When setting up and doing payroll, create a payroll reserve or margin account to assure that employees always get paid and get paid on time. Business cash flow may come and go but there are always bills to pay including payroll for your employees. When you create a payroll reserve account or margin account, you always make it is funded sufficiently to make the next payroll.
Many times the most important thing for setting up a cash reserve for payroll and other purposes is effective management of cash flow. A cash reserve is a hallmark of a successful business. And, it is a hallmark of an effectively managed business. At Exigo Business Solutions we often suggest that our clients use a business management method called Profit First. This system is set up so that your business takes a profit off the top with each pay cycle and puts aside money for taxes, owner’s pay, and things like payroll. To make this work you need to learn how to manage cash flow and spot the hidden expenses that typically rob a business of profits and working capital.
The first thing you need to do is determine how much money you need to have in reserve to manage payroll. This will not only include what you are paying out twice a month but also how much you are deducting and holding in reserve for taxes, FICA, and the rest. Then you need to look at how much money is coming in and what other expenses need to be cover and when. If this is a bit complicated, please contact us at Exigo Business Solutions and we will be glad to help.
This job is easier if you have steady income but can get a bit tricky if your business is such that cash comes in large but infrequent amounts. If that is the case you may need to incorporate a line of credit to help with the payroll reserve while you are waiting for the next big payment.
Your bookkeeping is not just to tally up the numbers and give you a bottom line. It should provide you with insights into your finances and clues for how to manage issues like setting up a payroll reserve. At Exigo Business Solutions we commonly recommend that our clients use QuickBooks bookkeeping software to track expenses and make sense of their finances. When you use a tool like QuickBooks it will be easier to manage cash flow and keep your payroll reserve financed. As an example, look at your last six months of cash flow for income and expenses to determine where the money can come from for your payroll reserve.
As a rule you would like to have three months of payroll reserves on hand although six months is better. Talk to the experts at Exigo Business Solutions for advice on this.
