Rising wage costs: what can you do?

Increased wages in New Zealand will have a direct impact on business margins. Sue De Bievre explains the actions business owners can take to maintain profitability.​

The new government is bringing in a raft of measures aimed at increasing wages in New Zealand.  Some of the new measures have already been announced and some are in the pipeline, but all look like they will have the effect of increasing labour costs in New Zealand. ​

This is not bad news as it will also positively affect the lives and incomes of many New Zealanders, but small business owners need to be preparing for this now. ​

As a business owner, whether you support this or not, it’s going to have a direct impact upon your margins, and you need to start planning how to deal with this now.​

The most immediate change is the increase in the minimum wage from $15.75 to $16.50 from April 1st 2018, with more rises pegged up to a potential $20 per hour by 2021.​

So how will this affect your labour costs, and your business profitability?​

Potentially, this could change the pay levels of your entire workforce.  If you raise the minimum wage, you may also have to adjust everyone upwards to maintain pay differentials.  Although businesses with a high proportion of low pay employees will be hit hardest, it can potentially push up the whole ecosystem, so think this through in terms of potential impact on your profitability.​

For example, if 30% of your costs are labour and everyone gets the rise, the effect on your margins is as follows:​

2018 - 5% increase ($15.75 to $16.50)      - Impact on net profit =                 1.5% down​

2019 - 5% increase ($16.50 to $17.30)      - Impact on net profit =                 3.0% down​

2020 - 5% increase ($17.30 to $18.20)      - Impact on net profit =                 4.5% down​

2021 - 5% increase ($18.20 to 19.10)         - Impact on net profit =                 6.0% down​

And that’s not all. Chances are your suppliers will be feeling the same impact, which means rising supply costs leading to further pressure on your margins.​

And it is important to maintain profitability, because if not, it can lead to falling business confidence - negatively impacting the whole economy.​

So what actions can you take to maintain your margins?​

If your business is being affected, so is everyone else’s and the market will move up to accommodate the changes.  Also, your customers will understand that you have to pay your people more and that has to be passed on. ​

Plan the process of price changes:​

Now is a really good time to think hard about what parts of your business you could do better/faster/smarter.  Wherever labour is involved, consider alternatives to speed up processes or look for technology solutions.  For example, by providing extra training to your employees they can work faster and deliver a greater output for the same cost. ​

Technology is also moving rapidly and providing faster, smarter ways of delivering what you do. ​

By looking at this, you can improve productivity and often increase the happiness of your employees by removing or reducing menial tasks.​

This is a great exercise to do with your team at the start of the year when everyone’s head is clear after a break.  Involve the team so they have ownership of the process, which will reduce any resistance to change that might otherwise occur.  You may be surprised if you ask your team (sincerely) how they would do things differently to reduce time spent on tasks.  Sometimes staff are sitting on improvement knowledge that gets buried in the normal run of busy work.​

You can focus on the small improvements such as:​

Some of your in-house work could be outsourced to another cheaper provider (or even offshore).  This has to be done with care so your existing team does not feel undermined - but now is a good time to be looking at this as employees will understand your motivation as minimum wages increase. ​

You may be able to find a virtual PA, or an outsourced administrator when someone leaves.​

Finally, don’t panic. New Zealand does need to lift its average income, particularly at the bottom end, and if you get on the front foot with the changes then you can create some opportunities for business growth and even margin growth.​

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Originally Published by NZ Business – 5 March 2018​