How to Juggle Your Small Business Finances and Make Payroll

At one time or another, most small businesses face a cash flow problem — money coming in does not cover money going out, including payroll. The dilemma may be caused by a variety of reasons: overdue invoices, mounting debt, seasonal fluctuations or perhaps the loss of a key customer. But regardless of the cause, when there is not enough cash in the company coffers to pay employees, a serious and unpleasant situation is at hand.

The recent recession has certainly exacerbated the problem for small businesses, as many large companies have been stockpiling cash as a hedge against uncertainty. They are paying their invoices more slowly, and the ripple effect of a constricted cash flow tends to hit the smaller companies the hardest because they live on smaller margins – and often from invoice to invoice.

Dealing with a Cash Flow Problem

If your company has a temporary cash flow problem that could cause you to miss payroll, you can always ask your employees to bear with you and wait to get paid. If the wait is relatively short and the pain minimal, your own staff may well want to pull together for the team. After all, they are the most vulnerable should your business suffer a major economic setback.

If that option is either unappetizing or not doable, there are several ways to juggle your finances so you can pay your people:
  1. Prepare. It’s easier to avert a crisis than to respond to one. You can reduce the impact of a cash flow crisis by preparing for it before it hits. That means that you must constantly monitor your finances, run forecasts, make reasonable estimates, and be ready to modify your budget as income and expenses shift over the course of a fiscal quarter or year. By anticipating when a cash crunch may occur, you can juggle budget items to minimize the crisis or even prevent it.
  2. Build up your cash reserves. This is your first line of defense against missing payroll or having to borrow in order to meet it. Building a cash reserve means having a dedicated account from which you can borrow. You’re literally borrowing from yourself. And while it may be tempting to raid it for other reasons, resist the urge. When the inevitable cash flow problem does arise, you and your employees will be glad it’s there and intact.
  3. Borrow from family and friends. Before going to a financial institution for a loan, explore the possibility of borrowing closer to home. Your friends and family may have been the very people who helped to start your business in the first place. Borrowing from them is an option to consider, as long as you are sure that they will be paid back promptly and in full. If there is any doubt, it’s probably better not to put your loved ones’ finances in jeopardy.
  4. Negotiate with vendors, suppliers or lenders to revise payment terms. You are as necessary to your vendors, suppliers and lenders as they are to you; they have a built-in incentive to help you remain in business. If you are a steady customer with a good payment history, you can approach them and request a modification of your payment terms so that you can get over your cash flow hump. When you are cash-rich again, you can show your appreciation for their consideration by paying your bills early.
  5. Apply for a line of credit. A revolving line of credit from a bank or lending institution is a must for a small business. If you can’t build up your own cash reserves, a line of credit lets you borrow from someone else’s. It makes short-term funds available when needed, and only requires repayment with interest when it is used. While extensions of credit from large banks have been limited during the recession, community banks and credit unions still have money to lend.
  6. Target unpaid receivables. Your most reliable customers — those who have historically paid you on time — may be able to pay their bills, or a portion of them, before their due dates. Early payment on outstanding invoices can help get you through a cash flow clog. It can’t hurt to ask, and you can always sweeten the pot by offering a discount for prompt imbursement.
  7. Accounts receivable financing. You can use your billings as collateral and pay a lender off as you collect income from your customers. A variation of receivable financing is known as factoring. Factoring companies will actually buy your receivables at a discount and collect the debts themselves. Either way, you get a cash infusion — but it comes with high interest rates.
  8. Merchant cash advance. A merchant cash advance is another type of receivables financing wherein a lump sum of money is given to a company against its future credit card sales. The lender collects a set percentage of a company’s daily credit card receipts until it recovers the amount owed plus a premium. Because it is not considered a loan, there is no interest rate attached to a merchant cash advance.
  9. Inventory financing. Inventory financing can provide a necessary source of cash for businesses that sell high-priced items that don’t move quickly, such as luxury items, or for businesses that need to display large amounts of merchandise and thus must carry a substantial inventory on their sales floor or in the warehouse. Lenders are repaid as the inventory is sold off.
  10. Credit cards. Credit cards, skillfully managed, can help you get through a cash flow crisis. Take advantage of an interest-free cash advance by repaying the balance in full before the first monthly cycle is up. Remember, credit cards carry much higher interest rates than bank loans or lines of credit, so don’t delay repayment.

Once you’ve gotten through a cash flow crisis, take steps to ensure that it doesn’t happen again. Decide to build up cash your reserves, look for ways to cut expenses, and encourage your customers to pay their bills as promptly as possible. Remember that employees who can count on being paid regularly are more likely to remain on your team for the long haul, helping your small business to prosper and grow.

Bill Fay

Author

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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