The Challenges of 3-Paycheck Months: Cash Flow Gaps, Credit, and Overtime

cash flow

Making payroll in the midst of a cash flow crunch is a major pain point for small business owners trying to grow their bottom line. Unfortunately, skipping payroll isn’t an option if you want to keep your business running and stay in good graces with both your staff and the law.

Each year contains four months that have five Fridays. For many companies, this means running payroll three times in a single month. Though there’s no easy answer to payroll problems, there are ways to combat their challenges. Here’s how you can get ahead of the payroll curve.

Cash Flow Gaps

Improperly planning cash flow is one of the leading cases for small business failures in the United States, according to Finpacific Treasury Systems. It also notes that small business owners often lack a general understanding of accounting principles.

It’s not always possible to create extra revenue streams to fix payroll issues, but there are ways to get creative about closing the gap. Start by looking at your vendor and wholesaler lists. Many are willing to work with companies struggling to smooth out cash flow issues with the promise of regular payments.

If vendors or clients owe you money but haven’t paid their invoices, you might be short on cash at the exact time you need to make payroll. In the event you need cash immediately, a system like Fundbox can help crush gaps and pay employees on time. Fundbox fronts the money so you’re not waiting for your clients to pay you before you can pay your employees.

When Credit Isn’t King

Payroll is one of the very few recurring payments for a small business that can’t be made with a business credit card. Payroll credit cards do exist, but with gray area—and your employees aren’t likely to approve. Check balance fees, overdraft fees, and denied transaction fees are commonplace, and some states require paper checks as an option.

Try leveraging a line of credit through your business credit card, bank, or credit union instead. Business owners can consider switching their payroll schedule altogether to get on top of the third-payroll headache. Instead of paying bi-weekly, pay on the 15th and the 30th of the month. Companies who are seriously strapped for cash can also look to a single, monthly payroll to give more time each month to collect invoices. Keep in mind state laws can vary regarding the frequency of payroll.

Calculating Overtime

Salaried employees may be exempt from collecting on overtime, but hourly employees aren’t. Sticking to a semi-monthly payroll schedule becomes problematic if you’re paying hourly employees the traditional 86.67-hour pay period.

If your employees are racking up overtime and you run into a three-pay period month, your accountant will be tasked with figuring out the adjustments to reflect the time logged between each pay period and cut checks accordingly. It’s doable, but a headache.

The bigger issue raised: How do these cash-crunched companies deal with paying the extra overtime over a three-paycheck period? Companies can’t simply turn hourly employees into exempt ones. They must qualify for exempt status with specific job classifications and qualifications. Instead, businesses can look to hiring more contractors and freelancers as well as establishing a payment schedule that coincides with an influx of cash.

Big Banks vs. Credit Unions

These overtime and payroll questions ultimately return to cash flow. Small businesses can try to appeal to their bank, but they are unlikely to get much sympathy or help in terms of a line of credit. Big banks tend to be focused on their profits and bottom line. Meanwhile, small credit unions—which hold a non-profit status and are member-owned—may be more willing to focus on the big picture of your entrepreneurial pursuits.




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Tags: FinancingHuman Resources