Balancing profits and pay pressures…
Employers and employees are facing unprecedented financial pressures, the like of which many have never experienced:
- The Office of National Statistics reported job vacancies reaching a new record of 1,295,000 in February to April 2022, an increase of 499,300 from the pre-Covid level in January to March 2020.
- The Bank of England expects inflation to reach 10% this year, if not slightly beyond, while food, energy and fuel prices soar and interest areas are likely to rise further..
Whilst there are rafts of statistics that all illustrate the cost of living crisis and the pressures that everyone is currently facing, it’s essential for business owners to focus on retaining staff, while factoring pay increases into overall profitability.
Many employees will look to their employers to support them, while business owners will want to keep their teams together, rather than face a recruitment battle, but how can they do that while preserving profits?
Know your numbers!
We always say that if you know the numbers in your business you can make informed decisions. This situation is no different.
If you know what percentage salaries are of the direct cost of sales, you can consider what the effect would be to the business if that figure were to rise.
When looking at the effect of, say, a 3% increase across all employees, you’ll need to also include:
- The increased salary cost itself.
- The increased employer contributions on the salary payments.
- The increased employers National Insurance contributions, which have increased by 1.25% this year.
For a business with a £3million turnover, gross profit of 30% and net profit of 10% (£300,000), they would need to increase sales by over £500,000 to maintain the same net profit levels.
Or, they could increase prices by 4%
Lots of businesses don’t look at this option.
Such an increase isn’t huge in the current market. Yes, it may well lose you some customers, but given the cost to a business of recruitment and induction of new team members, that may be a risk worth taking.
If your team are motivated and running at full speed, it may be possible to replace the few customers that move on. Remember you’re likely to lose far more if you lose key members of your team, and can’t maintain your service or supply your products.
Would a bonus scheme help?
We’ve often found bound schemes to be a short term benefit. Employees quickly become jaded to the reward aspect of the scheme, and come to view the bonus as an entitlement just for doing their job. If it doesn’t arrive, they are quickly demotivated.
Paying market rate as a minimum, and slightly over that if possible, is far more beneficial in the long term, whilst staying aware of other opportunities to keep your team close.
Consider a more structured development plan, a healthier work / life balance, hybrid working that suits your team’s lifestyle… There are many options. We’d also recommend speaking to your HR advisor for suggestions; retention should be something they’re proactively discussing with their clients. The vacancies we mentioned above are not going to be filled anytime soon.
Finally, make sure your team are aware of your position, and your desire to be supportive. They will be aware of many of the challenges you’re facing through the media, the increased NIC, the continuing impact of the pandemic, the increasing costs the business is facing. Making sure that they’re aware, in the right way, is crucial if responsible and reasonable employees are to fully appreciate the effort that you’re putting into finding ways to afford to support them, while you protect the business.
As ever, if we can help, whether to work out your gross profit percentage, to provide details of an HR advisor that we’d highly recommend, or any other way, please get in touch.
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