In our October newsletter, we showed how the real cost of the minimum wage increases is higher than is commonly discussed and that it is the business owner who shoulders those costs. This leaves a hard decision for the employer. A basic concept of accounting is that Revenue – Costs = Profit. So, if the cost of doing business is forced to increase, the business owner is left with three options.
- Lower overall costs by cutting staff or hours
- Raise prices
- Accept lower profits
If your lowest-paid staff are given a forced raise, one option would be to lower the number of hours you pay them for. This would mean your company would have to become more efficient and accomplish the same amount of work in fewer hours.
Another way to cut costs would be in materials and supplies. However, with inflation and the coming carbon taxes, it’s not likely that anything will cost less tomorrow than it did yesterday.
The option that gets the most media coverage is that of raising prices. If your costs go up 10%, just raise your prices 10% and end up with the same profit margin. However, in many industries that have elastic demands for their products, this is not that easy to do. Fear of losing out on market share to your competitors may keep you from changing prices.
Accept Lower Profits
Since cutting costs or jacking up prices are not easy moves, many business owners will be forced to take the hit. As much as the activist protestors would like you to believe, corporate profits are not often making millionaires richer. According to Industry Canada, almost 98% of businesses in Canada have less than 100 employees. Many of those are single owners with a couple staff who are barely getting by. These entrepreneurs take wages or dividends on what is left after paying suppliers, employees, and taxes. So, if the profits drop, that means that their take-home pay can be significantly affected.
So what should you do?
We can’t give one answer that will work for everyone. In most cases, you will have to find your own mix of the three options. By focusing efficiency and keeping a close eye on your books, you can probably find ways to cut costs without affecting quality. We can help you get set up with a bookkeeping system that will make sure you are tracking your expenses properly and keeping the most money possible.