Ontario’s minimum wage increased 21% January 1, 2018. Prudent businesses have already developed plans for how to mitigate the impact of the increase. Some solutions have been more popular than others.
Already there have been public call-outs of owners who are thought by some to be offside in how they are dealing with the impact of the change. Some are weathering the storm, others are quickly backtracking, and others are still trying to figure out their next move. Read How to Mitigate the Effects Of Ontario’s Minimum Wage Increase.
The reality is, businesses exist to provide value and make money. In the process, they provide jobs and opportunities for employees. If an employer is not earning a reasonable return on their investment for any reason they will not remain in business long.
Salary costs are often the single largest cost to a business. The impact of the minimum wage increase will vary by industry. To get a better understanding of the impact let’s take a look at a case study using a company that has a 60% labour cost and predominantly employs minimum wage workers. This means for every $1 sold, 60% of the revenue is labour related.
This is our case study showing a snapshot of their financials before the minimum wage increase:
In the above, the business has $1,000,000 in annual sales. Their labour cost is $600,000 (60%), other costs are $300,000 and their remaining profit is $100,000.
Now we take a look at the numbers after the effects of the minimum wage increase:
The only change above is that the labour cost has increased 21% (now represents 73% of the total sales). This single change has taken a business that was profitable and now brought it into a loss position. Obviously this isn’t good so what is a business owner to do?
Options can include:
- increase prices
- reduce hours
- reduce number of employees
- reduce benefits
- reduce other costs
- automate processes
Most employers will likely use a combination of these options.
Returning to our case study, if our business owner chose to increase prices in order return to the same level of profitability then our numbers would now look like this:
Keep in mind, our business is not selling any more volume they have simply increased their prices by the amount necessary (12.6%) to maintain the same level of profitability.
In the case of Tim Hortons, price increases of 12.6% would look like this:
Of course a business owner choosing this route would have to consider whether their customers would be accepting of a 12.6% increase. And in the case of Tim Hortons, this is not a decision that that franchise owners have – their pricing is mandated from their head office.
Ultimately they had to do something as has been widely reported in the media. I suspect in time we’ll see some pricing increases and increased automation.
In the meantime, as business owners consider their next move, they need to be mindful of the potential impact and ramifications of their decisions. You must carefully strategize how you are going to educate your employees. That is, how are you going to sell it to them? An effective strategy can significantly improve your likelihood of success.
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