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Cash Flow Crisis: Making Payroll

This lesson is a part of an audio course Unconventional Crisis Management by Paul Andrew Smith

So, I was interviewing a guy named Andrew Moorfield for my first book. And he starts telling me about when he founded an internet bank to make loans to small businesses. And at one point in the interview he said, “You know, the first time I couldn’t make payroll was the worst.” Which made me laugh, because if there was a first time, there must have been others. So I had to ask him about it. And it turned out, the reasons he didn’t have enough cash to pay his employees weren’t nearly as interesting as how he handled the situation.

He said he pulled all 25 employees into a conference room. And he wrote a number on the whiteboard and said, “That was our bank account balance at the beginning of this month.” Below that he wrote two other numbers, and explained, “Those are the revenues we expect to get this month and the expenses we have to pay to keep running the business.”

Then he drew a line underneath, did the math, and wrote the result, saying, “So, that’s what we’ll have left at the end of the month to pay your salaries,” and he circled the number. Then just to the right of it, he wrote another number and circled it. And he said, “That’s how much your monthly salaries add up to.”

And then Andrew paused and let the audience assess the stark dilemma in front of them. Because the number on the right was three times the size of the number on the left. And then he did something else strange. He asked the employees—all 25 of them—what they thought he should do about it. Now, he assumed the fairest thing to do was to pay everyone a third of their salary. But the team surprised him with a different suggestion. They thought a better method would be to pay a third of the employees all of their salary, and the other two-thirds none.

Well, Andrew was mortified. How could he possibly choose which employees to pay and which not to pay? But they surprised him a second time when they offered to help there as well. They said they would decide among themselves. So, Andrew left the team to talk. And when he came back, Andrew got his third surprise of the day. The people on the list to get paid were not the ones he expected. He thought the younger employees with the smaller salaries would be in the most desperate position. But among themselves they’d decided that the older ones—the ones with families to feed and mortgages to pay—had the most immediate commitments. Several of the younger ones still lived at home with their parents, or in an inexpensive apartment, and had no family to support. They were the ones who volunteered to go without.

So, Andrew thanked them for their understanding and cooperation. He honored their decision and paid the employees accordingly.

Now, Andrew learned a lesson from that experience he’s used to this day. When faced with a difficult decision that will result in people being disappointed, do two things. First, be real, open, and honest with them about the situation. Lay all the facts out in detail. Don’t shroud them to incorporate secrecy or describe the situation in vague, opaque terms like most big companies do: “Unfortunately, the company’s current financial condition requires that we make adjustments to employee salaries and benefits for an indeterminate period of time. Compensation will return to normal levels when key balance sheet metrics are restored.”

That kind of corporate-speak is loaded with one vague abstraction after another and probably raises more questions than it answers.

The second lesson Andrew learned was to ask the affected parties how they would decide if it was up to them. In Andrew’s case, they suggested a solution that he would never have thought of. But even if that doesn’t happen, when asked to put themselves in your shoes, with all the facts at their disposal, 9 times out of 10 they’ll probably come to the same decision you did. At that point, it’s far easier for you to deliver the decision and them to accept it.

Okay, in the next lesson, we’ll see how one of the oldest life insurance companies in the world handled a claim that should have bankrupted the company.

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Written by

Paul Andrew Smith