Labor can often be the costliest expenditure for most businesses. Keeping payroll expenditures between 15 and 30 percent of your gross income is a suggested way to stay in financial good standing. However, sometimes it can run up to 50 percent or more in situations where there is more labor than goods, merchandise or equipment that needs to be purchased.
Payroll obligations must be met to retain employees and keep the trust that is needed between ownership and labor for a business to run smoothly. Most states mandate that employee payroll must be met within designated periods. The income from invoice payments, however, can often lag far beyond the dates when payroll obligations must be met.
Many times, you have met your end of the contacts, but you are burdened with slow paying clients. This can, depending on the time frame, hamper your ability to meet payroll. You need to overcome this lag so that your first and largest expenditure can be met. An owner or manager must find successful strategies for managing payroll successfully.
5 Tips for Managing Payroll Successfully
- Consider factoring your payroll – Payroll factoring is not a loan; therefore, you will incur no debt when you partner with a factoring company. The factoring company will advance your company funds – usually within 24 hours – based upon a percentage of the value of your factored invoices. The factoring company will then take over the responsibility of collecting from your clients. After your client has paid, the remainder of the funds (minus small fees) will be returned to you.
- Know the benefits of factoring your payroll – Factoring is a way for your company to meet expenses each month without taking on any debt to do so. Factoring also aligns the amount of funding you have available with the expected payments from clients. In doing so, it ensures that your funding grows along with increases in sales. Most importantly, factoring opens up your cash flow so that you can be paid for completed work when you complete it rather than waiting the requisite 60-90 days that is common in some industries.
- Realize the downsides of payroll loans – Payroll loans are offered by mainstream, lending institutions such as banks. The interest can top out in the range of 20-30 percent. Because it is a loan, you will have to make payments – with interest – due on specified dates. If you are unable to repay due to late invoice payments from clients, the lending company may debit the payment from your account or credit card. The interest rate that you negotiated may also increase if you can not repay the payments on time.
- Know what to look for in a payroll factoring company – Look for a company with a trustworthy reputation. Ask about their payroll/staffing factoring experience. How long have they been in the industry? Are there any specific complexities of your business? Ask the factoring company how they handle those specific needs and turn them into results. Partner with a factoring company that has vast knowledge of your industry. You’ll need a partner who understands the industry nearly as well as you do. Find a factor who offers competitive rates and flexible terms. Find out if they offer additional services that could aid your business and improve your access to cash flow.
- Set up a payroll factoring plan that fits your own shoes – Factoring is never a one-size-fits-all relationship. You have to set up a plan that will fit your specific business and your industry. There is not minimum or maximum to the amount of invoices that must be factored. You can factor as many or as little as you would like to factor. However, there are usually benefits to factoring more invoices as volume may result in lower fees and higher advances. Factoring was created to fit small and medium-sized business models. It was meant for businesses like yours.
When banks are too process-heavy, credit cards charge too much interest, and new investors take on their own relationship issues, factoring is something tailor-made for small to medium-sized businesses needing to improve their cash flow to meet payroll, buy goods and equipment, or manage warehouse inventory.
The relationship you forge with your factor (financing company) will ideally be long-term and beneficial for both parties. They want to see you grow. They want to see you succeed. They want you to be able to use the funds you’ve worked hard completing contracts to use. Enter into the relationship for payroll obligations so that your employees can still have as much confidence in you as you have in the dream that brought you to this point today.