Every business has to decide which payroll schedule is best for them and their employees. In this article we look at monthly pay cycles, why they could be better for your business, and how you can move to a monthly cycle and be better off.
The most common frequencies in the Australia are monthly, fortnightly (common in government enterprises) and weekly (common in industries with high casual employment rates). Industrial law and some states do require a minimum pay period – you can always pay more frequently than a defined minimum, but not less.
Each pay schedule has advantages and disadvantages, but if you can pay monthly there are significant benefits.
Benefits of a Monthly Payroll Schedule
- You only have to run payroll once per month, saving labour costs
Processing payroll can be time consuming for even the experts. Doing it once reduces the time you spend, and the opportunity for costly mistakes. It’ll also mean you’re only reconciling your payroll and calculating additional payments like payroll tax and superannuation contributions once a month.
- Employees know they will receive their pay per once a month, which helps everybody involved avoid confusion
When everyone has the same monthly pay date across the business, there’s no confusion about when anyone is getting paid. You can also scale up/down available payroll resources to manage enquiries at peak time each month, saving valuable resources.
- Simple for employers to manage alongside other business functions
Your accountant does monthly reports, your creditors may have 30-day terms, your credit card statement has a 30-day interest free period. Lots of other things in your business happen over a 30-day period; adding payroll to the list helps you better align them all around cashflow highs and lows.
- Better for cashflow, allowing you time to process your payroll around other business activities to maximise your money
If you’re paying monthly, you can nominate a pay date that enables your business to maximise its money. If you’re issuing invoices with 30-day terms, you have the ability to time your pay date to a reasonable period after the reconciliation of those invoices and other income to ensure you’re not over-extending to cover salary expenses.
- It can be cheaper if you pay for services on a ‘per-pay’ basis
If you’re paying for outsourced payroll services, you’ll usually be paying per ‘pay event’, i.e. for every time a payslip is generated for an employee. If you’re generating fewer payslips – you’ll pay less. Simple!
On the other side of the equation, there are some situations where monthly payroll is not possible/difficult.
Potential Drawbacks of a Monthly Payroll Schedule
- You’ll need a payroll solution capable of efficiently running a monthly payroll
It sounds easy, but it’s not. As most basic packages are designed to pay an hourly rate based on hours worked, you will be stuck with manual processing every month. Many basic payroll solutions won’t be able to automatically calculate the same base take-home pay for an employee each month without some manual manipulation of hourly rates to get to the magic number (annual salary divided by 12). And if you’re changing pay rates each month to come up with the right take-home pay – guess what else will happen? Employees will continually ask you why their pay rate has changed each month, increasing the time you spend responding to enquiries.
- Not suitable for hourly, timesheet-based (‘return’) workers
Many award rates and additional interpreted benefits are calculated on a weekly basis. Trying to calculate additional entitlements for a month instead of a week is not only difficult, in some cases it’s impossible. It will also put an additional financial strain on employees who may depend on overtime payments etc. as part of their take-home pay.
- It can put a financial strain on employees, as they only get paid once per month
Getting paid once a month requires additional financial discipline from your employees. There are benefits – just like you, your employees can minimise the time they spend each week negotiating their finances and instead do everything once a month. But if you’re not a great money manager, you can experience increasing stress as you get further from your last pay day (for a laugh: here’s a quick ad from South African cracker company Salticrax demonstrating some of the potential impacts of this).
I already pay weekly/fortnightly – can I change?
Changing payroll cycle frequency is a process, but it doesn’t need to be a difficult one. With a one-off effort to change your processes and communicate the change with everyone, you can be paying monthly and enjoying the benefits with a minimum of fuss.
- Do a thorough cost-benefit analysis – while the benefits of monthly payroll generally are summarised above, there are always business-specific circumstances that make each business unique. Make sure you do a proper analysis of your payroll activity and costs before and after the change to ensure you will get the benefit you’re aiming for within your desired timeframe. If you’re not sure how to complete a cost-benefit analysis for your payroll, contact us for assistance.
- Communicate – as mentioned above, paying monthly can put a financial strain on your employees. Make sure to consult with your team about your plans – including the wider benefits to the business.
- Plan well in advance – give everyone in your team time to prepare (2-3 months is ideal). This allows your employees to change their personal financial arrangements where required and allows you time to adequately prepare and train your staff.
- Consider the payroll solution that best supports your needs – as mentioned earlier, some payroll tools cannot handle a monthly payroll. At the same time as you change cycle, it may be time to consider what solution works best for your needs, and whether a change offers additional benefit.
If you’re considering moving to a monthly payroll, we’re here to help. We can move you from your current payroll solution to a new solution paying at any desired frequency (or multiples thereof!) with free setup and Go-Live in as little as 2 weeks.