Eight months into the Biden administration, the president’s economic agenda is taking shape. Front and center is President Biden’s tax plan, which would increase the corporate rate from 21% to 28% and the top individual income rate from 37% to 39.6%, according to CNBC.
President Biden is also a supporter of a federal minimum wage of $15 per hour and more stringent energy regulations, among other proposals. All in all, the Biden administration’s goal appears to be leveling the playing field for low-income Americans, and the purported beneficiaries are employees. However, an increase in taxes and regulations would have a large impact on job creators as well, and I believe employers will need to prepare for a potentially higher cost of doing business. Below are three areas leaders often turn to when looking to reduce costs, along with my tips for navigating each option.
A common way businesses reduce costs is by cutting back on staff. While necessary for business growth, employees do cost money, especially with wages (and inflation) going up. Laying off employees lowers the labor costs borne by employers.
Let’s say you are trying to implement a $15 hourly minimum wage, and you have three entry-level employees. If each of your workers used to make $10 an hour and they now earn $15 per hour, you are paying $15 more every hour, which is the same as paying for a new hourly employee. This might require some businesses to reduce headcount. It may not seem like much, but a couple of dollars here and a few dollars there can make a substantial difference for low-margin businesses.
Of course, reducing headcount comes with risk, namely the loss of human capital. For small businesses, talent is everything, so lay-offs need to be approached cautiously and strategically.
It is also imperative for employers to understand if and when entry-level wages are trending up in their state. Ask yourself: What will a minimum wage increase do to the morale of your current team? Will you be increasing all employees’ wages or just entry-level? Employers need to review their bottom line prior to wage increases going into effect, gauging how it may affect future profits. Can your business afford to increase prices to offset the wage increases without losing customers?
To answer these questions, determine how much it costs to open the doors of your business every day. Add up all of your expenses for the month and divide that number by the days in the month. Then, you can calculate the new turn-key costs with minimum-wage requirements taken into account. Once you have both turn-key numbers, you will be able to gauge if your business can sustain profitability, thus providing you with the necessary information regarding headcount reduction.
One way to reduce headcount while still retaining productivity is to automate processes that do not require human effort. For instance, you might be able to automate an assembly line. Again, there can be a human cost to this if you are laying off employees, but automation may be a financially prudent option for businesses that need to become leaner and more nimble.
For years, the research on automation has been promising. WorkMarket’s 2020 In(Sight) Report (registration required), which polled 200 business leaders and 202 employees in April 2017, found that 53% of employees said they could save up to two work hours a day through automation. As one Forbes article pointed out, that’s roughly 240 hours per year. Nearly 80% of business leaders, meanwhile, said automation could free up to three work hours a day (or about 360 hours per year).
Automation can also protect your business from human error. By automating software, for example, employers can often cut down on manual data entry by relying on machines to do the job for them. And, in many cases, machines can do the job quite well.
That said, automation is costly, so to assess whether this type of investment makes sense for your business, calculate the cost of the saved labor expense. If the labor cost savings (including paid time off, health insurance and so forth) is more than the automation, you could consider automating. To reduce unemployment expenses, employers can also implement a hiring freeze, especially in industries that have high turnover or attrition rates.
Examining And Negotiating All Bills
Now, if you’re like me, laying off employees is the last resort. There is a human side to doing business, and I absolutely dread lay-offs. While necessary at times, it is a terrible situation. In lieu of shrinking staff or potentially automating it, employers can easily reduce costs by reviewing them in the first place. Examine your monthly bills. Ask yourself: Do I need to be paying that cable bill? Do I need all of those food offerings at work? Do I need to pay rent for office space, when remote work is so common nowadays?
The answers to those questions might surprise you. Once you ask them, it’s time to go over the “essential payments.” Can you negotiate them down? Can you find a better deal somewhere else?
This applies to vendors as well. Even if you’ve used the same vendor for years, it makes sense to evaluate and reevaluate the market from time to time. In business, the landscape changes often, and you don’t want it to pass you by. Ask for three or more quotes from competing vendors, and find the best one.
Before you do anything reckless, employers need to take stock of “money out” and “money in.” Review, review, review. Only then can you reduce your costs in the long run.