Small Business Development Center

Can Your Business Weather a 12.5% Cut in Profits?

Can Your Business Weather a 12.5% Cut in Profits?

Author

Authored by: Sherri Daymon

Does your business employ minimum wage employees? If so, are you aware that effective January 1st, 2020, the minimum wage in Washington State is increasing 12.5% (from $12.00 to $13.50 an hour)? Holy schmoly, that’s a HUGE increase in costs (i.e. a GIANT dip in your company’s profits). Your business advisor at the SBDC is here to help you plan for your particular situation, but below are some general strategies to make this cost increase a little less painful.

Increase Prices

When deciding whether or not to increase prices, you need to ask yourself, “Will our customers pay a higher price? Is our product worth this much more? Will our sales volume drop with a price increase?”

Sell More!

Are you sitting on a lot of inventory? Are there frequently a lot of empty seats at your restaurant? Are your landscaping tools or machinery often idle? If so, these are sure signs that you could use some marketing and sales assistance to increase the attractiveness of your current product or service. The SBDC can help you identify your target audience and tailor your marketing message to better reach potential customers.

Reduce Fixed Costs

Fixed costs are your monthly expenses, regardless of sales volume (examples include things such as rent, insurance, and debt repayment). Whereas increasing your prices can be done rather quickly, reducing your fixed costs can take some time. You may need to find another location, negotiate with your landlord for reduced rent, or find a symbiotic business to share your space. You may need to shop around for a more cost effective insurance policy. You may need to refinance or restructure your debt. Essentially, now is the time to go through every line on your Profit & Loss financial statement and ask yourself the hard question, “How can I reduce (or even eliminate) this ‘fixed’ expense?”

Reduce Variable Costs

Your variable costs are the expenses directly related to your sales and/or production volume and ideally appear on your Profit & Loss financial statement as COGS or Cost of Goods Sold. Variable costs include items purchased with the intent to resell (in the case of retail) or ingredients that go into your dishes (for a restaurant example). Finding suppliers with lower costs and reducing waste are just two ways to reduce variable costs.  

Examine Hours of Operation

Hourly labor can be tricky. On one hand, if business is slow, you can send an employee (or several) home to reduce costs (suggesting that labor is a variable cost). On the other hand, if you have set hours of operation, a component of your labor is fixed. Thus, it’s worth a serious examination of your daily and hourly sales to identify if you can and should reduce hours (or even full days) of operation to save on hourly labor expenses.

I worked through this analysis with one of my clients, who realized that he was consistently spending more in labor than he was generating in revenue the first and last hour his shop was open. By shaving 14 hours off his weekly hours of operation, he increased his annual profitably by over $17,000 (since a minimum of two employees are required in his shop at all times).

Reduce Labor Hours

If you don’t have daily and hourly sales data available to make the strategic decision about reducing hours of operation, but you want/need your total minimum wage labor costs to remain at the current dollar level (despite the $1.50 increase in the hourly minimum wage), here’s the formula to help determine how many hours to reduce, come January 1, 2020: Current minimum wage labor hours x $1.50 / $13.50. For example, if you currently have one minimum wage employee working 40 hours per week, you’ll need to reduce the hours worked per week to 35.5 hours.

Consider Cutting your Losses

If your business is struggling now and you rely on minimum wage employees and the suggestions above seem unfathomable to help weather a 12.5% cost increase, you might consider closing your doors. Regrettably, it’s not uncommon for business owners to pour their heart and soul into an enterprise and exhaust their personal savings trying to keep a business going. If you are currently paying employees minimum wage and forfeiting paying yourself and exhausted trying to turn your business around, I encourage you to be honest and brave in knowing it’s only going to get more challenging in 2020. Treat yourself with kindness and consider cutting your losses.

 

Remember, your SBDC business advisor is here to help you grow (or at least maintain!) your level of profitability. Contact us today so we strategize a combination of tactics to weather the imminent spike in the minimum wage. 

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