Meeting payroll needs is a challenge for most small businesses simply because employees have to be paid on a regular basis independent of whether a business receives payments from its suppliers. The mismatch between the period it takes for suppliers to release payments and monthly payroll obligations can create a cashflow shortage. This can make it hard for the business to meets its payroll needs, even in cases where the business is actually profitable. This is something that can be avoided by simply making adjustments in your contracts. The following are tips that can come in handy in helping you solve your payroll-related cashflow problem.
Ask for upfront payments
This will work in cases where you have a long-term relationship with your client. Since they are already assured of the quality of your work, it is possible to ask them to pay for the services being delivered right when they are placing an order. These prepayments will come in handy in hard months and may make the difference as far as being able to cover payroll is concerned.
Opt for a structured payment plan
If you are in an industry that involves multiple-staged projects, a structured payment plan is the way to go. A good example is the software development industry where software goes through multiple stages of development. In such a case, you can ask for a quarter of the total fees upfront, a fraction of the total right after the client approves preliminary sketches, another fraction after the successful completion and approval of the prototype and the final amount right after the product has been completed, tested, and then delivered. Opting for such contracts is advisable not only because it ensures that you have a cashflow boost even when in the middle of the project, but also because it helps prevent payroll issues by reducing losses in the event of the project getting cancelled or the client going under.
Protect yourself with termination clauses
A well-worded termination clause can help soften the blow of order cancellations. This is so especially when custom orders are involved. Making a provision for contract termination costs whereby your clients pay you a given sum if they decide to cancel an order or a contract will limit the hit that your business may have to take. The cash that you get as a result will sometimes be enough to cover both the costs of raw materials and payroll.
For more information, talk to a professional like Risley Annette CPA.Share