Managing Staff Redundancy Costs and Cash Flow

Redundancy is one of the most challenging decisions any business has to make. As a company director or business owner, it is essential to understand the consequences of staff redundancy and the legal obligations of both employers and employees when faced with redundancy. Managing staff redundancy costs can be complex, but there are steps you can take to reduce the impact on your business. In this blog, we will discuss how to manage staff redundancy costs, minimise negative impact and reset your business.

What is staff redundancy?

Making an employee redundant is a difficult strategic and emotional decision a business makes to maintain cash flow and keep the business financially stable. Employers are legally obliged to provide redundancy pay as a form of compensation for staff who are being made redundant.

If you’re facing redundancies, there are several steps you can take to minimise the pain:-

1. Understand the Costs Involved

Before you decide to make employee redundancies, it’s important to understand all the costs involved. This will help you make an informed decision and avoid any unexpected or hidden costs down the line. Redundancy costs can vary depending on your location and industry, but it’s important to factor in the following costs:

– Pay in lieu of notice (PILON)

– Statutory redundancy pay

– Unpaid wages, bonuses, and holiday pay owed

– Costs of finding and hiring replacement staff

– Legal fees

2. Consider Alternatives

Before making the decision to make staff redundant, it’s worth considering alternatives to compulsory redundancy that will help increase company cash flow. These alternatives could include offering voluntary redundancy packages, reducing hours, implementing a recruitment freeze, or negotiating pay cuts or freezes with employees. These alternatives can help you save costs and also minimize the impact on your staff.

3. Calculate Redundancy Pay

The business you are running may not be in the financial position to cover the costs of redundancy pay but would otherwise be able to carry on trading. In these circumstances, you can apply to the Redundancy Payment Service which is part of the Insolvency Service.  Redundancy payments will be made directly to your employees.   The amount of redundancy pay is due back from the company over a period of time.  This is a loan and as an employer you are financially liable, meaning you will have to cover the costs in the future. To access the Redundancy Payment Service you must not be subject to formal insolvency proceedings, as a company director you will need to provide evidence that other options were explored to obtain the funding necessary to cover redundancy payments. If your business meets these criteria, to complete the application you will need to provide these documents; evidence checklist, solvent employer case set up form, and details of employees who will be receiving redundancy payments. 

Clearview can be used to produce the P&L, balance sheet and cashflow forecast which is a requirement of every application.

Typically, a member of staff that has worked within the business consistently for 2 or more years will be entitled to statutory redundancy pay, which can be calculated with a redundancy calculator for employers. At Clearview, we provide a free to use redundancy pay calculator which can help calculate redundancy.

4. Scenario Plan Carefully

Careful planning is critical when managing staff redundancy costs and cash flow. You need to ensure that you have the necessary funds available to cover all the costs involved, including any future debt that may be obtained. This will help you avoid any unexpected financial burdens in the future. Knowing the difference between profit and cash is essential and our cashflow calculator can help with this. Additionally, it’s essential to plan the timing of the redundancies to ensure that you are not caught unprepared. This is where scenario planning is going to become your number one tool. You can try out different scenarios and immediately see the impact on your business’ cash flow. We suggest you create at least three scenarios: best case, worst case, and the most likely scenario. These should take into account which roles will be made redundant and the impact on revenue of each role disappearing.

 

5. Communicate Clearly

Communicating effectively and sensitively with your employees is critical when making redundancies. It’s essential to have transparent and timely communication with your staff throughout the process to keep them informed and up-to-date. This will help minimise any stresses or concerns they may have about their future and give them time to prepare for their next steps. The employees you’re making redundant will naturally be worried about their own financial circumstances and whether they’re going to be able to pay their bills on time. Keeping them in mind and informed about the company’s situation – the steps you’re taking to deal with it, and the fact that you’re not just writing them off – can ease their concerns.

6. Discretion is key

As the company director you may need to make some sensitive decisions to save your business. It’s important to make sure only the staff that need to know about any imminent redundancies are advised – and it’s important to have a stringent policy in place to ensure privacy and discretion are maintained.  You may also need access to data such as salary or payroll information that is in the hands of your employees or linked to other software. Clearview is a standalone piece of software which can be used separately to your payroll or accounting software giving you maximum discretion.

7. Seek Professional Advice

Managing staff redundancies is a complex process, and it’s always best to seek professional advice. An experienced HR professional or HR solicitor can help you navigate the process, ensuring you are compliant with your legal obligations and that your staff are treated fairly and with sensitivity. If you need help with the financial aspects, companies such as our sister company Porterdale can help with completing a checklist to put you in a strong position for redundancy pay eligibility.

Managing staff redundancy costs and cash flow can be a daunting task, but with careful planning and expert advice, it can be achieved effectively. By understanding the costs involved and considering alternatives, you can minimise the impact on your business. Clear and transparent communication with your employees is also crucial to ease any anxieties they may have about their future. If you are facing staff redundancies and have exhausted all methods to receive funding, contacting the Redundancy Pay Service may be a way to help your business to continue operating.

Clearview is a stand-alone cashflow forecasting tool that help you make decisions regarding the future of your business. In order to benefit from Clearview sign up for free today.