Weathering a Minimum Wage Increase
Minimum Wage Increases and Your Small Business
Minimum wage increases has been a fiercely debated topic as of late after the proposed implementation of a 15$ universal minimum wage was brought up during the Canadian federal election campaign. While there are plenty of positives associated with increasing minimum wage across Canada, the impact on small and medium sized businesses could be disastrous.
While this proposed increase would only apply to federally regulated industries like banks and airlines, the popularity of the proposition has many business owners asking themselves “what if?”. As it stands, each province sets its own minimum wage standards so while a universal increase may be far fetched, it could still happen. Let’s explore the hypothetical.
Do I have To Increase Wages for All Employees?
This is one of the more difficult questions that business owners would be faced with if an increase comes into effect. Here’s a typical example of a restaurant staffing situation:
Bus boys are currently earning minimum wage, waiters are making $15/hour and senior staff is making between $15 and $20. If the minimum wage were to increase to $15 an hour without increasing other wages, bus boys would now be making just as much as waiters and nearly as much as senior staff.
Although every business has a unique wage structure, they will all have to approach this issue with caution. There are really only two obvious options; to raise all wages equally or to raise only those below the threshold. Without raising other wages, those employees will likely feel demotivated. Why should they hold a higher-ranking job just to be paid the same? The employees may no longer feel that the business rewards good work. On the other hand, if all wages are raised then the phenomenon economists call the domino effect will could come into play. This means raising each pay grade up a notch to satisfy these employees. At the end of the day, no one understands a business better than the owner and in this case the only one who can make the decision as to which strategy is best for the business is the owners themselves.
How Much Would a Minimum Wage Increase Affect My Business?
This will vary from business to business. It depends on profit margins and the structure of your particular enterprise. We know that many business owners truly believe their employees are worth more than the minimum wage. That being said, it doesn’t necessarily make a wage increase economically feasible. A restaurant owner in B.C. is quoted rather frankly here:
“My employees deserve to have $15, they probably deserve to have $20, but can I raise my prices by 40%? No friggin’ way.”
In order to compensate for what can be a nearly 50% increase in wages in some provinces, a reallocation of costs will need to take place. If the business passes the burden onto their customers by raising prices, they risk losing clientele. On the other hand, if businesses absorb the added cost themselves, their bottom line will suffer.. Some economists believe a wage increase would stimulate the economy, however not all business types will profit from these market segments
How Can I Ease The Transition?
Businesses’ will have to get creative to make it work, often-using trial and error until they find something that fits. Some things to consider:
Know what you can afford
First thing’s first, you have to know your bottom line. Before you can plan for or put measures into place you need to understand your profit margins, sales cycles, and cash flow inside and out.
Trim the fat
Take inventory of everything your business is spending on and see where you can trim down. Consider automating some tasks with tech, like a bookkeeping software instead of having an actual bookkeeper. Audit your full time positions to see if the work can be done part-time. Consider working with contractors and freelancers where it makes sense but make sure to invest in your full-time, permanent employees as well. Have a thorough vetting process and hire more experienced and skilled workers, which will cut down on turnover, increase profitability, and avoid the minimum wage issue altogether.
Play with pricing
Research your competitors to see how much of the increase can be absorbed into your pricing. Some restaurants in the US have been successful revamping their menu prices to be all-inclusive, informing patrons that tipping is no longer required. Others have added a fixed percent service charge to bills. This helps to eliminate tip inequalities and redistribute the wealth to all minimum-wage staff versus just the individuals receiving said tip.
At the end of the day, the biggest hurdle small and medium sized businesses will face is the need for additional capital. As discussed, funds can come from raising prices or cutting costs. A likely scenario is that many small businesses will need to look outside of their own organizations to get the extra capital they need. By applying for small business financing from either a bank or an alternative lender like Evolocity, businesses can have a safety net to fall back onto should other methods prove unsuccessful.
Remember, the holidays are right around the corner! Does your small business need a financial boost to manage increased staffing? Our Merchant Cash Advance is a good short-term option to fatten up your cash flow and get you through busy season. Contact us with your questions.