When a client tells you they can’t make payroll, your role as their accountant suddenly becomes more difficult.
You need to work out whether you’re looking at a short-term cash-flow problem that can be resolved, or something more fundamental that could put the future of the business at risk. It is a situation accountants can encounter when supporting clients through financial difficulty, but it doesn’t necessarily mean the business is beyond saving.
At BRI Business Recovery and Insolvency, we work alongside accountants at exactly this point. We can help you assess how serious the situation is, understand what options may still be available, and decide when it is time to bring specialist insolvency advice into the conversation.
Why Can’t a Business Pay Its Employees?
Missing payroll usually comes down to one of two things: a short-term cash-flow problem, or a deeper balance-sheet problem where the company owes more than it can realistically repay.
Telling the difference is one of the most useful things you can do in that first conversation with your client.
A short-term cash-flow problem might be caused by a late-paying customer, an unexpected cost or seasonal pressure. If the underlying business is viable, there may still be ways to bridge the gap, such as a Time to Pay arrangement with HMRC, short-term finance, disposal of non-essential assets or restructuring.
A balance-sheet problem is different. If the business cannot realistically meet its liabilities from the money it expects to generate, simply finding a way to get through this month’s payroll may only delay the bigger problem.
Getting that distinction right shapes everything that follows. If the numbers aren’t giving you a clear answer, that is often the point to bring in a second, independent set of eyes.
Early Signs of Payroll Problems
By the time a client tells you they can’t make payroll, there are often signs that the pressure has been building for some time.
As their accountant, you may be in the best position to spot them:
- Payroll is being delayed by a few days and it is no longer genuinely “just this once”.
- HMRC or supplier payments are being pushed back to protect the wage bill.
- Directors are putting their own money into the business to cover payroll or deferring their own salary payment.
- Cash reserves are being discussed in weeks rather than months.
- Your client becomes uncomfortable or vague when you ask how the next payroll run will be funded.
None of these signs means that formal insolvency is inevitable. What they do suggest is that the business no longer has much room for a bad week. The earlier the conversation happens, the more options there may be.
If any of this sounds familiar with one of your clients, it is worth talking it through before the next payroll date arrives.
What Does Missing Payroll Mean for Directors?
The consequences of missing payroll aren’t just reputational and unsettling to their workforce.
Directors have responsibilities to the company and its creditors when a business is in financial difficulty. Continuing to trade, including continuing to incur liabilities such as wages, when they knew or ought to have known there was no reasonable prospect of avoiding insolvency can put their personal position at risk.
That doesn’t mean every missed payroll results in personal liability. It does mean directors need to take the situation seriously and seek appropriate advice when they become concerned about the company’s solvency.
There is also a practical cost for employees. Employees have their own bills to pay and personal financial commitments. If the situations isn’t managed correctly, commonly employees will start to consider there alternative options. The loss of key employees can have a knock-on impact on any strategic recovery plan that is put in place by the client.
If a company ultimately becomes insolvent, employees can look to claim certain amounts through the Redundancy Payments Service, including unpaid wages, holiday pay and redundancy pay. However, statutory payments are subject to eligibility rules and statutory limits, meaning employees may not recover everything they were originally owed. The government provides further guidance on how these payments are calculated.
Delaying the difficult conversation rarely makes the situation easier for anyone.
What Can Accountants Do When a Client Business Can’t Pay Wages?
Once it is clear that the missed payroll isn’t a one-off, there are a few things worth working through with your client straight away.
1. Establish what you’re dealing with. Separate short-term cash-flow pressure from balance-sheet insolvency, and be clear with your client about what the numbers are telling you.
2. Talk to HMRC where appropriate. If the problem is genuinely short-term, explore whether a Time to Pay arrangement could help the business manage its tax liabilities to attempt reduce the cash flow pressures.
3. Look at the available funding and restructuring options. Emergency finance may provide a solution in some cases, while others may need a more fundamental restructuring of the business by reducing operating costs. Although, emergency finance can result in directors being exposed to personal guarantees, which is a separate conversation to have with the client.
4. Document your advice. Keep a clear record of what you advised, when you advised it and what your client decided to do. Good records matter, particularly as financial difficulties develop.
5. Bring in an insolvency practitioner early if insolvency looks likely. You don’t need to wait for a second missed payroll, or for the situation to become unmanageable, before seeking specialist advice.
None of this needs to sit on your shoulders alone. Involving an insolvency practitioner early doesn’t mean handing over your client. It means giving yourself and your client another perspective on what is happening and what options remain.
How BRI Helps When a Client Can’t Pay Wages
This is where we come in.
At BRI, we work alongside accountants on corporate insolvency and restructuring cases that often start with exactly this conversation: a client who has missed, or is about to miss, payroll.
We’ll help you understand what you’re dealing with, what options may be available and what your client needs to focus on now, while respecting the relationship you’ve already built with them.
Sometimes you simply need a second opinion. Sometimes you need to know whether the situation has moved beyond what you can reasonably advise on yourself.
Either way, we’re happy to have that conversation.
If you have a client whose company can’t pay its employees, or you simply want to talk through something you’re seeing, contact our team. There is no charge for this initial confidential conversation and there is no obligation to proceed.