People costs — be they employees or contractors — are more often than not the largest expense or cash outflow of a business. They are also the most important and are (or should be) the first priority when it comes to payments, so ensuring your planning allows for all their components properly is a crucial part of cashflow and overall business management.
In comparing profit and cash flow perspectives, contractors are generally pretty simple. You receive an invoice for services, then pay it on the due date as you would for any other supplier. However, employee costs aren’t so simple.
Forecasting employee costs for a budgeted profit and loss statement is pretty easy. Assuming a 12-month / financial year is being budgeted for, you simply take all the components (gross pay, incoming tax, net pay, retirement / pension / superannuation, payroll tax, statutory workers’ insurance, annual leave / long service pay) and work out what they will cost for a year. You then divide the total by 12 to get a monthly cost. Some businesses like to budget according to their pay cycle, so they break it down into fortnightly or weekly parts. Where there are known annual or long service leave payouts, these are also factored in.
“Whether we are talking profit or cash flow, the components of employee costs will be the same.”
What happens if you get a cashflow forecast wrong with employee costs?
Late payments of income tax: Your relevant tax authority will never take too kindly to this. The last thing your business needs is a black mark from the government! Plus the interest penalty.
Late retirement / pension / superannuation payments: Vigilant employees whose payments are in arrears may not only complain to you, but register their complaint with authorities.
Forgetting statutory workers’ insurance: this is one of those obligations that can sneak up on you, and a penalty will be coming your way if you pay late. Get organised!
Leave payouts: These cannot all be planned for. You can plan ahead when leave requests come through. Some businesses also mandate leave at certain times when activity is slow.
How to avoid cashflow problems with employee costs
The pitfalls around employee cash outflows are not difficult to keep on top of. The above problems usually only occur due to a lack of organisation and systems. A business needs to be able to identify when all its liabilities are due, and have the tools in place to ensure funds are available so that all liabilities are paid when they need to be.
Use a rolling 12-month (at least) cash flow forecast. All employee costs discussed above occur on at most a 12-month cycle. You know when they are going to occur, to the day, so a good cash flow forecasting tool with a rolling feature will let you know what’s due and when, and the infrequent annual outflows such as workers’ compensation will never catch you unaware again.