As a small business owner, you probably have a system for creating a budget. But sometimes, your budget needs to change because of fluctuating income or expenses. For example, you should keep an eye on cash flow for 3-paycheck months.
If you pay employees biweekly, you will have months with three pay periods. The “extra” paychecks during those three-paycheck months will throw off your normal monthly payroll budget. To keep your finances under control, you need to project cash flow for months with extra payroll.
Cash flow projections
Cash flow measures the amount of money coming in and going out of your business during a certain period. You project cash flow by looking at patterns in your accounting books for changes in your income and expenses.
Projecting cash flow is very important for small business owners to do on a regular basis. In an SBA article, business plan expert Tim Berry explained,
If there’s just one formal business skill every business owner should have, it’s understanding and forecasting cash flow. It’s not intuitive because it’s not the same as profits; but it’s vital. We spend cash, not profits.”
You need to include extra payroll in your cash flow projections. For each employee, you will have to pay wages for an extra pay period. If your employees frequently work overtime, estimate the amount of overtime they will log.
You will also have to pay employer taxes on their wages. Include any other payroll expenses, such as health insurance and retirement fund contributions.
Take your time when projecting cash flow. Rushing projections could lead to mistakes. Inaccurate projections can leave you short on cash during months with extra payroll. You might want an accountant to help you project cash flow.
Prepare cash flow for 3-paycheck months
To successfully manage cash flow during extra payroll months, you need to prepare. Carefully plan out the steps you will take to pay your employees the extra paychecks.
There are several ways you can prepare extra payroll months. Try the following tips to manage cash flow for months with extra payroll.
#1. Increase revenue
To cover the extra payroll expenses, you will need additional funds. One way to grow your cash on hand is to increase your income. There are several ways you can boost sales to bring in the money needed for months with additional payroll.
Offer a sale or discount at your business before the month with extra payroll. When customers feel they are getting a deal, they tend to spend more money. And, you can expect a larger number of customers at your business during the sale.
Advertise your sale in advance. The more you get people talking, the more potential customers you will have. Post your sales event on your business’s social media accounts, and promote the sale on your website. Also, hanging signs inside your business is a good strategy for marketing to existing customers. As you earn money from the sale, set aside funds for the upcoming extra payroll month.
#2. Speed up collections
You can strengthen cash flow for months with extra payroll by stepping up your invoicing game. Do an audit of your outgoing invoices. Find the invoices that are due or past due. Contact customers who owe you money to collect payments faster.
You can start contacting customers with friendly reminders. If a customer won’t pay, you might need to be more assertive. You can charge the customer a late fee or interest on a late payment. Before sending the invoice, explain your late fee policy to the customer.
Review your invoice payment terms. A clear invoice that includes all necessary information helps you collect payments on time. To collect funds faster, you might need to reduce the number of days a customer has to pay the bill. The faster you collect payments, the more likely you are to have enough funds to cover the extra payroll.
#3. Reduce expenses
To help cash flow during months with extra payroll, slow down expenses. By reducing payments, you have more cash on hand.
To slow invoice due dates, you need to talk with your vendors and discuss payment options. Some vendors will let you postpone your due date or break it down into multiple payments. In your effort to reduce expenses, be sure to maintain good relationships with your vendors.
You can also use credit to pay vendors. When you pay with startup business credit cards, you postpone the date you have to pay cash out of your pocket. Usually, a check is withdrawn from your bank account within days. But, your credit card payment is not due for weeks after you use it. Be careful not to overextend your lines of credit.
#4. Look at alternative financing
To ensure you can pay employees during a month with extra payroll, consider alternative financing. A line of credit guarantees that your employees get paid, even if sales don’t cover payroll costs. You can then pay back the credit in the following month, when pay periods go back to normal.
Talk to your bank about securing a line of credit to meet payroll. You might be able to find options specifically made for small business owners. Be sure to look at all the terms and conditions before accepting the line of credit.
A line of credit might seem like a simple solution to managing cash flow for months with extra payroll. But, you need to make sure you can pay the credit back quickly. Lines of credit often have high interest rates. Letting the credit go unpaid could cause you to rack up a costly bill.
#5. Manage employee hours
If you pay hourly wages, keep a close eye on employee hours during months with extra payroll. The more hours your employees work, the more costly your payroll expenses will be. Take you time creating the employee schedule during the 3-paycheck month. Make sure your business will be properly staffed while avoiding scheduling extra help.
You might also want to regulate overtime hours during months with extra payroll. Overtime costs you time and a half your employee’s wages for every overtime hour worked. These costs could add up, making it impossible to meet your payroll expense needs. Set rules for working overtime, and don’t schedule an employee more than forty hours of work per week.
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This article is updated from its original publication date of December 1, 2016.This is not intended as legal advice; for more information, please click here.