A stable workforce is at the heart of any business and if you’re struggling to make payroll, you have a serious problem. If you’re unable to pay your staff then it’s also likely that you’re struggling to pay bills from suppliers, HMRC and other creditors when they become due, and at that point, your business could be technically insolvent.
If you’re facing a situation where you’re not able to make all your business payments, you should prioritise paying your employees. While you may be able to extend your payment terms with a supplier or negotiate a Time to Pay Arrangement with HMRC, failing to pay your staff on time could spell disaster for your business.
It’s worth thinking about how your staff will react if they’re paid late or not at all. After all, if your staff can’t rely on you to pay their wages on time, can you really expect them to fulfil your orders and carry out the work as required? Some may respond relatively positively but others may down tools and even leave or threaten to take legal action against you.
However, while you should always do everything you can to pay your staff, there may be times when that simply isn’t possible. If you find yourself in this situation, here’s what you should do.
If you find yourself in a position where you’re unable to pay your staff their wages, you should inform your employees at your earliest opportunity. Telling them well in advance will give them more time to think about how they’re going to pay their bills and put alternative plans in place. They’re certainly not going to be happy with the news, but at least it won’t come as a nasty shock on payday.
Before you tell your team, put a plan in place so you can explain what you’re going to do to resolve the situation, and ideally, you should have a clear timeline for when they can expect to be paid.
When it comes to resolving the problem, your options depend on whether it’s a one-off, short-term problem or whether it’s more indicative of a long-term decline.
If the inability to pay your staff is the result of a temporary cash flow problem, such as a late paying customer or unexpected expenditure, you should explore your options to generate a quick injection of cash.
There are lots of options to consider, from short-term business loans to business credit cards, overdrafts and asset-based funding. However, it’s important not to borrow more money or provide personal guarantees if there are underlying problems that are impacting the business’s profitability.
If long payment terms and late payments are a problem in your industry, invoice financing could be a reliable way to create a steady stream of cash flow. It allows you to receive a set percentage of an invoice’s value immediately without having to wait for a customer to make the payment. The fee for this kind of agreement will dent your profitability but it will make it easier to pay your staff and meet other liabilities on time.
If you’re unable to raise finance quickly and expect the problem to be short-term, you could contact your debtors to offer them payment discounts if they make payments immediately. You should also think about how you can tighten up your accounts receivable process to get more cash in the business. You could reduce your payment term from 60 days to 30 days, charge interest on late payments and offer early payment discounts.
Although it’s not recommended, you could delay payments to other creditors such as HMRC and non-mission critical suppliers so you can pay your employees. Withholding payment is a last resort and this approach should only be temporary.
If you’re confident that this is a short-term cash flow blip, you could lend the business the money to pay staff from your personal finances. Your director’s loan account will be in credit and the company can pay you back when its cash flow position is more stable.
If you’re regularly struggling to pay your staff and are having to rob Peter to pay Paul, the likelihood is that your business is insolvent. At this point, we strongly advise you to speak to a licensed insolvency practitioner to help you meet your obligations as a director and protect the interests of all your creditors, including your employees.
There are several options available to you depending on the future viability of the business and the distress levels you are experiencing.
A Company Voluntary Arrangement is a structured repayment plan that lets struggling businesses repay their debts to their creditors over time. It’s often the case that debts to suppliers, landlords, HMRC and other unsecured creditors can be substantially reduced, with manageable monthly payments made over a typical period of 3-5 years. As long as the payments are made every month, the company will be able to trade without interruption and there will be more cash flow available to pay staff.
If the company is struggling but ultimately viable, going into administration can give you the chance to restructure and save jobs while the business is protected from creditor pressure and legal action. Any employees kept on past the first 14 days of the administration will be able to claim for wage arrears and unpaid holidays. If the business is eventually sold through an administration procedure, the employees’ existing contracts will be transferred to the new company and it will be responsible for any wage arrears.
If the company’s cash flow problems are severe and the business is no longer profitable, your best option could be to close it down voluntarily via a Creditors’ Voluntary Liquidation (CVL). In this case, the company will cease trading and the business’s assets will be sold for the benefit of its creditors. The employees will be made redundant but they will be able to claim a redundancy payment and for wage arrears.
If you find that you’re struggling to make payroll and it’s not a one-off problem, you need to speak to an insolvency practitioner. Call today to arrange a no-obligation consultation with one of our nationwide team of licensed insolvency practitioners.
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