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November 23, 2015

National Living Wage: managing the pros and cons

10 and 20 pound notes representing the National Living Wage

The National Living Wage set to increase from April 2016.

The new National Living Wage (NLW) announced by the Government earlier this year has been met with considerable concern by many small businesses.

Quite rightly, business owners fear this hike in statutory wage costs is only going to add to the growing costs they are already facing. With changes to the tax treatment of dividends just around the corner and the additional costs associated with pension auto-enrolment, not to mention rising rents – particularly in the South East – it is clear the NLW will add significant pressure to already over-stretched budgets.

A recent survey by the Federation of Small Businesses (FSB) has found that more than a third of SME owners (38%) predict the new National Living NLW rate of £7.20/hour will negatively impact their business when it comes into force in April 2016.

When asked to consider the projected rise in the NLW to at least £9 an hour by 2020, 54% of small businesses said it will have a negative impact. And just 6% of SMEs think the policy will have a positive impact on their business when it is becomes law.

According to the FSB’s latest Cost of Employment Index, a small retail business with six full-time staff aged 25 and over and earning the current adult minimum wage, will have to pay an extra £5,900 per year. That is a considerable additional annual cost to a small business.

So what can small business owners do to prepare for the National Living Wage?

The first thing to do is to realistically assess what this means for your business:

•  How many staff do you have that are actually over 25 years of age?
•  Of those, how many are paid under the NLW’s required £7.20/hour?
•  What would the net increase be to your business?

Armed with this information, you then need to think about how you will absorb those extra costs. It’s important to assess the impact of the wage rise carefully. Take the time to review your budget and ask:

•  What will be the effect on profit margins? Is this sustainable?
•  Do you need to review your pricing structure and put prices up?
•  Can business costs such as overheads be reduced? E.g. telephone and broadband charges, business expenses, etc.
•  Are there any supply chain savings that can be made such as negotiating better pricing terms or setting up a consortium with other like-minded businesses to drive down costs and boost purchasing power?

If any positives can be taken from the introduction of the NLW, it is that it will encourage many small business owners who will be most affected by the change, to stop and take a long, hard look at where their business is going, how it is performing and to carefully review their budgets and cash flow forecasts. This is no bad thing. What needs to be avoided is making a knee-jerk reaction such as cutting staff numbers or putting prices up without carefully thinking through the consequences.

Some SMEs will have no option other than to increase their prices. If the business cannot absorb the cost of the higher wage rate and business owners want to retain their current staff on the same hours, this may be the only way to offset the additional costs.

While this may seem a backward step, it’s important to remember that the NLW applies to all businesses, so the chances are, your competitors will also be affected. If other businesses also have to increase their prices in order to afford the larger wages bill, your business won’t appear any less competitive. What’s more, if you decide to start paying the NLW rate before April, you may even be able to promote this to customers and staff and use this to your competitive advantage!

No matter what your views on the NLW, it is here to stay. It remains to be seen whether there will be the large number of job losses and rise in inflation that some are predicting. All small businesses can do is plan, prepare, budget and do what is best for their business and their employees.

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