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18663 Ventura Blvd, Suite 227Tarzana, CA 91356
FREE CONSULTATION818-436-2775
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Personal, Affordable Payroll Services, Bookkeeping, and Tax Processing for Small Business throughout Los Angeles County.

Minimum Wage Increases – How to Analyze the Impact on Your Business

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Over the course of the next few years, the US is likely to have a huge variation in minimum wage laws. There will be differences by state as they have been for many years. But significantly, there is the real possibility that your city might require much higher or lower minimum wages than the city or county next door.

 

For instance, the City of Los Angeles and Los Angeles County are moving towards $15 per hour with about the same time schedule. Some other nearby municipalities, like Santa Monica, are also changing. On the other hand, some cities don’t seem to have any increase on their agenda. Depending on how the state decides to move, you could have one city at $15.00 per hour sitting next to a city with $10.00 per hour.

 

In addition to these disparities, you will almost definitely have state differences. Some states may still be at $7.20 while others are at $15.

 

California businesses have had the tricky job of dealing with a $1 increase in July of 2014 followed by a $1 increase this month. For many companies, wages are at or near the top of their expenses. Adjustments have to be made.

 

Finally, when the minimum wage goes up, there is a ripple affect across all wages, both in companies who have staff at minimum wage, and those that don’t. There may not be a 1:1 change or a same percentage increase change on more highly paid workers, but there is pressure to move others up.

 

A list of considerations regarding your response to the minimum wage increases

 

If you are in a geographic area required to increase the minimum wage:

  • Will you raise everyone up by the same dollar amount?
  • Will you raise everyone up by the same % amount?
  • Will you raise everyone, but by different amounts?
  • Will you cut back hours to reduce overhead?
  • Will you cut back positions to reduce overhead?
  • Will you contemplate zero based budgeting to cut back overhead?
  • Will you raise prices to compensate?
  • Will you move your location to a lower wage area?
  • Will you automate to save dollars per unit, per day, or per month?
  • Will you outsource some activities to other US locations?
  • Will you outsource some activities to offshore locations?
  • Will you turn some workers into 1099 contract employees?

 

If you are in a geographic area that is not required to increase the minimum wage:

  • Do you believe you will need to increase wages to compete for labor?
  • Will you be able to hold labor costs and raise prices as competitors are forced to do in neighboring cities or states?
  • Will you hold prices and attempt to increase business due to the competitive wage advantage?
  • Will you preemptively begin to look for labor saving methods in case your city or state increases minimum wages?

 

As you review all of these and try to make wise decisions regarding your response to this rapidly evolving story, part of your analysis needs to be driven by the specific facts of your enterprise. In order to do that, you must be able to easily plug various wage scenarios into your income statement to see what the actual bottom line effect will be.

 

If your company does $500,000 in sales with a 50% gross margin, you have $250,000 in gross profit. If all other overhead is $100,000, and your payroll is $100,000, you end up with a $50,000 profit. The new California law increases the minimum wage by $1 or 11.1%. If you increase your payroll by 11.1%, you will increase by $11,100. This would leave you with a profit of $38.900.

 

However, you might choose to raise folks who are making $20 an hour to just $21. This would only be a 5% increase. The total cost to you would be less than the example above. With a good accounting program, you would be able to try various scenarios quickly to see what the final bottom line results would be for each approach.

 

In future posts we will evaluate this subject in more depth. In the meantime, however, you might feel that your current bookkeeping systems are really inadequate to easily evaluate your options. For a very small monthly amount, you can outsource your payroll, bookkeeping, and accounting to ATPP. We will help you to set up systems that will quickly provide you with answers to questions like this.

 

Call ATPP to discuss your payroll, bookkeeping, accounting, and tax needs. You can reach an accounting pro at 818-436-2775.