Can Your Small Business Afford Christmas Bonuses?

Does your business offer a bonus to staff members at the end of the year? Christmas or holiday bonuses, like all staff bonuses, are one of those complex items that a business must plan for well in advance.  Without adequate planning, a business of any size will experience cash flow stress. On a personal side, you can also instigate staff disappointment or unintentionally lower the morale of your team.

Managing employee expectations

Expectations for bonuses need to be clearly set in advance. Explicitly list performance expectations and targets required to qualify for a bonus. It’s important to advise staff members not to include bonus income in their personal budgets. A bonus is not a sure thing and it’s easy for staff to become demotivated if it’s not awarded.

I highly recommend anyone employing staff watch this excellent video on how to motivate people.

Before you introduce a staff bonus, consider this

If your business is thinking about introducing staff bonuses, make the following considerations before you take the plunge:

  • On a strategic level, are bonuses going to increase or decrease motivation and performance of employees?
  • What will guide the awarding of bonuses?
    • Individual staff performance
    • Overall success of the business
  • Will sales performance affect bonuses? If so, how will this be communicated to team members?
  • How will you reward staff who don’t directly affect sales (e.g., people working in customer service and administrative roles)?
  • Will bonuses be given to staff based on the before tax (EBIT) financial results of the business?
  • What per cent of EBIT will be allocated to bonuses?
  • Will the percentages awarded to staff be based on responsibilities and roles or will every employee be eligible for the same amount?
  • How will you set expectations regarding bonuses and are they something your staff will generally bank on?
  • How will your management team communicate to staff in advance if the business will not be paying bonuses in a given year?

Will your cash flow suffer?
If, after considering all of these factors, you decide to reward Christmas bonuses, take the following steps to ensure you are financially ready for the added cost:

  1. Ensure you have a clear cash flow budget so you know with certainty you have funds to pay the bonuses when expected.
  2. If your bonuses will be based on sales performance, budget for these as a cost of sale and account for the money in your cash flow forecast.
  3. Before you offer bonuses, complete a scenario analysis on your business performance so you have a clear understanding on when you can and can’t pay the bonuses.
  4. To make sure your bonus payments do not have a future impact to your business, add the payouts into your cash flow forecast.

Remember, a Christmas bonus should be as the name suggests, a bonus. Under no circumstances should your business feel an obligation to give them out. In Australia, among other countries, employees don’t necessarily expect a bonus, so if your business cannot accommodate one this year it doesn’t mean you’ll lower employee morale.

Find out more about cash flow and budgeting

If you need help deciding whether your finances can accommodate Christmas bonuses, why not try out Reep? Our visual representations of cash flow forecasts give power back to business owners to help with financial decision-making.