Knowing what to do if you can’t pay your employees can help you reduce the impact of running late with salaries. It can also relieve anxiety, by giving you actionable steps to follow.

Payroll problems

The thought of not being able to make payroll makes any small to mid-sized business owner uncomfortable – especially because it can so easily happen.

Many South African businesses experience low-cash periods. This might happen during a downturn, as a result of settling a significant bill or simply because a large client runs late with a payment.

However, staff can’t simply make do without their pay. Payroll problems can have disastrous knock-on consequences, including loss of key employees.

Big decisions

A missed or late payroll is often the first sign that your business is in serious trouble. This may force you to face big decisions. These are the types of questions you need to consider:

• Are all your savings and credit resources exhausted?
• Are there any receivables due to you that you could chase?
• Should you ask management to forgo their salaries for a while, and have the lower-paid staff earning in the meantime to keep up morale?
• Do you need to retrench staff, liquidate or go bankrupt?
• Would a loan help you stay afloat? If so, will you be able to pay it back?

Regardless of the context, it’s important to see that your staff get paid as quickly as possible and to keep them informed.

Bear in mind that if you owe staff money, you will have to pay it to them at some point, even if they leave the business. Otherwise, they may pursue legal claims against you.

Steps to follow if you can’t pay employees on time

Chase up late payments

First and foremost, chase up any late client payments. Don’t damage business relationships, but e-mail and phone until you get results.

Cut business costs to cover payroll

Next see how far you can cut immediate costs. If you succeed in this and/or in securing some outstanding payments, you might find that you can make payroll after all.

Negotiate with suppliers to see which payments can be deferred or paid in instalments for the next few months.

If your business rents property and/or equipment, you could explain your situation and request a hiatus in payments. The owner or agent might be open to this, especially if it means they’ll be able to keep an otherwise reliable tenant going forward.

Consider leveraging credit that’s available to your business – and take advantage of any insurance you have on credit repayments.

If your business has movable assets that aren’t critical to operations, now might be the time to pawn or sell movable assets.

Consider securing finance

If you’re having trouble making payroll but expect cash to flow into your business in the weeks ahead, securing finance is an ideal solution.

You might need to consider an alternative form of funding that’s quicker and easier to access than a standard business loan.

Securing asset-based funding, like the funding offered by Lamna, involves using a valuable asset, such as a vehicle, as collateral to secure a short-term loan. Once you repay the loan and interest at the agreed rate, the asset is returned to you.

Advantages are that the funding is easy to access and available almost immediately, and the process is straightforward and confidential.

Communicate with staff about the shortfall

It’s best to be upfront with your staff about the financial challenges facing the business.

Make it clear that the last thing you want to do is lay off people.

Negotiate with staff on work hours and pay.

Many people will opt to work shorter shifts, or fewer hours overall, and take pay cuts rather than losing jobs.

Make it clear that, ideally, these measures are short term and will return to normal once the business recovers. The more open you are, the better things are likely to go. This also helps protect you legally.

Follow legal advice if layoffs are necessary

When layoffs are the only option, make sure you do it properly to protect both your business and your staff.

Consult a qualified legal practitioner to make sure you’re following the correct regulations and procedures for retrenchments in South Africa. For example, specific steps must first be taken in an attempt to avoid dismissals.

Look to the future

Going forward, keep a constant eye on your finances so you’re aware of any shortfall well ahead of time.

This way, you can also let your staff know early on, so they have enough time to work around the situation.

Consider ways to restructure financial systems and operations to prevent a recurrence of the situation.

Can you rework your collections process so that you’re not left waiting for funds from clients every month? Can you reduce operating costs? Also see if any suppliers you frequently work with will give you an extension on payments.

Re-establish employee trust

Importantly, find ways to re-establish trust with your employees.

Your employees work in return for reimbursement. Failure to give them their due will severely test their loyalty and motivation. You need to reassure them – before they find employment elsewhere.

Outline clear measures you’re implementing to get greater control of the company finances. Update staff regularly. Also consider rewarding them for their extra patience and loyalty, once this is possible.

Wondering what to do if you can’t pay your employees? We may be able to help. For more information about using a movable asset to secure an immediate short-term loan, contact Lamna on 086 111 2866 or simply complete and submit our online application form.