The short answer. Make the next payroll first, legally and in full. Tell your team early, never skip payroll tax deposits, collect every overdue receivable this week, cut variable spending, and bridge the gap with your line of credit or owner cash. Avoid merchant cash advances. Then compute the Working Capital Gap that caused the shortfall, because a missed payroll is a symptom.
This Week, In Order
- Know the exact number. Net pay, payroll taxes, and the date each is due. Not an estimate. The real shortfall.
- Collect what you are owed. Call every customer past due today. Offer card or ACH payment on the spot. Overdue receivables are the fastest cash most businesses have.
- Stop non-essential spending. Defer purchases that are not needed to deliver this week's work.
- Talk to vendors before you stretch them. A vendor who hears from you first will usually work with you. A vendor who finds out when the check is late will not.
- Bridge with credit or owner cash. A line of credit or the owner's own money, put in as a documented loan to the business, buys time without changing the cost structure.
- Tell your team early and honestly. If payroll will be late or partial, people need to hear it from you, in advance. Check your state's wage payment rules with an employment attorney before you change any pay date.
What Never to Do
- Do not skip payroll tax deposits. Taxes withheld from employee paychecks are held in trust. The IRS can hold responsible owners personally liable for unpaid trust fund taxes. Using withheld taxes to cover net pay converts a cash problem into a personal one.
- Do not sign a merchant cash advance under pressure. Fast money on a payroll deadline is the most expensive money there is. See Should I Take a Merchant Cash Advance?
- Do not stay quiet. Employees who find out from a bounced deposit leave, and the best ones leave first.
Why It Happened
A missed payroll is almost never a payroll problem. It is a cash cycle problem that payroll exposed, because payroll is the one bill that cannot wait.
Compute Days of Working Capital: cash plus available credit divided by average daily cost of operations. A trade contractor holding $90,000 against $7,000 a day of operating cost has about 13 days. The healthy band for trades is 30 to 45. That business was always going to hit a wall. Payroll is just where it hit.
Then check the floor. If pricing does not clear Minimum Mandatory Profit, the business is producing less than it is obligated to produce every month, and the shortfall comes out of cash until cash runs out.
Make Sure It Does Not Happen Again
- Build a payroll reserve equal to at least one full payroll cycle, held separately.
- Shorten the operating cycle with deposits, milestone billing, and same-day invoicing. See How Do I Get Customers to Pay Faster?
- Check Days of Working Capital every week, not when the account is empty.
- Reprice work that does not clear the floor.
Frequently Asked Questions
Can I pay employees late if I tell them in advance?
Wage payment rules vary by state and can carry penalties. Talk to an employment attorney before you change any pay date. Telling people early is the right thing to do, but it does not replace complying with the law.
Should I skip my own paycheck to make payroll?
In a true emergency, the owner is usually the last to be paid. But if you skip it more than once, your business has a structural problem. Owner compensation at market rate is part of the floor, not a bonus.
Is a line of credit the right fix?
It is the right bridge. It is not the fix. If you draw on the line for payroll every month, the line has become permanent debt and the cause is still there.
How do I know if this will happen again?
Track Days of Working Capital weekly. If it is below the band for your segment and trending down, the next shortfall is already on the calendar.