February 4, 2021 By SmartBiz Team

The endurance of the coronavirus pandemic sustains economic stagnation. As a result, the futures of many small businesses remain uncertain.

Reductions in demand, employee health, and disruptions to supply chains contributed to businesses’ closures. Financial fragility similarly advanced closures.

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A study published by the Proceedings of the National Academy of Sciences of the United States of America found that 75% of businesses only had enough cash on hand to survive two months or less following the pandemic’s onset.

Small businesses in such precarious financial positions may encounter operational challenges. A lack of accessible cash may lead businesses to lapse on payroll.

This is a difficult situation. Luckily, businesses have more options than hiring an accountant. They can, in fact, implement the following solutions:

  1. Watch your cash flow
  2. Cut costs to conserve cash
  3. Apply for loans
  4. Leverage tax provisions

These options may help businesses to navigate and overcome the difficulties of not making payroll.

1.Watch Your Cash Flow

Businesses should manage their cash flows to anticipate financial stress and mitigate potential lapses in problems.

No one could have anticipated a global pandemic and subsequent economic downturn. However, businesses may implement practices to help them meet payroll when the unexpected strikes.

Even in the best of times, many small businesses struggled with their cash flows. A majority (82%) of small businesses that fail report problems with their cash flows.

The following practices may help you to sustain a financial stability:

Maintain detailed financial records

A profit and loss statement doesn’t provide the full picture of your business’s performance. Many financial obligations influence your cash flow including accounts receivable and payable, inventory, and capital expenditures. It’s important to keep thorough records across the board to ensure you have enough cash on hand to pay employees.

Review your metrics regularly

The formula to calculate your cash flow’s simple. However, other measures influence your cash flow such as how long it takes for you to collect on receivables. Frequent assessments of operational metrics will help you to gain a full understanding of your financial performance.

Forecast cash flow

You may use another formula to project sales and expenses based on your prior history. The measurement helps you to understand your business’s direction. By comparing your forecasted cash flow to your cash flow, you may detect worrisome trends in time to make positive changes.

Businesses should monitor their cash flows to preempt financial distress, helping them to make payroll.

2. Cut Costs to Conserve Cash

In the event of financial constraint, businesses should consider opportunities to reduce expenses. This may free up the cash necessary to cover payroll obligations including employee paychecks.

One option is to liquidate inventory by selling items at a discounted rate. A reduction in your storage requirements may activate cost-savings. . This not only eliminates warehouse rental costs but also makes cash immediately accessible.

Another option is to reduce work hours, especially if business is slow. This may not be a popular choice with employees, but it may be better than a violation of the Fair Labor Standards Act (FLSA). A lapse in payroll’s a violation of the FLSA, which may cause you to incur the following costs:

  • Back wages
  • Back taxes
  • Criminal penalties
  • Damages
  • Attorney’s fees and court costs
  • Imprisonment

These consequences result in a significantly higher financial burden than the initial payroll costs.

To help cover payroll and prevent FLSA violations, you can negotiate with partners. Talk with creditors, lenders, suppliers, and landlords about temporary solutions such as deferred or reduced payments.

These businesses need to make money. However, they likely also understand the value of a lasting partnership. This means they may be receptive to your requests for flexibility.

Businesses should implement measures that reduce costs in other areas of operations to make cash available for payroll.

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3. Apply for Loans

Businesses that apply for loans may access the financial resources necessary to cover payroll.

You may benefit from an Economic Injury Disaster Loan (EIDL). The Small Business Administration (SBA) offers these loans at a 3.75% interest rate to small businesses impacted by disaster-related hardship.

You can now access a maximum of $150,000 to cover expenses with an EIDL. These funds must be used for certain purposes including:

  • Working capital
  • Paying fixed debts
  • Payroll
  • Accounts payable

Eligibility for these loans shifted in response to the COVID-19 pandemic. Small agricultural businesses, for example, are now eligible for an EIDL.

Businesses should apply for loans to cover operational costs such as payroll during periods of financial constraint.

4. Leverage Tax Provisions

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established additional support measures that may help businesses impacted by the pandemic to make payroll.

Under the CARES Act, businesses may defer the deposit and payment of the employer’s share of Social Security taxes. You may defer deposits of your share of Social Security taxes during the “payroll tax deferral period” between March 27th, 2020 and December 31st, 2020. During that same period, you may also defer payments of the tax imposed on wages.

Half of the deferred payment of your share of Social Security tax must be paid at the end of the deferral period. The other half will be due the following year on December 31st, 2022.

You should also leverage the Employee Retention Credit, which is a refundable tax credit against certain employment taxes equal to 50% of up to $10,000 in qualified wages per employee. These wages must be paid to employees between March 12th, 2020 and January 1st, 2020.

There are eligibility requirements to access the Employee Retention Credit. To qualify, you must have either:

  • Had operations that were fully or partially suspended during any calendar quarter in 2020 as a result of covid-19 and subsequent restrictions; or,
  • Experienced a significant decline in gross receipts during that quarter. The provision defines a significant decline as gross receipts equaling less than 50% of those for the same calendar quarter in 2019.

Businesses should take advantage of new tax provisions to reduce financial obligations and prevent lapses in payroll.

Consider Your Options When You Can’t Make Payroll

Rather than address the problem, businesses should implement measures to prevent lapses in payroll. It’s important to manage your cash flow to ensure that you’re able to pay employees every month.

When you can’t make payroll, cost reduction measures may help. By selling equipment or reducing prices, you can increase the amount of accessible cash to cover payroll.

Legislation in response to the coronavirus pandemic provides businesses with additional resources. Loans and tax provisions may be viable solutions to your payroll problems.


About the Author

Kate Russell is an Editorial Associate for Clutch — an Inc. 1000 private company that helps decision-makers determine the best B2B service providers to solve business challenges. She leads accounting research and content initiatives.

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