I’ve met payroll 605 times. I’m proud of that.

We’ve never failed to pay our employees on time. We’ve never asked them to hold their checks for “a few days.” We’ve never told them we’d get it to them “as soon as we can.” We’ve never asked them to work for free.

We pay our folks twice a month, and it seems like the next payroll comes up nearly immediately after the last one.

Of course, payroll is our single largest expense. In fact, it exceeds all of our other expenses combined.

Payroll is tough. It’s always coming up, and it’s always a big number. Payroll is frightening.

The looming payroll is one reason I always encourage you to put off hiring until it’s absolutely essential. It’s scary and challenging.

I’m proud that we’ve been able to pay our employees on time, every time for 26 years. It’s the tangible evidence of our commitment to our team. We do what we promise.

But meeting payroll isn’t something every law practice does each time payroll comes due.

Some law firms struggle to meet payroll. Some simply can’t pay on payday. I’ve heard it all.

• “We’re maxed out, we’re overextended, and we’ve got to put it off.”
• “It’s okay. Our people are committed. They’ve agreed to help us out this once.”
• “We’re a team. It’s not about me, it’s about us, and we’re all willing to sacrifice for the good of the group.”

The Effects of Missing Payroll

Here’s what happens when you miss payroll (even if only by a day):

Trust

Trust evaporates. It’s gone. Failure to meet payroll cuts to the core of the employer/employee relationship. No matter how much “It’s okay, I don’t mind” talk you get, you’ve damaged the relationship. No promise will ever again be heard in quite the same way. The damage that’s done is dramatic, permanent, and irreparable.

Rumors

About 20 minutes after you tell folks you can’t pay (and you’d better tell them before they figure it out on their own), there will be talk. It’ll spread like wildfire through the legal community. Everyone will know instantly. News of your failure to meet payroll spreads even faster than information about you sleeping with your paralegal and getting caught by your spouse. It’ll be the talk of the town immediately.

The Doors

You’d better lock the doors from the outside, because your team will be rushing out of them. Résumés will be fired up in the word processor, and job-inquiry e-mails will be headed out to the world. The job hunt is on. Soon you’ll be left with only those who can’t find a better position. Let’s face it: while we love working for you, we love getting paid even more. Buh-bye, sweetie pie!

Reputation

You can literally see your reputation die as the rumors fly, employees leave, and people realize they can’t count on your promises. This business is all about trust, and you just blew it. Your reputation will take a beating, and it’ll take a very long time to recover.

How to Handle Payroll Woes

What do you do if meeting payroll is in jeopardy? What if you’re facing this issue right now?

1. Act Early

Fire people. Cut the team down to size. Get the expenses under control. If you’re operating with next to nothing in the bank account, then it’s time to increase revenue and cut expenses. Your business needs to operate at a profit. If you can’t make that happen, then you need to shut it down and get a job working for someone who can earn a profit or who is willing to pay you anyway. If you’re feeling panicky as we talk about payroll, then you need to get this resolved or give up and move on. There’s too much at stake. Wouldn’t your team rather have a job where payroll is questionable than be unemployed? That’s just you trying to rationalize your situation. Cut the expense.

2. Reserve Fund

It’s essential that you figure out a way to operate with a reserve fund. You need cash in the bank to meet payroll. You should set a minimum balance that you feel is right and act when that balance is in jeopardy. Some argue for six months of payroll in the bank. That feels high to me, but I suppose it depends on your tolerance for stress and the nature of your practice. The reserve fund is the only surefire way to keep you from missing your payroll deadline.

3. Hire Slowly

Don’t let the peer pressure to hire cause you to increase your payroll before you’re ready. Hold off on hiring. Stretch your team to their limits before adding help. Keep everyone maxed out, and you’ll be able to hire only when people reach their breaking point. It’s better to have people stressed about being too busy than stressed because they aren’t sure they’ll get paid. Some stress is inherent in every job. We all strive for excellent work conditions. Remember, however, that getting paid is a threshold “condition.”

4. Variable Pay

Instead of hiring and adding to the payroll, figure out ways to get the work done without committing to payroll. Pay overtime as you max out the team. Pay bonuses when things get even busier. Use virtual help or hourly workers so that you’re not committed to paying wages when the work doesn’t justify the expense. Tie your expenses to your revenue so that increases in revenue are available to pay the increased expenses. Be sure that declines in revenue also result in a declining payroll obligation. Variable pay is your best friend in solving the payroll problem. In an ideal world, all payroll is variable and linked to profitable revenue.

Take Control Now

If you’re coming close to hitting the payroll wall, then take action now, before you do permanent damage. Get yourself backed up to a point where you’ve got your finances under control. Get off the tightrope and walk on solid ground. The failure to meet payroll is dangerous territory, and you don’t want to be in that zone.

As I mentioned, I’ve met payroll 605 times, so far. I truly am proud of our consistent, steady record on that front. But payroll number 606 is just a few days away. I can already feel the stress of maintaining our reserves while making good on our commitment. The payroll just keeps on coming. It’s always hanging over us. It’s always a source of pressure. Manage your business so you can be proud of your record too.