In my last post we discussed the tentative 32% increase in Ontario’s minimum wage. We also reviewed the critical importance of why you need to perform an “Impact Assessment” to understand how it will affect your business. READ HERE.
Today we’re going to discuss ways of mitigating the impact. Let’s use a simple example based on the following:
Current annual revenue = $1,800,000
Current annual labour cost = $950,000
Your maximum risk = $304,000 (32% x $950,000)
This would be based on all of your labour cost being at the current minimum wage of $11.40.
Your minimum risk = $0.00 (0% x $950,000)
This would be based on having no staff today below $15.00. If this is the case, congratulations. You’ve ducked a bullet.
In all likelihood you will fall somewhere in between. For illustration sake let’s assume that you’ve calculated your increased cost to be $165,000.
Assuming your revenues stay flat and no other costs increase, you now have to determine what to do about the extra $165,000 in costs.
When it comes down to it, you’ve really got five options:
- Suck it up.
- Increase your prices.
- Reduce head count.
- Reduce other expenses.
- A combination of the above.
Let’s take a closer look at each of these options.
Option 1: Sucking it up is a pretty big pill to swallow. The reality is – this is the default option. Most of the business owners who will suck it up will be those who didn’t take the time to assess the impact and deal with it proactively.
Option 2: Increasing your prices is a likely option for many business owners. In the case above, with revenues of $1,800,000, a business would need to increase prices 9.2% to negate the cost of the increase. This increase does not impact profitability in any way – it simply maintains it based on the increased labour expense.
Option 3: Frequently, owners have one or more employees that they know they should let go but for a number of reasons they’ve been hesitant to do so. Now may be the time to act. If you’re already running a tight ship then this is likely not an option.
Option 4: There are a few ways of reducing costs. Labour expenses can often be reduced by automation. Now may the time to investigate and invest. A regular expense review is also definitely on my list of best practices and there’s no better time than now. Many times business owners find they are paying for items that no longer make sense. There was likely a good reason at one time for any expense but as businesses evolve, some things become redundant or just aren’t used anymore. And for those expense items that you still need, this may be the best time to negotiate lower prices from your suppliers.
Option 5: The most likely option in my opinion is that most pro-active business owners will offset the increase in costs through a combination of the above.
The truth is, the proposed increase in Ontario’s minimum wage is beyond your direct control. How your business deals with it is up to you.
If you need assistance with assessing the impact or strategizing a solution we would be happy to assist.