Top 5 Ways to Manage Payroll During a Recession

May 21, 2020

There is no successful business with uncertainty in the future. There are economic booms followed by years of recessions. Unfortunately, it’s those unusual times with the COVID-19 pandemic on the rise. The business forecasts suggest a significant financial disturbance and downturn in the coming months. So, this is the best time to talk about business compensation strategies. 

We are not officially in a downturn yet, but with record-breaking unemployment and layoffs, no one knows how long it will take to get business on track. Many questions come into mind, and the most overbearing one is: What will happen when my business runs out of cash and can no longer afford to pay salaries to the employees?

How to Manage Payroll During a Downturn?

The impact of the pandemic has been devastating on the employment sector as the unemployment rate throughout the world is increasing at a rapid rate, with layoffs rippling across the globe. It doesn’t have to be that way. 

Here are a few options to consider when you are having trouble managing payroll and compensating your hardworking employees. 

Be Upfront With Your Employees

In times of recession, when your company is not able to make payroll or managing the wages of its employees, be upfront with your workers and inform them openly. Provide them time to make preparations and figure out the financial situation, rather than laying them off or them finding out on their payday. 

It is against the law in the UAE and other countries to pay a fraction of what employees are owed for their work. We suggest talking to your employees ahead of time about keeping some percentage of their wages for the business that will be reimbursed after the situation gets better. This will minimize the risk of administrative penalties. Give them a statement that summarizes their pay schemes and incentive payouts in the short run and your long term financial plans. 

Use All Available Resources to Ensure Funds for Payroll

If the financial situation of your business is so extreme that it is impossible to make payroll, look for different ways to get funds as soon as possible. You can borrow money from personal contacts, or we suggest consulting an accounting firm to help you with loans and government relief grants. You can also suspend your own salary to manage payroll.

Look for all available resources and possible funds. Contact the customers that owe you money, and ask them to settle their debt now to get a special discount on their debt amount. It will affect overall business in the short run, but you will be able to cover payroll and keep your business from shutting down. Offer discounts to your customers, lease office space, or sell extra equipment, to get additional funds for payroll management. 

Restructure your Business 

As soon as you have managed to secure funds for payroll, you need to take a step back and analyze your business models and determine areas to cut expenses and overhead costs in the long run. During the 2008 financial crisis, Tom McMullen said,

“Companies need to avoid making hasty decisions due to current economic situations and consider the long term effects on employee engagement, motivation, and performance. Many companies are being more prudent with compensation and bonuses, but if employers don’t play their cards right, they may find themselves without a full house when the economy turns around.”

Therefore, when you are faced with a recession, cut your business expenses first instead of directly going for employee’s incentives. Your workers need to know that you are fully committed to their success in the long run and their future and company’s future if linked together. It means to pay your employees on time and don’t try to resolve the financial issue on the expense of your hardworking people. 

Collect All Outstanding Invoices and Accounts Receivables

Cash flow and liquidity is a top priority during a recession. When there is a financial crunch, you CANNOT let any invoice get past the due date. It is the number one priority for all companies to settle their account receivables to manage healthy cash flow in the business to make payroll on time. If there are invoices past due, immediately contact customers and remind them of due payment. 

With the crisis, like the current coronavirus pandemic, it is recommended to consult with the best accounting firms in Dubai to manage not only your accounts but also payroll. These experts can also help you with different business tactics like offering discounts and penalties, so your customers pay immediately. If a client is taking too long to settle the payment, don’t be afraid to get help from these experts and take things to court and handle things legally. 

Opt for Payroll Factoring 

If payday is approaching and you don’t have enough funds to pay your employees, you can use payroll factoring. Payroll factoring is a tool that allows a business to exchange their invoices for getting a loan from a bank or other lending party. What it does is that the lending partner pays your employees and collect money due on the invoices on due. 

This option is excellent for small businesses that need to stimulate cash flow and quickly get money to pay salaries to your employees. You need to go to a lending partner and sell your accounts receivables for cash in advance. Lending agents also provide you with a percentage of your invoices rather than paying them the full value. However, you need to take into the charges of the lending agent before making a choice, so consult with an accounting professional to minimize the risks. 

Think and Plan for the Future!

We cannot control the global economy, but we can be prepared regardless of what happens. Economic recessions, no matter how long, are always followed by booms, so make sure your employees are there to help you speed things up when things get better. Manage your payroll smartly and keep working as a team. And remember, “This too shall pass!”

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