New minimum wage - are you ready? by Stewart Russell

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News • 2021-04-08

New minimum wage - are you ready? by Stewart Russell

The minimum wage is going up on April 1, from $18.90 per hour to $20, equating to a 5.8% increase.

This increase is likely to have a significant impact on the operating costs of those businesses with a relatively high wage bill for staff on or near the minimum wage, in sectors such as hospitality and tourism, for example.

Business owners need to review their operating costs to understand the impact of the minimum wage increase on their business pricing model.

One of the most important things business owners need to understand is what their break-even point is.  This is the position where a business covers its costs of operation.  This break-even position can be calculated on a per day, per week or per product basis, depending on the industry.

For a business with predominantly fixed costs the calculation is simple.  Add up the total costs for the month and divide it by the number of working days.  If your average monthly costs are, say, $22,000 and there are 22 working days in the month, then you need to generate income of $1000 per day.  

Remember to include a salary for yourself working in the business, as you still have your personal monthly costs to cover.

For a retailer or wholesaler it is slightly trickier, as they must take account of the purchase cost of the goods.  However, the principle is the same. Using the above example, if you have a gross profit margin of 25%, you will need to sell $4000 of product to make a gross profit of $1000 to cover your costs.

If you know your breakeven number, you can monitor it daily and be able to quickly spot potential problems and act appropriately.

With increasing costs, the break-even position will increase, and business owners will need to decide whether they can make savings in other areas to either maintain the break-even position – or whether these costs can be absorbed and a smaller profit margin made, or whether to increase prices. 

I have already received a letter from one of our suppliers, who has advised they will be increasing all prices by 5.8% - as most of their costs are staff costs.

When recalculating your revised break-even position, you may also want to factor in the likely increase in minimum sick leave, from five days to 10 days, expected later this year.  This will potentially increase employers’ staff costs by 2%.

We recommend you contact your accountant/business advisor to obtain assistance with your pricing model and break-even analysis.

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