Paying your staff overtime can give your business a workable short-term solution for human resource capacity issues. However, it can also cause consequences to your business’s cash flow.
Your staff may welcome the extra money, but you need to understand its long-term effects on your employees’ work-life balance and business time management. Let’s look at how overtime affects your business’s cash flow and time management.
Why Is Cash Flow Important to a Small Business?
Cash flow refers to cash and cash equivalents inflows into the company. These include cash received, cash spent or invested, or debt repayment. The different types of cash flow in a business are:
- Operating cash flow: Net cash from normal business operating activities flowing into net income.
- Financing cash flow: Cash inflow and cash outflow related to creditors and business owners.
- Investing activities: Cash inflows for business equity and/or debt investments sold, collectibles, sale of fixed assets, interests earned, and insurance proceeds.
Financial management requires that cash flow meets the business’ liquidity needs. This means the business can obtain financing when needed, pay its debts (obligations), and finance its activities or operations.
A positive business cash flow means it’s earning more money than the amount spent. The business is also left with enough cash on hand to fulfill obligations like payroll, overtime, loan repayments, and equipment purchases.
A negative business cash flow means its net income can’t fulfill the financial obligations like paying employees and suppliers and monthly rent and lacks money for daily business costs. Every business needs a positive cash flow to maintain its operations.
Can Employee Overtime Affect Business Cash Flow?
Employee overtime can affect business cash flow in different ways:
- In the S., employers are required to pay employees overtime pay for every hour above 40 hours per workweek. Failure to pay employees their overtime can lead to litigation. Litigations are expensive and can cost the business more money and affect its cash flow.
- Closing overtime loopholes to avoid paying overtime can reduce employee morale and performance and cost the company more in the end. Employees will work only on their regular time and leave anything beyond the work hours for the next day.
Allow Overtime Payment Only When It’s Necessary
A business should find good strategies to manage cash flow and allow overtime only when necessary. Generally, overtime hours increase business running costs. If they’re excessive, the business spends more on wages, which can negatively impact cash flows.
Employees will also want to extend their work overtime for extra pay. This means finding an opportunity to delay work and extend overtime periods. This affects employees’ work output and performance, which may end up affecting the business and its cash flow.
The business should find a way to evaluate workers’ productivity to evaluate if underperformance can necessitate the need for overtime. Workers should work overtime only when necessary, such as during peak seasons.
Overtime is a great way to motivate employees and benefit a business, but it can add massive running costs to the business and affect its cash flows. Reducing overtime or scrapping it may also affect employee performance, reducing net business income. Business owners should find better strategies to manage and reduce employee overtime to manageable levels.