Friday, October 07, 2011

SOP Friday: Choosing Pay Dates

When you start to have employees, your business changes in many ways. Sometimes the simplest decisions have dramatic impacts on your operations and finances. A great example of that is the choice of pay dates.

The decision about when to set pay dates affects cash flow more than anything else. But it also has a significant effect on staff morale and their cash flow. So, without regard to the bank or the payroll process per se, I'm goning to talk about the effect of payroll dates on cash flow and employees.

You would think that pay dates would be a very simple thing, given the fact that every business with employees has figured it out. But there are some gotchas you have to avoid.

The biggest lesson we had to learn was the frequency of paydates. Your state or province has requirements regarding this matter. Google "pay date regulations " to start researching. Of course, the official governing agency in your state is the final word on this.

In California, no employer can pay monthly except the State of California. Everyone else must pay at least twice a month. That means, generally:
- Every two weeks
- At two set times for the month
- Weekly

Paying weekly is great for cash flow, generally, because you need less money for each payroll period. But it increases the "hassle" level because it seems like you're always processing payroll. Whether you do it in-house or pay someone, you'll need to make sure time cards are all in and settled before payroll rolls around again. It also means you need to maintain a steady level of cash in your account at all times.

Weekly pay can also be a hassle for employees that are not good at setting aside a little each week toward rent and other personal expenses. Because they'll get four (or sometimes five) paychecks in a month, they won't get enough for rent from any one paycheck. Bi-weekly or twice a month works better for most employees on this regard.

Paying Twice a Month vs. Every Two Weeks

If you haven't really focused on this question before, you might think that every two weeks and two times a month works out the same. It doesn't. And the the difference can kill your cash flow.

There are 52 weeks in a year and 13 weeks in a quarter. So, if you pay every two weeks, you have an extra pay period every now and then. Paying twice a month, you will have 24 pay periods in a year. Paying every two weeks, you will have 26 pay periods in a year. That means there will be two quarters (and more importantly, two months) with an "extra" pay period.

The totals come out the same for both employee and employer. But that extra pay period can be hard on the employer two doesn't have the discipline to set aside an extra sum every week to have the cash on hand. If you forget about it, or don't plan for it, then you have to come up with an extra payroll twice a year.

The next topic to look at is scheduling the lag time between end of pay period and payday. For example, if you pay weekly, you will probably end the pay period at end of day Friday or end of day Saturday (although it could be any time/day). You will need at least a week to collect time cards, make sure they're accurate, ask the employees to make corrections, and then process the actual payroll. So, with a little work, you could distribute checks one week later on Friday.

For example, you might schedule pay dates like this:

Period January 1-7 will be paid Friday 13
Period January 8-14 will be paid Friday 20
Period January 15-21 will be paid Friday 27

If you have pay periods of 1st to 15th and 16th to end of month, then you will also need at least a week til payday, but the actual pay date will vary because you have to worry about weekends. For example, if your goal is to pay around the 10th and 25th, you might ocassionally move a pay date as follows:

Period January 1-15 will be paid on Wednesday Jan 25th
Period January 16-31 will be paid on Friday Feb 10th
Period February 1-15 will be paid on Friday Feb 24th (because the 25th is a Saturday)

We tried to pay on the 5th and 20th for awhile, but we moved to the 10th and 25th for two reasons. First, the time frame was too short. Because two-day weekends can show up anywhere in the pay cycle, we usually did not have five days to settle time cards and process payroll.

Second, there is a serious cash flow issue with paying on the 5th. We run all managed services payments by credit card on the 1st of the month. Some process more quickly than others. This depends on whether the client is using American Express, Visa, or Mastercard. Generally, the money is available to us on the third business day after the 1st. Because of weekends, the third business day might be as late at the 6th. And, because we have so many holidays moved to Monday in the U.S., that means that the actual payday is moved as late as the 7th.

As a result, we had lots of pay dates where we were apologizing to employees and delaying the payday a day or two. In addition, most employees have rent due on the first, and it's late on the 5th. So getting paid on the 6th or 7th is a real hassle for them.

We solved this by simply moving payday to the 10th and 25th. That gives us plenty of time to let all the credit cards settle. Now our official policy is that pay days are on the 1st adn 25th, and that "Saturday" pay days are paid on Friday and "Sunday" pay days are paid on Monday. This creates a pay period right before rent is due.

Payroll Services

Payroll services (Paychex, ADP, your accountant, etc.) are pretty good at helping you figure out what you need to do to get payroll scheduled. Some of them take the money out of your account the minute you hit ENTER. Others take the money the next day. A few will let you schedule a day 1-2 days out.

In all cases, these services will have standard operating procedures that help you stay compliant with your local and state laws regarding payroll. Every state is different, and a few localities add more regulations.

- Implementation Notes -

Implementing your pay roll procedure is pretty straight forward. You need to decide what works best for you, define it in a one-page memo to employees, and then document the process of actually processing it online with your payroll service.

I think it's a good idea to print out a list of holidays and pay dates for your employees each year, and distribute these during the first week of January. Remember, some "holidays" are not recognized by most businesses and banks (e.g., Groundhog Day in the U.S.). Other "holidays" are recognized by banks but not most businesses (e.g., Columbus Day in the U.S.). Overall, you just need to let your employees know what to expect.

Once you find a pay day schedule that works for you, it should just work smoothly. The only hard part might be moving from one pay schedule to another. Employees are rightfully nervous about losing a little money during a switch like this. So be sensitive to that.

If you're a managed service provider, you might find our system works well for you. Basically, we pay on the 10th and 25th, which is good for us and our employees. We like the 10th because it gives plenty of time for the credit cards to settle into our bank account from the first. Employees appreciate the 25th because it puts a paycheck in their pocket right before rent is due on the 1st.

Your Comments Welcome.

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About this Series

SOP Friday - or Standard Operating System Friday - is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.

Find out more about the series, and view the complete "table of contents" for SOP Friday at

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Next week's topic: Clients Who Abuse the Phones


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