For business owners, there are few worse situations to find oneself in that finding it impossible to pay employees.
Your employees are the lifeblood of your company and, without them, you are going to struggle to keep the business running.
In this article we’ll offer practical advice about what your options are from this point forward.
What Happens if you Can’t pay Your Employees?
Not being able to pay staff is a classic cash flow problem, and it raises the question of whether the business has hit a bump in the road or if the situation indicates insolvency.
In situations like this it’s crucial you have sound financial advice so this is the time to consult your bookkeeper and accountant, and really gain the best possible understanding of the bigger picture.
Will you be able to resume payroll in a few weeks, or is the overall viability of the limited company in question?
Of course there’s the practical matter too of how your staff will react if they find they’re going to be paid late. We recommend formulating a clear plan before discussing this with them, so you can explain what actions you’re taking to resolve the situation.
What to do if you Can’t Afford Your Employees Salary?
Your options are as follows:
- Finance – Bank loans, alternative finance, or invoice finance will all improve cash flow.
- Chase Late Payments – Along with your accountant you need to make sure there’s no money owed you that hasn’t come in yet.
- Liquidate Surplus Inventory – If you have substantial inventory, consider how you could sell this to generate cash flow.
- Renegotiate Payment Terms – Are their companies with whom you’ve established trust that might be open to better terms. If you can pay them later, the working capital cycle will increase.
- Cut Your Own Salary – Can you take less money yourself for a time to increase funds available to the workforce?
- Cut Back Employee Hours – Reducing hours is going to decrease the amount of money flowing out of the business
- Temporary Shutdown – Could you shut down a premises or facility for a short period in order to avoid layoffs and save money?
- Voluntary Exit Incentives – For some employees, the right incentive might mean they’re happy to retire early, which would reduce the number of layoffs.
Company Rescue Measures for a Business That’s Still Viable
If the business continues to be ‘viable’ – that is, to have the potential to be run successfully and profitably – then keeping it open is the right move. Here’s how we can help you do that:
Company Voluntary Arrangement (CVA)
This structured repayment plan with creditors must be proposed by a licensed insolvency practitioner. CVA’s are proposed for a proportion of the debt so if creditors vote to accept the proposal you will be able to pay back a reduced debt, over an agreed timeframe.
Going into Administration
Suitable for larger companies, administration is a rescue mechanism whereby an administrator (insolvency practitioner) assumes the running of the company for a period of restructuring. During this period, a legal moratorium protects the company from creditor action. NB: as with other insolvency processes, administrator must offer a better return for creditors than the alternatives.
It’s also worth mentioning that if the administration results in the sale of the business, a regulation known as Transfer of Undertakings (Protection of Employment) or TUPE will mean their employment contacts transfer to the new business. This would mean the new company assumes responsibility for wage arrears.
Insolvency Options for a Business That’s No Longer Viable
If the current cash flow problems indicate that the business simply cannot continue then your best option is to close the company as efficiently and painlessly as possible. Choosing voluntary liquidation will mean the company ceases trading and an insolvency practitioner takes over creditor communication. The IP’s job will be to sell any assets the company may have and pay creditors in order for priority.
You can read our full article here on the Creditors Order of Priority in Insolvency.