Payroll is a list you use to calculate the workers’ wages according to their policies, which could be a per-time or per-piece wage. The payroll also includes information about the employees.
From any amenities or perks to the employee’s salary package to the fixed deductions and attendance history, the payroll document includes all the minute details that could affect the net payable amount of a salaried employee.
Any cash the business pays is called an outflow, and payroll is also an outflow because the company pays its employees. If the sum amount of payroll is high, then the cash flow could end up hostile if the overall outflows are more significant than the inflows (incomes) of the business. The chances of outflow being more significant are more likely because payroll is one of the business’s most significant expenses and could negatively affect the net cash flows, making it a liquidity problem.
As payroll plays a significant role in the expense account of the business, any error or mistake can be a barrier to making a successful payroll document. A few common problems in payroll are:
Inaccuracy
An improper payment to an employee will result in imbalanced records and will further become a problem while creating cash flow statements. Inaccuracy becomes the problem as this will result in an incorrect cash flow. Overstating the cash flow means that the outflows recorded in the statement are less than the actual amount, creating the concept that the business has enough cash to expand or pay off its debts when it is untrue. Another issue is if it is understated, it will result in negative cash flow, and the finance department will be unnecessarily worried.
- Not recording the attendance of a staff member
If the authorities are not tracking employees’ absences, this will affect the profit calculation of the business.
- The confusion caused by part-time employees
Some businesses work with full-time employees, part-time employees, and contractors. Sometimes, it is hard to classify what employee comes under what group, which is confusing while listing a payroll.
- Not having enough funds to pay wages
When a business has low profits, paying its employees’ wages gets complicated as it is one of the most significant expenses. The company might have to take a loan to pay its workers in this situation. Not having enough funds to pay wages is also a cash flow problem because the business will need excessive funds to pay the salaries, generating through loans that will give rise to outflows.
Payroll problems result in cash flow problems in the long run, as payroll is part of cash flow. To avoid these payroll and cash flow issues, companies should find efficient ways to prevent these risks.
- An efficient attendance recording system
A business could always use a punching clock or thumb impression recording system to get accurate employee information. A punch system provides information like the employees’ performance and working hours.
- An automated payroll/accounting software
Businesses should also install payroll software to save themselves from the burden of recording all employee details.
Long-Term Planning & Cost Optimization
To ensure that you always have cash in hand for wages and salaries, try cutting down other avoidable expenses like finding a cheaper supplier or a place with lesser rent. The business could also issue a business credit card to earn a line of credit to pay their employees- make sure not to exceed your limit and pay before the due date. If a business can’t afford a few employees, it can make them redundant and find contractors or part-time employees who ask for lesser wages. If nothing works and you can take debts, you could sell a non-current asset to have additional funds in the business and have a better position in the net cash flows.
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