Why Startups Fail At Payroll… And Why It’s Their Downfall

The primary reason why so many startups fail at processing payroll is because entrepreneurs aren’t payroll experts.

People create startups because they have a vision they want to make real in the world. Rarely does this vision have room for a practical and accurate payroll function.

20% of small business fail in their first year. The number one reason?


They say cash is king and with startups, this is the First Commandment. Access to capital is essential to keeping your head above water and being able to grow. At the centre of any successful business, large or small, is a successful and efficient payroll function.

From paying staff to raising invoices from suppliers to paying taxes, good payroll allows your money to work for you allowing your startup to thrive.

So, if you don’t want to end up as just another failed startup statistic, it’s important to get your house in order.

Get the right skills

Recognizing your limits is what makes the difference between a startup succeeding or failing.

Startups need to shore up their weaknesses in payroll and HR.Whether that’s through hiring a professional, seeking out software or reaching out to a dedicated third party.

While your operation is small, you may not be making your money work its hardest. Effective management of payroll can ease cash flow problems and ensure long-term viability.

Having someone on your staff who doesn’t just know how to “do the books” and process the payroll, but has knowledge of your tax obligations as a business frees up time for others to focus on running the business.

The Directors of most startups end up being jacks of all trades, managing payroll, HR, marketing and sales all at once.

According to a study, multitasking decreases productivity by 40%.With so many payroll regulations and tax laws, you want to minimize the margin for error as much as possible.Improper filing and payroll entry omissions will result in tax audits, which penalize companies with hefty fines.

But if you want your startup to be a force to be reckoned with, you don’t need jacks of all trade, you need masters.

Lessons to Learn: Trolls

In 1965, Thomas Dam, the Danish woodworker, fisherman and creator of the Troll Doll lost the rights to his own designs due to a copyright error.

In 1962, he began selling  his dolls in the U.S. through his company Dam Things Establishment. But no one at his company had the skills to understand the nuances of the U.S. copyright laws.

So when his company tried to copyright the Troll in 1965, the design was deemed to be in the public domain in the U.S., making the copyright invalid and the design free for all to use.

Prioritize employee retention

As an employee, choosing to move from an established business to a startup comes with certain risks. Is there room for progression? Will there be opportunities for personal growth? Does the startup have an infrastructure for employment that I have come to expect?

Startups offer exciting opportunities for top talent to explore new ventures. But, if you want to retain the masters of the craft, that you need for your business to thrive, you need to make sure that their basic employment expectations are met.

Employee retention begins with onboarding and is reinforced with accurate payroll. The cost of employee turnover is huge. Some recent estimates putting the price at $45,000 to $150,000 to replace an employee.

When you hire a few more employees, you might not be able to keep them if you can’t reliably and accurately pay them on time.

In the U.S. 82 million employees have experienced paycheck errors. Of those, 49% will start job hunting if they experience just two payroll errors.

Organizations with a strong onboarding process have an 82% higher new hire retention rate. The most effective onboarding programs take advantage of technology, emphasize assimilation and foster new-hire socializing.

Advanced HR tools provide on-demand training that goes beyond traditional “classroom” learning. They also provide proactive structures for learning, so employees and managers can track and record internal training success.

Combining technology with a dedicated mentor or coaching program helps further development and increase new starter assimilation into your business culture.

Assimilation means that your new hire has bought into your company culture.They feel welcome, wanted and part of something that matters. This is further emphasized through the use of social networking during the onboarding process.

Lessons to Learn: The Father of Silicon Valley

William Shockley is best known as the “Father of Silicon Valley.” But thanks to poor management all of his staff went further than he did.

Shockley, along with John Bardeen and Walter Brattain were awarded a Nobel Prize in Physics in 1956. Their research into semiconductors led to the creation of the transistor. The invention of the transistor is how you are able to read this article on a computer.

Shockley was also, by all accounts, the worst manager in modern history. Among his many lacking qualities as a manager, he deeply distrusted his workers.

He had a habit of publicly berating his staff. He would even hook them up to lie detectors to determine whether any of them were sharing secrets with his competitors.

Of the eight highly trained and inventive individuals hired by Shockley to market semiconductors, all of them quit. Those men went on to found 65 companies in Silicon Valley, including giants such as Intel.

Thanks to his inability to retain his staff, Shockley missed out on the potential patents, money and success that his staff went on to achieve.

Structure for growth

Successful startups grow fast. Real fast. Even if its unsustainable, fast growth is what startup investors want to see. From distribution to sales and HR, your internal structure needs to be flexible and scalable.

Growth leads to more growth, but if you can’t support that growth, you’ll start to run into trouble and you may end up a few squares back from Square One.

In order to manage successful sudden growth, your back office functions need to be scalable. Make sure you have internal structures and tools that allow for expansive growth, and that your outsourced providers can scale with you.

Lessons to Learn: Borders

Borders went from being a local bookstore to a global giant. But were unable to sustain growth when it mattered the most.

Tom & Louis Borders founded a small bookstore in 1971, while still at college. Over the years, the business was a modest success, until it began global expansion in 1997.

But their international dreams were dashed by a lack of internal growth structure, which led to mounting debt.

At a time when ebooks were the direction to invest, Borders was unable to pivot. The finances went into freefall and Borders was forced to closed all of its retail locations in 2011.

The business went into liquidation, its assets in the hands of competitors, such as Barnes & Noble and Kobo.

People say that startups need to focus on what they’re best at: “building their business”. But that’s not what they’re best at. Entrepreneurs have a single driving focus towards their vision. They excel at one thing and sometimes that results in something that transforms the world.

But for every successful startup, there are a hundred that failed because they didn’t get the right skills, keep their best talent or weren’t prepared for growth.

Don’t become another startup statistic. Get your payroll in order.

The article was produced for Times of Startups by Gary Webb, Marketing and Communications Director at FMP Global. With over 25 years experience working with household names such as National Express, Halifax Bank of Scotland (HBOS) and Camelot (The National Lottery) Gary has huge market expertise across the outsourced services sector.

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