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New minimum wage from 1 April

The minimum wage is going up on April 1, from $20.00 per hour to $21.20, equating to a 6% increase.  As well as affecting those members of your team at the lower end of the pay scale, it also puts upwards pressure on wages to ensure pay parity between more experienced members of your team.

This increase will have a significant impact on the operating costs of those businesses with a relatively high wage bill for staff on or near the minimum wage, especially some of the industries hit hardest by COVID; hospitality and tourism, for example.

Business owners need to review their operating costs to understand the impact of this increase in wages and other costs such as fuel and freight.

They need to understand what their break-even point is.  This is the position where a business covers its costs of operation.  This break-even position can be calculated on a per day, per week or per product basis, depending on the industry.

For a business with predominantly fixed costs the calculation is simple.  Add up the total costs for the month and divide it by the number of working days.  If your average monthly costs are, say, $10,000 and there are 20 working days in the month, then you need to generate income of $500 per day.  

Remember to include a salary for yourself working in the business, as you still have your personal monthly costs to cover.

For a retailer or wholesaler, it is slightly trickier, as they must take account of the purchase cost of the goods.  However, the principle is the same. Using the above example, if you have a gross profit margin of 20%, you will need to sell $2,500 of product to make a gross profit of $500 to cover your costs.

If you know your breakeven number, you can monitor it daily and be able to quickly spot potential problems and act appropriately.

With increasing costs, the break-even position will increase, and business owners will need to decide whether they can:
 - make savings in other areas to maintain the break-even position
 – absorb these costs and accept a smaller profit margin, or
 - increase prices.

One of my suppliers has already advised me of a 6% price increase, as most of their operating costs are wages which are increasing.

For businesses which are experiencing cash flow difficulties, the extension to the Government’s small business loan scheme went live on Monday.  Businesses that have already applied for the loan can get up to an extra $10,000 five-year loan (interest and repayment free for the first two years).  For businesses who haven’t previously applied the maximum amount of the loan is $20,000 plus $1,800 per full time employee. 

Finally, a reminder for those with income tax to pay the final tax payment for the 2021 tax year is due on 7 April.  For businesses struggling with cash flow, it is possible to extend this by a couple of months using a system called tax pooling.  This year by concession and for those businesses struggling due to COVID, it may be possible to extend the tax payment by up to six months.

If you need any assistance with your pricing model, break-even analysis, tax pooling advise or help with the small business loan scheme we recommend you contact your accountant/business advisor.

 

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