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Utilize Your Payroll to Improve Your Cash Flow

Posted by Stephen King
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payroll

The biggest thrill wasn't in winning on Sunday but in meeting the payroll on Monday.  - Art Rooney

A streamlined and error-free payroll process is critical for keeping business running smoothly.

Did you know that streamlining and optimizing your payroll along with other SMB back office processes is not only a way to save time, but it can help improve your business cash flow?

While payroll is in fact money that is paid out by a company, it is considered separate from accounts payable as it involves both expense and liabilities accounts.

Even though payroll is separate from accounts payable, you can configure your payroll to boost your cash flow just like you can by streamlining your accounts payable process.

15 Ways to Improve Cash Flow in Your Business • WEBINAR • Click Here to Sign up!

Make Direct Deposit Your Best Friend

Making your payroll process paperless saves time and money for both you and your employees. Running payroll on paper checks costs money. You have to pay for ink and paper to cut the checks, and if an employee is out of the office for a set time, or they work remotely – you have to spend money on postage to mail out their payment.

Disruptions to your cash flow can occur when using paper checks. Your employee may receive a check on the 1st of the month, but not get around to cashing it until the 4th or the 5th. Or they may cash the check, but the bank may put a hold of a day or two on the check. With this method, you could cut payroll on the 1st of the month, but the check may not clear for up to a week later.

The lag-time causes issues in your cash flow, and even though your money is in the account, you can’t use it as it’s allocated for the outstanding checks. Using direct deposit allows your bank to directly transfer the funds to your employees’ bank accounts so it’s available for the disbursement date of your choosing.

Switch from Weekly to Monthly

While they may sound the same, there’s a difference between a “bi-weekly” and “bi-monthly” (aka semi-monthly) payroll schedule. Many businesses operate on a bi-weekly schedule, but simply changing to a bi-monthly schedule where your employees receive payment on two set days of the month (usually the 1st and the 15th), is actually one of the best ways to optimize your payroll.

The reason this change matters is due to how variations in our calendar system impact the bi-weekly payroll method. For businesses using the bi-weekly method, ten months out of the year, your payroll is paid out twice monthly. However, there are two months each calendar year in which there are actually three payroll periods as opposed to the standard two. For these two months, you’ll have to cut an additional check due to the 3rd pay period. This slight variation disrupts company cash flow, and creates additional work for your payroll staff.

Businesses operating with limited resources and small revenue streams sometimes have enough problems covering payroll twice a month. Throwing in an extra pay period means some businesses have to resort to borrowing or financing to cover payroll for that 3rd cycle.

Conversely, by switching to a semi-monthly payroll schedule, your business will pay payroll exactly 24 times each year on predetermined dates. This means you’ll know exactly how much payroll will cost each month, giving you more control over your budget and a more predictable cash flow for your business.

For more tips on improving cash flow management in your business, check out our upcoming webinar...

Cash Flow Webinar