SMEs concerned about higher wage bills under new minimum pay laws should consider a variety of coping strategies.
Close Brothers’ research suggests the majority of SMEs are supportive of the National Living Wage, which requires employers to pay all staff who are 25 or older at least £7.20 an hour. The most recent Close Brothers Business Barometer found that 71% of SMEs surveyed backed the initiative while only 14% disagree with its introduction.
That is not to say, however, that SMEs are finding it easy to cope with these higher pay levels - almost one in four expect it to have an impact on their business.
Prudent employers will consider several different courses of action to mitigate the associated risks.
Assess the impact precisely
Businesses’ first priority should be to make sure they have fully quantified the potential impact the National Living Wage will have on their costs as research suggests the policy will have a disproportionate effect on SMEs.
It’s therefore crucial that businesses assess exactly how many employees over the age of 25 they are raising pay for and what impact that will have on the total wage bill (including tax, national insurance and pension costs). Also consider pay differentials – some employers may feel pressured to increase the pay of more skilled or experienced staff currently earning more than the National Living Wage, in order to sustain the gap. It may be possible to mitigate that cost by offering cheaper benefits instead – such as flexible working.
Increase productivity
One in four businesses in the Close Brothers Business Barometer said they were aiming to increase their income in order to cope with the National Living Wage. In practice, that will mean focusing on productivity – generating higher revenue for each hour worked by employees.
There are a number of possibilities to explore. Investment in new plant and machinery, or technology, for example, could improve the business’s efficiency and output significantly. Staff training and development programmes that boost the skills base of employees can also be effective. Wider reach through export markets, is another possibility – a recent Goldman Sachs report suggested internationalisation could be the key for improving SME productivity.
Reduce other costs
Many SMEs will also want to consider ways to reduce their existing cost base in order to mitigate the effects of rising wage bills. In the Close Brothers Business Barometer, more than half said they were considering this option.
One possibility is to focus on the workforce itself: reducing overtime hours, employing younger workers who don’t qualify for the full National Living Wage, or even cutting the workforce are all options – but consider the impact on productivity too. It may be more sensible to look at other cost-cutting areas first, such as identifying areas to reduce waste or to save money with suppliers. For example, the Government estimates the typical SME could reduce its energy bill by up to 25% by installing energy efficiency measures.
Take on additional finance
Some businesses may want to consider how funding can help them cope with the National Living Wage – either to manage the short-term transition to higher wage bills, or to finance investment in productivity-boosting or cost-cutting measures.
It is important to consider all possible options in the finance market, rather than assuming traditional routes - such as an overdraft or loan - are necessarily the right option. The Close Brothers Business Barometer found half of those businesses considering taking on funding in connection to higher wage bills were looking into invoice finance, asset finance or asset-based lending.
Plan for the future
Finally, while the National Living Wage has come into force at a significantly higher level than the previous minimums, it’s important not to lose sight of the fact it will continue to rise over the years ahead, as the Government seeks to link it to national average earnings.
The British Chambers of Commerce says the fact the National Living Wage could be at £9 or higher within four years is worrying many employers, who fear they will struggle to keep up with inflation-busting increases. For businesses affected, it’s important to have a business plan that allows for rising wages over a number of years.
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