For most small business owners, not having enough cash to make payroll for their employees is one of the top concerns that keeps them awake at night. It is not unusual for small, growing companies to have periods where cash is tight, forcing business owners into the unfortunate position of not being able to make payroll.
There are several reasons a company may face a cash shortage, such as seasonal declines in business, slow paying customers or having to outlay significant amounts of cash to complete a large project or contract.
If worrying about how to make payroll is keeping you up at night, here are few tips to give you peace of mind.
1. Identify The Issue Causing Your Company’s Cash Crunch
- Slow paying customers: When customers don’t pay on time, your cash flow suffers as a result. While offering credit to creditors is a great way to increase revenue, your company may not get paid for 30, 45 or even 60 days.
- Seasonal demands: If you are in an industry with seasonal peaks and large swings in sales, you are likely to experience cash constraints during your slower periods.
- Large projects: A common issue for small, growing companies that causes cash flow problems is when that big break comes and your company wins a large contract or project. All of a sudden, you need more staff or equipment requiring substantial upfront cash outlays in order to complete the job; however, you are not going to get paid until the job is complete.
2. Create A Budget To Monitor Your Cash Flow
- After you determine the cause of your cash flow crunch, creating a budget is a great way to manage cash flow, but it must be monitored on a regular basis to be a useful and effective tool. Typically, reviewing and updating a budget each month is sufficient; however, if you are just starting out or are having severe cash constraints, I suggest preparing a weekly cash flow budget for a twelve-week period and reviewing each week.
3. Obtain Payroll Financing To Assist During Periods Of Cash Shortages
- The best way to get peace of mind on how to make payroll is to obtain payroll financing. Having financing in place to cover periods of tight cash flow is a smart and strategic way to ensure you have the funds you need to meet payroll.
Small Business Funding That Works
Given the urgent nature of meeting payroll, you need fast and flexible business funding. Factoring provides financing that is short-term, fast, flexible and cost-effective.
Factoring is simply selling your company’s receivables to a third party, the factor, and receiving an advance against the invoice amount (typically between 80% and 90%). When the invoice is paid by your customer, the balance is sent back to you, less applicable fees.
Benefits Of Factoring
- Get Cash Fast: Once you have a line in place with a factoring company, you typically receive funding within 24 hours.
- Flexibility: Some factoring companies allow you to pick and choose the customer and invoices you want to factor. This gives you the choice of factoring all of your invoices for a steady and consistent stream of cash coming in or submitting invoices when extra cash is needed to cover payroll.
- Short term: Factoring facilities are short term in nature so you are not indebted to a lender for a significant period of time.
- Cost effective: Factoring fees are based on the amount of your factored invoices and the length of time the invoice is outstanding. Be wary of fixed fees such as account management fees, collateral management fees, audit fees or minimum fees.
Don’t let the worries of payroll keep you up another night. Plan ahead and get the necessary payroll financing your company needs.
Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Schedule a demo below, or call 888.833.2286 to speak with one of our small business finance consultants.