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As you may be aware, the next minimum wage increase is looming and from 1 October 2014 it is set to increase to:

age current
1 Oct 2013
new
1 Oct 2014
% increase
21+ £6.31 £6.50 3%
18-20 £5.03 £5.13 2%
16-17 £3.72 £3.79 2%
apprentices £2.68 £2.73 2%

 

And if that isn’t enough, many businesses are also gearing themselves up for the impact of auto-enrolment.  Some businesses are already running the scheme and although it’s early days, the drop-out rate is actually much lower than we expected with more employees choosing to stay in the pension scheme.  Here’s a brief reminder of the timing and future costs of auto-enrolment for you:

staging dates qualifying earnings
 total
contribution
 employer
contribution
October 2012 to September 2017 2% 1%
October 2017 to September 2018 5% 2%
October 2018 onwards 8% 3%

 

These forthcoming increases might understandably be causing you some concern, in particular the effect on your business’s profit margin, and ultimately your own personal earnings.

First of all, it is important to quantify the cost – what will these increases actually mean to you in pound notes each year?  Once you know that figure, you can then decide how to bridge that gap.

The strategy you then choose might include a combination of:

  • increasing sales, through:

o    increasing the number of customers you have

o    cross selling

o    up selling

This doesn’t have to be through high-cost, high-risk marketing.  An increase of just a few percent in one or more of these areas can make a substantial difference to your profit.  Why not spend some time thinking creatively about this, and include your team too – they often have some great ideas.

  • reviewing your pricing strategy.  Are you giving discounts away unnecessarily?  When was the last time you benchmarked your prices against your competitors’?
  • negotiating discounts and rebates with trade suppliers.
  • cost cutting.  This can sometimes be harmful to the business longer term, but take a look at your main overheads to check that you’re getting value for money – the bigger the cost, the more likely there’s savings to be found.
  • managing your waste effectively – whether that’s stock, materials or time.  Is waste creeping in that you’re paying for?

If you’re tempted to reduce your prices to stimulate more sales volume, then please talk to us first of all.  Unfortunately, businesses can often increase sales volume, but ultimately make less gross profit.  Add the inevitable increase in activity costs which will follow, and the strategy can sometimes be very damaging.  We can calculate for you how much you would need to increase your sales volume by, to make the reduction worthwhile.  Once you have that figure, you can then decide if it’s a safe strategy for your business.

Here’s an illustration of how a few percentage improvements in a couple of areas can bridge the gap you might be facing with the increase in labour costs.

Illustration:

A company is facing increased labour costs of £40,000 as a result of the changes to the minimum wage and auto enrolment.  Its sales and costs are currently:

   £
sales 2,930,000
cost of sales 1,760,000
variable costs 124,000
fixed costs including labour 820,000
net profit 226,000

 

If this company was able to:

  • increase its sales volume by 1%
  • increase its selling price by 1%
  • cut its costs by 1%

the company would achieve an extra £67,281 of profit.  This would not only cover the expected increase in labour, but also add a further £27,281 to its bottom line.

Interestingly, a 2% change in each of the above figures produces an additional £135,526 of profit, and 3% produces an additional £204,733.

It’s surprising how a small percentage change in a few key areas of your business could have a dramatic effect on your bottom line.  If you’d like a complimentary illustration based on your own business, then please get in touch with us and we’d be delighted to prepare one for you.


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