Karla de Leon is OBDC’s Lead Business Advisor. This is part of OBDC’s business advising team’s ongoing series of best practices and tips for small business owners. Never miss a tip by signing up for our newsletter.
Earlier this year, Oakland saw a $3.25 increase in its minimum wage from $9 per hour to $12.25 per hour. While some business owners have been adjusting to this increase, it’s now time to prepare for another increase.
Starting January 1st, 2016, the minimum wage in Oakland will go up $0.30 per hour to $12.55. As a business owner, this increase (or the previous one if you still haven’t quite adjusted) is a perfect time to take a look at your finances and make sure your business is cash flow positive.
If you employ minimum wage workers, a hike in the minimum wage means an increase in payroll and payroll tax expenses for you. While this might seem like a loss for small business owners, taking a good, hard look at your finances can help ensure that this increase doesn’t eat into your profits.
Treat this wage increase as you would any other increase in expenses for your business. As a business owner, you must be quick to adapt. Here are a few ways you can manage your finances such that you maintain your business’s profitability through wage increases:
Increasing prices is often the first idea that comes to mind when expenses go up. The decision on whether or not to increase your prices is highly dependent on your business. If you have a local specialized business, where you can explain to customers why prices are increasing, you might have an easier time successfully raising prices without losing customers.
Increased minimum wage is a cause many in the Oakland area support. If you provide your customers with an explanation, they will likely understand. This is especially true with restaurants, coffee shops and other similar service industries where we’ve seen many businesses successfully raise prices without losing too many customers.
However, if your customers are very price sensitive because they can get your product elsewhere more cheaply and just as easily, raising your prices might not be an option.
We are not advocates of layoffs but sometimes reduced staff is a way businesses can manage their cash flow.
This doesn’t always mean letting good employees go. Some business owners choose to step in and do extra work themselves, while reducing some employee hours. Others simply do not rehire when there is natural employee turnover. Either way, fewer hours worked by employees means less goes into your operating expenses. This might be a good short-term strategy until revenues increase.
Increasing your productivity comes in many shapes and forms, but the ultimate idea is: can you sell more with the same amount of resources?
You might be able to buy new equipment that allows you to produce faster and sell more. You might be able to tighten up your operations such that you can serve more customers with the same amount of staff or reduce expenses elsewhere. Another alternative might be to increase your marketing efforts to increase your number of customers per day. These increases in revenue will help make your percentage of labor costs lower overall, which potentially means more profit.
Some of these options, such as obtaining new equipment or doubling down on marketing, might require some additional working capital. This investment might help grow your business in the long run.
Instead of seeing this minimum wage increase as a negative toward your bottom line, why not see it as an opportunity to position your business for growth in the New Year? Take a careful look at your financials and see the opportunities for growth, not just the increase in expenses.
You don’t have to figure this all out by yourself. Make an appointment with OBDC, and let us help you determine if developing an online strategy is right for you. Email Paula for your business consulting appointment today at email@example.com.