By Mike Kappel, AllBusiness.com
Three-paycheck months are great for your employees. Who wouldn’t want an extra paycheck a couple of months per year? But, a three-paycheck month might not be so gentle on your small business budget.
Paying employees with a biweekly pay frequency has quite a few benefits, like consistent payroll processing. And, biweekly pay is the most popular pay frequency. However, you need to prepare for three-paycheck months. Otherwise, you could dip into negative cash flow territory.
Sure, Susie’s extra $1,500 is no big deal. But multiply that by 60 employees, and your monthly budget could end up fluctuating by an additional $90,000—two times per year.
How to prep for three-paycheck months
Payroll is typically one of the biggest expenses a business owner has, and when your biggest expense multiplies, your company feels it. But before you start panicking and changing up your pay frequency, take a step back. Thousands of small business employers overcome this hurdle, and you can too.
So don’t stress—prepare instead.
1. Adjust your budget
Under a biweekly pay schedule, employees receive 26 paychecks per year. With only 12 months in a year, you’re left with two three-paycheck months. Depending on when you pay employees, the months with three paychecks could change. At the end of each year (or whenever you plan your budget), find out which months will have three paychecks.
Once you identify the two three-paycheck months in the year, jot them down—but don’t just write on a crumpled Post-it Note that later finds its way to the trash. You need to make sure your entire budget reflects the months with the extra paychecks: Account for the cost of extra wages, employer taxes, and benefits contributions. If you fail to include the two extra paychecks in your budget, your monthly projections could be way off.
With the added payroll expense in your budget, you may need to adjust your funds. Consider cutting back on expenses during those months, or see if your vendors can push back invoice due dates. You also can increase your available cash, which I’ll explain next.
2. Ramp up your cash
If you want to have enough money on hand to cover three-paycheck months, increase your cash flow—ah, if only it were that easy. Coming up with successful ways to ramp up cash can be challenging. Plus, there are times when low cash flow is outside of your control, like during an economic downturn. However, there are a number of strategies you can do to improve cash flow:
Offer special sales. Give your sales a boost by offering discounts. Offer customers discounts one to two months before a three-paycheck month, and also try increase any low-cost marketing efforts. Speed up collections. There are many benefits of extending credit to customers, but sometimes, they just don’t pay. You’ll especially notice lack of collections during three-paycheck months. Speed up collections by offering early payment discounts or applying late payment fees. Grow your cash reserve. Throughout the year, you should be tucking money away into your small business cash reserve. That way, you can dip into the extra funds if you need help covering payroll. Check out alternative financing. If you’re really in a pinch, consider applying for alternative financing, like a business line of credit.
3. Balance employee shifts
By law, you need to give nonexempt employees working more than 40 hours in a workweek overtime pay. And be aware that time-and-a-half pay adds up—I mean, it’s 1.5 times the employee’s regular hourly rate. Paying overtime wages can be especially tricky during months with three paychecks.
If you want to free up some money, don’t schedule employees more than 40 hours per week during three-paycheck months. Let’s say 20 employees normally work five extra hours per week. These employees earn an average of $15 per hour, which is an overtime hourly rate of $22.50 ($15 x 1.5). That could end up costing you $9,000 in one month ($22.50 overtime wage x 5 overtime hours x 20 employees x 4 weeks).
If part-time employees work fluctuating schedules, you can also cut back some of their hours during months with three paychecks.
