If you ask most startups how often they run payroll, the most common answer will be: “Twice a month.” Now ask them why they run payroll twice a month, and they will give you a puzzled look and then probably respond with, “I thought that’s how it’s supposed to be,” or, “That’s how often I got paid in my job at <some big company>,” or some similar variant. In fact I’d love to hear in the comments why your startup decided to do payroll twice a month?

That puzzled look is key though, because it tells me that it was something the founder hadn’t considered before.

Startups are agents of change. The entire premise of a startup is to change the status quo. They bring technological change, market change, behavior change, business model change to bear. In order for a startup to be successful it has to catalyze some form of change — even if it’s as simple as making users change from using the incumbent product to the new product. In a lot of ways you can think of a startup as a mechanism/structure for a group of people to come together to incite change (don’t you love the revolutionary undertones of that!?).

Well, then why do we not question the payroll cycle? Your payroll vendor of choice says you should run payroll twice a month and boom, you’re now locked in to doing payroll twice a month!

In my first company,  I was doing everything that anyone else in the company wasn’t doing (C*O) and since we only had engineers on board, it meant that I was doing the payroll too. At that time payroll wasn’t as automated as it is these days. We were using ADP, but everything was still on paper. A courier would deliver a package to the office that contained paper pay stubs, checks, and the tax documents etc., and then I would have to sit there, sign all the checks, hand them out, and then worst of all, try to make sense of how to enter the data from the piece of paper into Quickbooks for accounting purposes (hated doing that part!).

The first time I processed payroll, I realized this is a pain in the rear and I didn’t want to deal with it twice a month. So I called up the payroll processing company and I changed the payroll cycle to be once a month. It turned out to be a brilliant move. Not only does doing payroll once a month involve less administrative overhead, but it also means that as a young bootstrapped startup you now have a month to be able to get enough cash in the bank to make payroll! That’s a heck of a lot less stressful.

When I’ve described this to founders their first reaction is “Can you do that?” Well, the answer to that is simple – Yes. Their second reaction is, “but my employees may want to get paid twice a month.” My fix for that is that if anyone needs cash before their first pay cycle the company can give them an advance, and then deduct the advance amount from the person’s first pay check. Now this should really only be necessary once (a priming issue), or on a very infrequent, special situation basis. For most people, I expect them to be able to manage their personal finances such that whether they’re getting paid $1,000 once a month (say on the 1st of the month) or $500 twice a month (on the 1st and 15th of the month) it shouldn’t make a difference to them. If someone isn’t able to manage their personal finances well enough then that’s a signal that there are other deeper problems.

In fact, I would even recommend including this in the offer letter: “We pay once a month, on the first day of each month for the preceding month. Fir  your first pay cycle, the company would be happy to provide an advance upon request,” or something like that. If the company wants to be extra nice, the first month advance could even be standard practice that can help transition employees who are used to a twice a month pay-cycle from their previous employers over to a once a month payroll cycle.

It is important to point out that setting the payroll cycle frequency is something that is best done in the very early stages of the company. Trying to switch from doing payroll twice a month to doing it once a month is probably going to ruffle feathers and have people asking questions. So this is really something to think about early and decide accordingly. Also as the company grows and becomes a real business with a significant number of employees and you have a HR person on board, then no one should really object to getting paid more frequently.

So my protip for companies that are just getting started is to think about doing your payroll once a month. Why? Well…

• * Less overhead: 12x a year vs. 24x a year.
• * Less expensive / More cost-efficient: Since most payroll service providers charge on a per payroll basis, running payroll less frequently means you’re paying less to them.
• * More time to manage cashflow: You have ~30 days between your biggest cash outlay. Those extra 15 days can mean closing another deal, collecting on that receivable, or getting an investment before the payroll deadline.

And for anyone who want to get paid twice a month? Give them an advance the first time. Deduct it from their paycheck and then they should be good with the next cycle being once a month.

You can follow me on Twitter at @ManuKumar or @K9Ventures for just the K9 Ventures related tweets. K9 Ventures is also on Facebook and Google+.