can have devastating consequences for your business. But what can you do to minimise its effect on your business?

What to do if you can’t make payroll.

A good, present, hands-on business owner should be able to see signs they may fail to make payroll. A quick check on their bank accounts and reviewing their cash flow to see how money is flowing in and out of their business should tell them all they need to know.

Some of the signs that making payroll will be a challenge include:

Knowing that your business is struggling and may struggle to make payroll gives you time to put in place contingencies or a crisis management plan of some sort.

With or in the absence of such a contingency, here are some of the things you can to handle the inevitable crisis from failing to pay wages on time:

1. Communicate the impending payroll challenge to your employees.

There is no worse feeling for employees than to be told on payday that the company has failed to fund payroll. It completely throws them off, leaving them with no time to make contingencies on how to cover essentials like rent and food.

Communicate with complete transparency the trouble the business is and what steps you are taking to resolve it. Yes, the news will not be greeted with cheers, but you will be surprised at how understanding some will be.

2. Use personal funds.

No matter how well you communicate the payroll struggles to your employees, the fact will still remain that you have a legal obligation to pay them their salary dues. You have to find money from somewhere.

One of the first places to look is your own personal funds. You may be stretched as it is, but as the business owner you have the duty to keep the company afloat.

If you can’t raise the money from your own sources, consider asking your family to chip in. You, however, may have to give up some equity to make this happen, which is better than paying fines or being sued for failing to pay workers.

3. Apply for payroll financing.

Raising capital is not easy, otherwise we would all be running businesses. So you may have little luck raising the money you need from family.

At that point you must consider applying for a loan. Ask your bank if they can extend an overdraft to you. They will be the most likely to consider your funding application since you have an existing relationship.

There are also lenders that specialise in payroll financing. Reach out to them and apply for a loan. That route can, however, leave your business heavily indebted due to the often high interest charges. So you may have to consider other solutions first, like:

4. Sell some assets.

If you own some assets that are not critical for your business, this may be the time to liquidate them. Do you have a piece of machinery you recently retired, or a vehicle you don’t use often? Consider selling them.

Since failing to make payroll is usually a sign of problems about how you are managing your business. This is the right time to sit down with a bookkeeper, accountant or business coach to investigate the real reasons you can’t pay workers.

That brings us to this next option:

5. Pursue your accounts receivable.

If you have clients that owe you, there is no better time to send demand letters than right now. Consider taking legal action to recover your money from overdue accounts. Sue them before your workers sue you for unpaid wages.

6. Reduce your staff.

This is not an immediate solution as you can’t lay off workers because you have failed to pay them. You have a legal obligation to pay them their unpaid salaries.

Cutting the size of your of workforce works going forward, after you have cleared current payroll. Start with non-essential staff. And let that be a lesson to not hire too many people too early.

7. Reduce working hours.

Sometimes laying off staff is not a practical solution. Your staff complement may already be so small you can’t lay off workers and still operate a functional enterprise. Or retrenchment may be too expensive an exercise at this point.

Your only option may be to keep all your workers on the payroll but reduce their working hours. That will reduce their salaries, but at least they will get them on time. And this should only be temporary, until sales pick up or cash flow improves.

So what are the reasons why you might fail to make payroll?

Reasons why companies may struggle to pay workers.

Failing to make payroll can mean a lot of things. It could be that you could not process payroll in time for payday. A reason for that could be that you process payroll manually and there was just so much to do you could not beat your payroll deadline.

That reason may only mean that you won’t be able to pay workers on the published payday. Salaries could, therefore, only be delayed, which can be explained and not cause too much anxiety in your staff.

Things go belly up when you fail to make payroll because you can’t fund it. This is when you have no money to pay workers. Explaining it to your employees will require all yours powers of persuasion.

The reasons you can run out of money can range from:

Failure to make payroll can also be a sign that there is no product/market fit. With no defined market for your product or not enough people who have a need for the problem you are promising to solve, you won’t be able to sustain a business.

One of the costs that will soon prove difficult to cover when sales are low are salaries. Because you have to pay them regularly, you will struggle to fund payroll if you are not making enough money.

Simplify payroll with software and automation.

The economy in Kenya is really tough right now. Many small businesses are struggling to stay afloat, unable to pay workers and serve clients. One of the ways they can save money and keep the lights on through this difficult economic period is by automating payroll.

Payroll automation relies on software to automatically capture payroll data and calculate salaries. Digitising your payroll processes saves time and money and ensures that as long as cash flow is sound you will make payroll.

Investing in payroll software also helps reduce payroll errors and improve record-keeping, reporting, and data security. All this has a positive effect on business transparency and compliance.

To fully optimise the benefits of payroll automation, you will do well to use an online banking and business payments automation provider for efficient disbursement of salaries. It’s no use processing payroll on time if workers can’t access their salaries.

Intasend takes the pain out of automating salary disbursements. Our business payments solution automates the process of requesting payments from clients and disbursing payments to suppliers, vendors, and employees.

We support direct bank deposits and M-Pesa disbursements. Our platform allows you to make bulk disbursements with one request. All you need to do to disburse salaries is upload an excel sheet with your employees and their payment details and we will send them their salaries, wherever they prefer to access them.

Simplify salary disbursements and save money and time and enjoy the highest transaction success rates on the market with Intasend. Request a demo or sign up here today to get started.

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