(And three steps you can take right now to protect yourself against them)
When times are uncertain employees often ‘bank’ their annual leave.
As you will know, they do this as it gives them a financial buffer should they lose their job: several weeks of paid leave to help tie them over while looking for a new one.
From their point of view, this short-term financial safety net makes complete sense.
So, can you blame them for stockpiling leave like this?
But when they do, it goes on to your balance sheet.
As a debt.
The risk to you, as an employer?
If leave accrued gets too high…and trading conditions mean you need to downsize…this is a real cost over and above redundancy, at a time when cash flow is tight.
And even if you don’t have to downsize, debt levels affect the amount you can borrow. What if you want or need to source extra working capital in the near future?
All this points to one thing: the importance of keeping annual leave balances low.
So, the question is:
Have you checked your annual leave liability lately?
If not, you may be in for a rude surprise.
Since this time last year, it has probably jumped dramatically.
Because of Covid-19, many of us have not had our normal holidays in 2020.
There was no winter trip to Australia or the Islands, or anywhere further afield.
And if we’ve holidayed at all it has been at home. For many, around the school holidays.
For an average size SME this accumulation of unused leave could mean an extra $185,000 of liability on its balance sheet.
A SME paying the average wage of $52,000 per year to 25 employees would accumulate around $100,000 of leave each year.
But the chances are you will have employees with more than four weeks leave and others who earn more than $52,000 per year. In my experience $185,000 would not be a surprising number for an average SMEs annual leave at this time of year.
That’s the bad news.
But it’s not purely about money.
There are health & safety and productivity aspects to consider.
For example, this Australian study found that employees who take their annual leave, rather than acquiring it for extended periods of time without taking a break, are more productive, less stressed, and happier at work.
The good news?
With a little forward planning, these problems are (relatively) easy to get on top of.
Here are three steps you can take within the next 30 days (or less) to fix them:
# 1. Check your payroll system
Many SME’s don’t record leave accrued liability in their monthly balance sheet.
If this applies to you, look in your payroll system for the balance of each employee’s annual leaved owed.
# 2. Schedule staff summer holidays now
This is the time to talk to employees about Christmas, and really the whole period from November through to April.
And it doesn’t have to be about them being away for several weeks at a time.
Summer leave might be a time to get a bit more creative about how you give employees a break and manage your leave liability.
For example, there could be chances for them to take long weekends across the summer. Or perhaps shorter trading hours with half days off.
Whatever the case, encourage your team to have time off.
Not only does this make good financial sense – in terms of leave liability – but it also helps them recharge their batteries.
We all need to come back in 2021 ready and refreshed for another year of Covid driven recession and challenges.
# 3. Longer term, have an annual leave plan for each employee
Every employee should have an annual leave plan.
As part of this, we recommend operating on this principle: at the end of March, no employee has more than 5-10 days of annual leave entitlement owed.
These are just three quick ways to help you get on top of this issue and keep debt off your balance sheet.
For more suggestions about this – or for help with other business challenges – contact Fiona Harnett at MacGregor Jamee to arrange a needs assessment.
MacGregor Jamee helps SME owners increase revenue, reduce costs, and improve operational efficiency.
We do this by providing them with the sort of high calibre chief financial officer, business mentoring, leadership coaching and business consultancy services often only available to large corporates.
To arrange your free assessment contact Fiona Harnett on 09 5255735 or email@example.com.
Or visit https://macgregorjamee.co.nz/