The Dangers of Annual Leave Balances on Cash Flow Management

January 7th, 2022

Cash flow problems are the leading cause of business failure for small businesses in Australia, and sometimes the causes of these problems aren't obvious. Did you know that letting your staff build up large annual leave balances could put your future business cash flow at risk? 

If you have a large annual leave liability on your balance sheet, you may be at risk. Read on to find out how, and ways to mitigate the risk for your small business.

The problem of unused leave balances

The National Employment Standards in Australia specify that full-time and part-time employees are entitled to four weeks of fully paid leave. Some occupations have more.

However, it’s a fact that many Australians don’t take their full four weeks each year for various reasons. The result is that their leave balances build up, and they are entitled to their full leave balances if they decide to quit your business. This can result in cash flow problems if you allow excessive leave balances to build up, particularly if you have large staff numbers in your business.

It can also be a problem if you have a lot of staff all requesting long breaks simultaneously, both from a cash flow and staff morale problem. Obviously, if you approve all the leave, it must be paid, and business productivity is likely to suffer. On the other hand, if you don’t approve everyone’s full request for extended leave, it can seriously affect staff morale and your work relationships.

Fair Work Australia defines excessive annual leave accruals as being more than eight weeks for ordinary employees and more than ten weeks for shift workers.

Be wary of the ‘great resignation' and the risk of negative cash flow

Many analysts are beginning to notice a resignation trend among workers worldwide since the COVID-19 pandemic hit — it’s been termed the ‘great resignation’. Nearly one million Australians changed jobs last year alone. If you have excessive leave balances among your staff, being hit by the great resignation could be crippling for your cash flow management. 

As stated earlier, your employees are entitled to have their leave paid out upon resignation. So if they resign with a large balance, they could be leaving with a large sum of money.

How you can keep your staff leave balances under control — and maintain positive cash flow

Thankfully, there are a variety of strategies you can use to encourage your team to take their full leave entitlements each year. They include:

1) Negotiating with staff members to pay out excessive amounts of unused leave. This reduces the employee’s leave balance as they are paid out rather than having the leave owing to them.

2) Encouraging your staff to take regular days off to reduce their leave balances to acceptable levels (such as every Friday or every Monday, if that’s practical).

3) Directing your staff to take leave if they have built up excessive amounts. You must follow Fair Work Australia’s guidelines to ensure your legal compliance with workplace laws if you take this approach.

As your employees' annual leave entitlements accrue, try to keep an eye on how much money you would need to pay them if they gave notice tomorrow. Being aware of how much cash you need to cover any unexpected situations can help you develop a plan around how to manage money shortages. Undertaking a cash flow analysis is great, but you also need to be aware of contingencies like annual leave entitlements — things that may not appear on your latest cash flow statement.

What to do if you’re experiencing cash flow problems

If your business doesn't have enough cash to keep up with annual leave or any other operating expenses, financing options like invoice finance or trade finance can help. It can allow you to pay suppliers upfront and access cash from your accounts receivable ledger before your customers have paid you. Business finance can help your business move forward without affecting your working capital. 

The bottom line

Managing the holiday leave balances of your staff effectively is an important business cash flow management tool and can help to significantly reduce your risk of being caught out owing thousands in annual leave. By keeping on top of your potential cash outflows, you can work towards maintaining a positive cash position.

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