One of the most forgotten, yet financially brutal, challenges business owners face comes twice a year: the extra paycheck months. If you pay your employees biweekly or weekly, there will be two months every year where you process three (or five) payrolls instead of two (or four). Somehow, even though we know these extra payrolls will happen, they still blindside owners and have the ability to destroy their company.

Even for me, every time these months roll around, I feel the pressure. And that is with my SAVINGS account fully funded and prepared. Payroll carries a different kind of emotional weight because it is not just another bill. These are real people who showed up, did the work, and are depending on the owners to follow through on their financial commitment to them.

From what I can tell, this happens because most business owners think about payroll as a monthly expense instead of an annual expense. They know roughly what payroll costs each month, so they build their budget around that number. Then a three-paycheck month arrives and suddenly payroll increases by 50% for that month. For example, if their normal payroll is $20,000, then for the extra payroll month it jumps to ~$30,000.

And if they do not have that extra ~$10,000 on hand, what do they do? How do they get it? How do they pay their employees?

Option #1: Quick Turnaround Loans

The first option many business owners consider is borrowing quick loans. There is no shortage of lenders willing to give them fast access to cash. The problem is that speed usually comes with a price.

Many of these loans carry astronomical interest rates and repayment terms that create even more pressure on future cash flow. What started as a payroll problem quickly becomes a debt problem. Then the next month arrives and now you are carrying both payroll and loan payments. Some of these quick pay loans have to be repaid weekly, meaning it becomes very difficult to get ahead of your cash flow needs and build up reserves.

The scary part is that this solution often feels reasonable at the moment because payroll feels urgent. But all you have really done is move today’s problem into tomorrow while making it more expensive. I have seen a lot of business owners take these loans and then struggle to get out from under them for 3 years. They end up having to keep borrowing and borrowing and borrowing, never really able to get off the hamster wheel of loans.

Option #2: Prepayment on Invoices

Another option business owners turn to is requesting prepayment from customers or offering discounts in exchange for immediate payment. While this can create short-term relief, it often comes at a significant cost. Stealing from Peter to pay Paul, if you will.

The money arrives today, but less of it actually stays in the business. The profit margins shrink. The cost of goods or scope of the project increases but since you have already billed for it and received payment, it is more difficult to ask for additional funds, which means you take a bigger loss on a project than you were previously prepared for.

Over time, this creates a dangerous cycle where you are constantly borrowing from future revenue to solve today’s cash flow challenges. That is exhausting, and it makes it incredibly difficult to build financial stability inside the business. Often, this comes with a “we had the best sales month ever but where did all the money go?” comment from an owner.

Option #3: Delaying Payroll

This is the option that is the worst option for any owner. When business owners run out of cash, they sometimes ask employees to wait a few extra days for their paycheck. Sometimes it is framed as a temporary issue. Sometimes it is positioned as a one-time occurrence. Sometimes the owner is simply hoping more money comes in before payroll is due.

The problem is that your employees’ trust gets broken. Your employees planned their lives around getting paid on time. Their rent, mortgage, car payment, groceries, and childcare expenses do not stop because your cash flow got tight.

Additionally, labor laws do not care about good intentions. In many states, including California, delaying payroll can create significant legal and financial consequences. Employees can file wage claims, penalties can accrue, and the long-term liability can become far more expensive than the payroll itself.

The Real Solution: Grow Your SAVINGS Account

When the SAVINGS account is properly funded, three payroll months no longer have the ability to wreck a business. The money for the extra payroll is already sitting there, waiting to be used. Every two weeks, 1% of the gross revenue should be transferred from the OPERATIONS bank account into SAVINGS bank account, where the goal is to build between 3-6 months of cash reserves. Extra payroll months will no longer be emergencies. There is simply a transfer from SAVINGS back into OPERATIONS, and payroll gets processed exactly as it should.

But, if cash flow is already a struggle, how do you build up cash reserves in SAVINGS? I invite you to buy my book: OR read my April KPI blog series, where I share how to set your sales goal numbers effectively:

Final Thoughts from Your Favorite Accountant

If you pay employees biweekly or weekly, pull out your calendar today and identify your next extra paycheck month. Then calculate exactly what that payroll will cost and start building your SAVINGS cash reserves now.

Because at the end of the day, positive cash flow isn’t luck, it’s strategy. And it’s my goal to make that strategy as simple as possible for you.

Learn more about our Premium Accounting Services here: