Written by Rob Drower and John Cleghorn, Managing Partners – Prime Strategies Group

Most of you will be well aware that the minimum wage rate will increase to $16.50 as of 1 April 2018, a date that many may think rather apt. This is a rise of $0.75c per hour, and at 4.76% is the largest minimum wage rise in over a decade.

As Business Consultants we work primarily with Medium and Small Business Owners and we are hearing many different views on what SME owners think about the minimum wage rise, and concerns about the potential effects this decision will have on their business success overall. SME’s in New Zealand make up a large portion of the New Zealand economy, and political decisions like this can have a huge effect on those businesses, which flows on to affect the families of employers, employees and customers.

As SME Business Management Consultants we are always keen to have feedback from SME’s about how this legislation will affect them, and what options they have considered. You can email us to share your thoughts.

A consideration worth a moment’s serious thought is how this will affect the morale of more senior or longer-term employees. Many of your staff are more experienced than those currently on the minimum wage, but will not see their pay packet increase. Will they be looking for a similar percentage increase? alone could argue that is only fair. They certainly would have a good case if they have greater knowledge and take on more responsibility than your minimum wage earners. Does this then lead to a general wage increase right across the business?

It would be prudent for business owners to look closely at the current wage rates of their staff earning between the minimum wage rate and $20 per hour and assess each staff member individually, taking stock of their worth to the business. We believe that a proactive approach to this issue will reward you with much better results than a reactive one.

Regardless of the various outcomes, the result will be an overall increase in wage cost to the business owner. How will business owners plan to absorb these costs? Will they simply maintain their current margins? As with all cost increases, there are several options that can be taken.

Actions we may see businesses take include:

  • Leave things as they are, accepting a further reducing business profitability overall
  • Increase prices, gambling that the market can absorb increases
  • Aim to increase productivity, which is often easier said than done, unless you have expert advice!
  • Create redundancies, which is very difficult for businesses to weather well as this often damages the business culture, and is tough on everyone
  • Work to reduce costs in other areas, again, a tough ask in anyone’s language

Business Owners need to be aware that their suppliers are facing the same issue, and their solution may be to increase product price to cover their increased costs. This will result in a double whammy for Small Businesses with even more costs coming into the business.

For example, when a freight delivery company’s wage costs increase, they may well raise the cost of their freight services in an effort to recover their increases in wages, effectively on-charging their additional costs to their clients.

A big-picture strategy may be the solution for your business

Right now is an opportune time to look at your business as a whole and assess all of your options.

What is your margin today compared with this time last year or the year before? Is it on the up or on the down? If your profit margin is not increasing every year in line with inflation and cost increases, then in fact you are going backwards, and a wage increase will add to that.

The approaching wage rise may be the catalyst to look at your current financials and take strategic action to identify new opportunities and improve your business efficiencies in other areas as well.

Expert Business Advice is on call

A Business Advisor can bring significant wider experience into a business and work in partnership with you to refine your business processes and systems, and reveal new opportunities for growth. With the end of the financial year approaching along with the new minimum wage rate, this is the perfect time to take stock of how your business can be fine-tuned to work smarter rather than harder.

If you would like to leverage decades of personal experience and proven business management methodologies, contact our nationwide team of Business Consultants. Our team will be only too happy to give insights and advice on how your business can deal with the minimum wage rise, and with 2018 in general!