How to Mitigate the Effect of Ontario’s Proposed Minimum Wage Increase

In my last post we discussed the tentative 32% increase in Ontario’s minimum wage. We also reviewed the critical importance of why you need to perform an “Impact Assessment” to understand how it will affect your business. READ HERE.

Protecting your profitability

Today we’re going to discuss ways of mitigating the impact. Let’s use a simple example based on the following:

Current annual revenue = $1,800,000

Current annual labour cost = $950,000

Your maximum risk = $304,000 (32% x $950,000)

This would be based on all of your labour cost being at the current minimum wage of $11.40.

Your minimum risk = $0.00 (0% x $950,000)

This would be based on having no staff today below $15.00. If this is the case, congratulations. You’ve ducked a bullet.

In all likelihood you will fall somewhere in between. For illustration sake let’s assume that you’ve calculated your increased cost to be $165,000.

Assuming your revenues stay flat and no other costs increase, you now have to determine what to do about the extra $165,000 in costs.

When it comes down to it, you’ve really got five options:

  1. Suck it up.
  2. Increase your prices.
  3. Reduce head count.
  4. Reduce other expenses.
  5. A combination of the above.

Let’s take a closer look at each of these options.

Check out your business

Option 1: Sucking it up is a pretty big pill to swallow.  The reality is – this is the default option. Most of the business owners who will suck it up will be those who didn’t take the time to assess the impact and deal with it proactively.

Option 2: Increasing your prices is a likely option for many business owners.  In the case above, with revenues of $1,800,000, a business would need to increase prices 9.2% to negate the cost of the increase. This increase does not impact profitability in any way – it simply maintains it based on the increased labour expense.

Option 3:  Frequently, owners have one or more employees that they know they should let go but for a number of reasons they’ve been hesitant to do so.  Now may be the time to act.  If you’re already running a tight ship then this is likely not an option.

Option 4:  There are a few ways of reducing costs.  Labour expenses can often be reduced by automation.  Now may the time to investigate and invest.   A regular expense review is also definitely on my list of best practices and there’s no better time than now.  Many times business owners find they are paying for items that no longer make sense. There was likely a good reason at one time for any expense but as businesses evolve, some things become redundant or just aren’t used anymore.  And for those expense items that you still need, this may be the best time to negotiate lower prices from your suppliers.

Option 5: The most likely option in my opinion is that most pro-active business owners will offset the increase in costs through a combination of the above.

The truth is, the proposed increase in Ontario’s minimum wage is beyond your direct control. How your business deals with it is up to you.

If you need assistance with assessing the impact or strategizing a solution we would be happy to assist.

We help business owners solve problems.

For more information contact:
Graham Acreman, President | Stellacon Solutions
(613) 263-1010

ALERT: How Ontario’s Minimum Wage Increase Will Affect Your Business

Ontario Business Owners – are you ready for disruption? If not, you could be facing a knock out.

business challenges

Ontario is now less than 6 months away from unleashing one of the largest disruptors that many business owners will ever face – a substantial increase to the minimum wage.

For many business owners, particularly those in lower wage industries (think retail, general services, non-trade blue collar, etc.) there is a big hit coming and you need to be prepared.  If you didn’t already know the General Minimum Wage will be increasing from the current $11.40 to $14.00 on January 1, 2018 and then to $15.00 in 2019.  This represents a 32% increase over the next 18 months.

Have you taken the time to figure out how this is going to impact your business?  Have you strategized about how you are going to handle it?  Failure to do so may lead to dire consequences including the loss of your business.

In case you think this is a case of crying wolf, let’s take a look at a couple of real world examples:

For purposes of a simplified illustration, we’ll make the following assumptions:

Revenue = $2,000,000 per year and remains flat over the next 2 years

Non-labour expenses (all other expenses) increase 2% each year

In Example 1 below,  the 2017 “Labour cost” = 40% of revenue.  All other business costs = 50% of revenue leaving the owner with a 10% profit. In 2017 this will equal $200,000 pre-tax.

Example 1

Effects of Minimum Wage Increase

Moving forward to 2018 with flat sales and a 2% increase in non-labour costs together with Phase 1 of the minimum wage increase, the 10% profit has evaporated and the business has taken on a small loss.  In 2019, this business owner is now losing almost $100,000.

Minimum Wage Increase

Let’s look at another example with a business that now has a 60% labour cost:

Example 2

Minimum Wage Increase

Again, in 2017 they have a $200,000 bottom line but one year later that 10% profit is wiped out and you have almost a $100,000 loss. One year after that there is a $200,000 loss.

Minimum Wage Increase

Now you may be thinking, “I have some employees working at minimum wage but many are being paid more than that. After all,  I give my employees an increase every year”.   That may be true. The reality is, every business owners impact will be different. But consider the following pay structure which is based on starting your employees at the current minimum wage and then providing a 5% annual increase:

Salary Scale

With the effects of the minimum wage increase Jan 1, your new starting rate becomes $14.00 per hour.  Your challenge is, all of the rates on the above pay structure are below the new minimum – you will need to increase everyone.  And, do you think your employees with 2 years or 5 years tenure are going to be happy being paid the same amount as a new hire?  You’ll need to make some further accommodation here too.

The minimum wage increase won’t affect every business but it will affect many businesses.  As a business owner, you need to understand if it will impact your business and if so, to what degree.

Read Now: How to Mitigate the Effect of Ontario’s  Proposed 32% Minimum Wage Increase

Need help with your business? Want to increase performance & your bottom line?  Contact us today:
Tel: (613) 263-1010minimum wage increase

Business Detective – Case of the Declining Profits

Peter, the owner and President of a local moving company, had an issue. New sales were steady and customer retention was good but the company’s bottom line was slowly declining. Month after month. Everyone in the company appeared to be working hard. The team was focused on looking after their customers. So why were profits in decline?

 Discussions with Peter revealed that he had been running his business for twenty years. He had many interests outside the company and had been attempting to step away from day-to-day involvement with the business. Ultimately, we wanted his management team to run the  business.   To this end, six months ago he had promoted Fred into the role of Operations Manager. Fred was Peter’s best driver and a model employee. Peter figured  that if everyone could be like Fred then the company would do well.

In meeting Fred, it was apparent that he cared about the company. His stated focus was on looking after his customers and making sure everyone was happy. While these were noble goals, they were only part of his overall responsibility. The reality was that operations were loose. Specifically, labour force costs were not being well managed. The real issue? Fred was unaware of the impact that he could have on the company’s financial performance.

This wasn’t Fred’s fault though – he was focusing on what he knew and what was important to him. He had never been trained on why it was necessary to keep tight controls on his labour costs and more importantly, how to do so.

This scenario is not unique and happens every day. Regretfully, it can kill a company quickly if it’s not identified and fixed. Fortunately, the missing skills in this case are all teachable skills. Proper coaching together with regular, structured follow up was ultimately the successful solution for Fred and Peter.

Need help with your business? Want to increase performance & your bottom line?  Contact us today:
Tel: (613) 263-1010