Perspectivas Profesionales is a new monthly section in El Mundo Boston featuring the leading Latino voices from the world of business and entrepreneurship. For more content like this click here. Puedes leer este artículo en español aquí
By Kenny Salas, co-founder of Camino Financial
Editor’s Note: Camino Financial is online marketplace that evaluates businesses and matches them with non-bank lenders. Different from a bank, the Company focuses on lending to small businesses seeking $5,000 to $500,000 in debt financing, and can fund a loan in as little as four days. For more information visit: www.caminofinancial.com
Whether we like it or not, several local governments in the United States have imposed ordinances to increase minimum wage. In May, the City of Los Angeles approved a minimum wage ordinance to gradually increase the minimum wage from $9 to $15. So what does this mean for business owners?
Illustrative example: Quick Service Restaurant (QSR)
Most of the employees at a QSR earn minimum wage. Let’s say a restaurant makes $500,000 in revenue per year and spends 30 cents of every dollar or $150,000 on labor. Also, let’s assumes this QSR makes a 10% profit or $50,000. If the minimum wage increases from $9.00 to $10.50 in a year (the case in Los Angeles), the labor cost increases to 35 cents on the dollar plus the additional payroll tax expenses. The restaurant’s profit will decline 63% from $50,000 to $18,750. That means the restaurant owner takes home $31,250 less in cash each year (a significant pay cut for any person).
Although the approved step ups of minimum wage may appear modest, they may have a material impact on the bottom-line, especially when a company has low margins and employs minimum wage labor. I’m not providing this illustrative example to scare you or make you upset with the government. On the contrary, what doesn’t kill you can make you stronger IF you react properly. The biggest mistake you can make is not doing anything now! I guarantee you that some of your competitors will see this as an opportunity to capture market share. See below five tips to improve the profitability of your business:
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- Meet with your CPA or Accountant to review your costs and expenses in detail.
It’s not enough to just keep your books in order or file your taxes on time. Schedule time with your accountant to prepare a cost report and analyze each item in detail. One approach to analyze your costs is called zero-based budgeting. Start each category at zero and begin budgeting expenses based on their ability to drive value in your business. Separately, small businesses fail to optimize their inventory costs. Are you spending too much on storage costs? Have you tried to rework a deal with your suppliers?
- Increase prices or add fees related to NEW services or product features.
It’s never easy to increase prices, especially when you’re not offering an additional benefit in exchange. To make this conversation easier, ask yourself whether you can provide an additional service or product feature at a marginal cost. For example, a potato chip manufacturer can offer a new flavor to excite its buyers. Offering something new will help you pass a price increase to your customers.
- Invest in technology/equipment to reduce labor costs.
If you haven’t embraced technology, you need to do so ASAP. Review the operating processes of your business to determine whether you can install new technology to reduce labor costs. Also consider seeking debt to purchase equipment or invest in your business. It will be easier to access debt today before the wage increase negatively impacts you and your competitors’ financials.
- Uncover hidden gold by reviewing your customer database.
The 80/20 rule typically applies to businesses (especially small businesses) in that 80% of your profit likely comes from 20% of your customers. There may still be an opportunity to upsell your top 20% customers. If you can’t sell them anything more, then profile the customer so you can focus your marketing efforts on a similar profile. The flipside also applies to the 80% of customers contributing less than 20% of profit. To the extent you find customers that are unprofitable or don’t pay you on-time, consider firing them. Sounds harsh but this could save your business – consider the high opportunity cost of serving an unprofitable customer!
- Innovate!!
In both good and bad times, a successful business owner always innovates. I’m not only referring to rolling out a new product or service. One can also innovate when reviewing a company’s operational processes. Many successful entrepreneurs claim that process innovation that facilitates execution is more crucial than an innovative business idea.
Again, don’t wait until the minimum wage increase. If you take action and at least maintain your profitability, you can earn market share while your competitors bleed cash.
Kenneth is co-founder of Camino Financial. Prior to Camino Financial, Kenneth worked at a private fund investing in Hispanic-owned businesses. Before then, he worked in investment banking specializing in mergers and acquisitions. Kenneth received his MBA from Harvard Business School and B.A. at UC Berkeley. Connect with Kenneth at https://www.linkedin.com/in/kennethksalas
