The Fair Work Commission has announced a minimum wage rise of 3 percent starting on July 1. While businesses argued for the wage hike to be limited to match the 1.5 per cent inflation rate, it’s still just half of the 6 percent that the Australian Council of Trade Unions hoped to achieve. Even this relatively modest wage increase will create real difficulties for many businesses though, particularly those who rely most on low income workers, like the hospitality and the embattled retail industry.
While the Australian economy is growing, and overall profits are high, businesses are reacting to the wage hike with alarm. This is because Australia’s most profitable businesses are in precisely those industries that don’t rely on low-income workers, while those who are affected by the wage hike have already faced years of declining growth. In order to afford a pay rise for their workers, these businesses need to find other places to make cuts, and innovate to boost their profitability going forward.
Affected businesses are those who can least afford it
The industries who rely most on minimum wage workers are the hospitality and retail industries. Both of these are highly competitive, though the retail industry in particular has faced years of slow growth and record rates of company failures. These types of businesses often hire minimum wage workers specifically because they can’t afford to pay more. Going forward, that may need to change.
Politicians who supported the wage increase largely quoted figures which showed that the profits of Australian businesses have grown much faster than wages in recent years. Additionally, they stressed that low wages were contributing to low growth in consumer spending. This, in turn, has contributed to the difficulties faced by businesses who rely on consumer spending — most notably retailers. An increase to the spending power of low income workers should help the employers of those same workers to grow. Without the necessary profit margins to afford higher pay rates, though, this presents a challenge.
Managing increased labour costs
Before any longer-term effect can manifest to improve economic conditions for these businesses, they need to find a way to deal with a 3 percent increase in labour costs. Some have already announced that they’ll be forced to lay off workers, though this will help little for businesses that already run very lean with regard to staff. Fortunately, there are better ways for businesses to cut costs in the near term to make up the difference.
Reduce penalty-rate hours
A simple way to cut costs in the near term is to identify unprofitable times at which your business is required to pay penalty rates. Trimming your business hours to remove just a few penalty rate-hours, or simply cutting your staff during those times, can go a long way toward making up the difference.
Avoid layoffs to prevent overtime
While many businesses will feel tempted to lay off workers in an attempt to cut costs, it’s important to consider whether the business can actually do without the labour of those workers. Losing an employee might feel like it reduces labour costs, but this will actually increase them if another employee is forced to work overtime to ensure that the business continues to run normally.
Focus on stability and growth
In the longer term, businesses need to find ways to become more profitable, to reach a point where wages can rise organically. That means first ensuring that your business can deal with the cash flow difficulties that are driving record numbers of companies out of businesses, and then finding ways to drive growth.
Improve cash flow stability
Whether a financial shock comes in the form of a wage hike, an equipment malfunction, or low sales isn’t important; what matters is that businesses have access to the funds they need to get through and deal with the problem. Alternative finance tools like invoice finance and more recently supply chain finance are specifically designed to give businesses the time they need to smooth out short term cash flow problems, so you can focus on long term issues.
Implement a growth strategy
While consumer spending isn’t growing very quickly in absolute terms, there is plenty of room for businesses to grow. Slowing spending has forced record numbers of retailers to downsize or shut down entirely, including very large businesses like Gap, Avon, and Woolworths. The customers they leave behind represent a significant growth opportunity for competitors.
Successful businesses are those who play to win, rather than just to avoid failure. That means developing a plan for attracting those orphaned customers and turning the overall situation to your business’ advantage. Rising labour costs are a natural part of a healthy economy. The key to managing those costs is to ensure that your business is healthy as well.