Can’t afford to pay employees – What should you do?

Facing the inability to pay your staff’s wages is undoubtedly a challenging and stressful situation for both employers and employees.

Various factors, including unexpected expenses, declining sales, or delayed customer payments, can contribute to such a predicament.

Regardless of the cause, swift action is crucial to mitigate the impact on your business and the well-being of your workforce.

This article intends to provide practical guidance for navigating this challenging scenario, presenting both immediate and long-term strategies to consider.

What Happens if You Can’t Pay Your Staff Wages?

If you find yourself unable to pay staff wages, there are several options available to consider:

1. Secure Finance: Explore traditional bank loans, alternative finance options like peer-to-peer lending, or invoice financing. These avenues can inject essential funds into the business, helping meet payroll obligations.
2. Chase Late Payments: Assess your accounts receivable and actively pursue overdue payments. Collaborate with your accounting team to recover funds owed to your business, alleviating immediate financial strain.
3. Liquidate Surplus Inventory: Identify surplus or slow-moving items in your inventory. Selling these items, potentially at a discounted rate, can generate quick cash.
4. Renegotiate Payment Terms with Suppliers: Work with suppliers to extend payment deadlines or restructure payment schedules. This can provide temporary relief from financial pressures, allowing time to stabilize cash flow.
5. Reduce Your Own Salary: Consider temporarily reducing your own salary as a director. This action not only frees up funds for staff wages but also demonstrates commitment to the business’s financial health and the well-being of employees.
6. Cut Back Employee Hours: Reduce staff working hours to decrease payroll costs. However, balance this with potential impacts on morale and productivity. Transparent communication and fair implementation are crucial.
7. Temporarily Shutdown Operations: As a last resort, consider a temporary shutdown of specific business operations to significantly reduce costs. Be mindful of the impact on staff and business continuity.
8. Offer Voluntary Exit Incentives: Propose voluntary exit incentives, such as early retirement packages, to reduce workforce costs. This can be mutually beneficial if employees are willing to accept these options.

Each option comes with its own implications, and careful consideration is essential. It’s advisable to weigh the short-term relief against the long-term consequences for both your business and your employees. Transparent communication throughout the process is key to maintaining trust and morale within your workforce.

What options are available if I cannot pay staff?

If you find yourself unable to pay your employees, you generally have two main options: to attempt to rescue the company or to close it down.

Here are the main options under each category:

Company Rescue:

1. Company Voluntary Arrangement (CVA):
   • A formal agreement between you and your creditors.
   • Allows for the repayment of debts over a specified period, often at a reduced rate.
   • Aims to keep the business open and trading.
2. Administration:
   • A more formal process involving the appointment of an administrator.
   • The administrator takes control of the business with the goal of saving it.
   • May involve restructuring or selling parts of the business to repay creditors.

Formal Insolvency:

If the business is not viable for rescue, formal insolvency may be necessary. There are two main types:

1. Voluntary Liquidation:
   • The most common type of formal insolvency.
   • Involves voluntarily closing down the business.
   • Assets are liquidated, and proceeds are used to settle debts.
2. Compulsory Liquidation:
   • Occurs when a creditor forces the closure through legal proceedings.
   • Involves a court order to wind up the business.
   • Assets are sold, and proceeds are distributed to creditors.

Considerations:

• Company rescue options are aimed at keeping the business operational and settling debts over time.
• Formal insolvency involves shutting down the business and distributing assets to creditors.
• The choice between rescue and insolvency depends on the viability of the business and the available options.

Navigating financial difficulties can be complex, and seeking professional advice, such as from insolvency practitioners or legal experts, is often crucial to making informed decisions for the best interests of both the business and its stakeholders.

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