Business Planning - Be prepared for living wage rise

Benjamin Franklin, a founding father of the USA, famously said: "In this world nothing can be said to be certain, except death and taxes." Perhaps it is time to modernise that quote. If you are in business you will know for certain that your costs will rise and, particularly in 2019, it will be your labour costs.

This is simply because in April 2019 the National Living Wage will increase by 4.91% to £8.21 an hour for workers aged over 25. Rates for younger workers will also rise above inflation and average earnings. So no matter what age your employees are, your costs will rise and you need to be ready.

The impact of an increase in the National Living Wage will, of course, have a significant impact on the profitability of enterprises in our sector. Typically, producers count labour as their largest cost, while retailers and "re-sellers" count it as their second largest cost, so what can we do to minimise the impact of it rising further?

The first step is to measure. My favourite mantra — "You can’t manage what you don’t measure" — definitely applies to your labour cost. Most people do measure their labour input into their organisation, but if you are not doing so on a regular basis then now is the time to begin. True, you should and probably do know your weekly or monthly wage bill, but I am talking about getting more detailed. You need to be able to identify how much labour is required to produce your product or deliver your service, plan for that required amount of labour and then measure the actual amount spent on labour to carry out those operations.

Potential overruns

Take a typical landscaper building domestic gardens where the labour element of the build is typically the largest cost. The landscaper might quote for the job allowing 20 days labour. However, if it overruns and takes 25 man days, the job will be less profitable. Monitoring the actual labour input as you go along should help reduce an overrun, so produce a budget for labour spend, monitor that budget often and if there is a variance — a difference between the actual and planned spend — then deal with it quickly.

In addition to using budgets to control your labour cost, you might also consider creating some financial targets or goals. Typically, retailers might use two ratios — "wages as a percentage of sales" and "sales per employee". In an ideal world, the former ratio should be going down and the later going up. In essence, these ratios are a measure of how well you are using your labour — a measure of efficiency or a measure of output. As a business owner, one of your key tasks is to ensure that your labour is operating efficiently. How then can we make labour more efficient?

Consider your organisation for a moment. Do your staff carry out jobs that could be done by specialists? If so, then you should seriously consider outsourcing because there is a good chance that a specialist company could do the job more efficiently than your existing staff. In the long run, it could be cheaper to outsource for skills such as marketing or IT.

Staff training

Another way to increase efficiency is to make sure that your staff are fully trained and capable of doing the tasks allotted to them. An untrained workforce is unproductive. Unfortunately, there is a cultural trend for training to be the first thing that gets cut when costs rise or sales decline, but this is really counterproductive. Keep investing in training and you will see your labour efficiency increase.

Training is only effective if staff use acquired knowledge and skills, so improving the supervision of your staff will also pay dividends in increasing efficiency. We know that a demotivated workforce is unproductive and how often workers are demotivated because they are poorly managed. So along with training your staff to do the task in hand more efficiently and effectively, make sure you train your supervisors and managers to be better at leading teams of people. Improve their planning, delegation and motivational skills, and you will end up with a more energised team that increases output.

Communication is another key element in ensuring that your staff become more efficient. Have you told them exactly what you expect them to do? Are they aware of the quality standards they should be working to? Do they know the parameters of the task? It is worth noting that apparently 70% 
of mistakes in the workplace happen as a result of poor communication. So improve communication, make
it timely and accurate, and your efficiency should increase.

Another way to minimise the impact of the National Living Wage is to actually reduce the number of employees you need. This is a dangerous strategy if, for example, you operate a retail business. It is easy to reduce your wage bill by simply employing fewer people in the spring, but service and then sales might suffer.

However, if you are involved in production, perhaps there might be tasks that could be mechanised. Keep your eye on what is happening with robotics, IT and software advances, and review how new technology can be used in your organisation. But do not get bogged down thinking you need to install robots. Retro-fitting new technology to old technology can produce equally good results. One only has to look to the innovative "Hands Free Hectare" agricultural project to see how crops can be produced by adapting technological advances.

Increase prices

So far we have considered ways of either reducing employee numbers or making your existing employees more efficient. There is another way and that is to raise your prices. Admittedly, this is difficult to do if you are in a market where there is continuing downward price pressure from multiple retailers, but it should be possible in many cases.

Raising prices is always easier if you have "differentiated" products — ones that are unique and uncommon — so look at any ways you can develop more unique products, services, specifications or designs. You are aiming for something that is hard for a customer to compare with something else on price. Make it different so you can justify or distract from a price increase.

Finally, beware of simply responding to the rise in the National Living Wage by cutting numbers and perhaps expecting remaining staff to do more. Remove deadwood, by all means, but otherwise I would suggest that this is counterproductive and simply not necessary. Aim to achieve a culture and environment where people work smarter rather than harder, support your staff and develop them as the assets they are.

Neville Stein is a horticultural business consultant


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