With the changes being made to the National Living Wage (NLW) you may have some worrying thoughts for your business; lower profit margins, continuing inflation and government/ local authority contracts not increasing with inflation. However, there are some things you can to do help your business cope with the new NLW requirement.
Facts: As of April 2016, the NLW will apply to workers aged 25 and over, increasing the minimum hourly rate up to £7.20. The NLW will then increase to £9 by 2020.
What Does the National Living Wage Means for Care Businesses:
Government Contracts Not Increasing Pay Rates
If you have government contracts to deliver care and nursing staff to government owned homes, domiciliary care, hospitals, or other locations, then they may not increase their pay rate for your staff. As a result, your profit margin would be a lot lower than it was before due to the increase in the NLW. You should consider your Profit and Loss forecasting and not be scared of asking for prices to be reviewed. Remember Turnover is vane, profit is sane! 0% net profit of a 1 Million pound contract is £0.
If you run a government/ local authority funded home, then the business could be at risk of a collapsing due to lack of increased government/ local authority funding after changes to NLW. This can affect private employers who have service users funded by the government.
Martin Green, the chief executive of Care England, is working with the government to find a fair solution to help the care sector with these changes. Care home owners, you can also help, by writing to your local and regional MPs and other government bodies to help them empathise with your care home’s needs.
With continuing inflation in mind, you know that all businesses will have to put their prices up to help accommodate for the changes to the NLW. With this knowledge, you will be able to price your services much more realistically, resulting in a larger quantity of work and contracts that you can carry out. Never be scared to put prices up if it is means to survive. This would then increase the amount of revenue your business is generating, therefore increasing profits across the board. This will mean that even though you are now paying your staff more money, your profits are actually increasing due to the amount of work your business will pick up, on the correct rates, enabling your business to expand further if this is your goal. If you wish to stay the same size, you must make sure your current revenue stream is sufficient and future proof.
Importance of Profit Margins
With any for-profit business, its’ sole purpose is to make money. You always need to consider your profit margins to ensure that you are making enough money to help expand business and be able to comfortably pay staff wages. With the changes to the NLW, its now important to focus more on the quantity of work that you are supplied with, as you generally would be making less profit per job as your costs will be higher. Alternatively, to counteract the changes to the NLW, you could increase your rates when supplying to privately owned customers/ service users to keep to your current profit margin. However, as always with increasing prices, you run the risk of your customers looking elsewhere to get the same services at a cheaper cost. You also need to consider the extra cost of holiday pay, sick pay, and pension contributions that will all have an inflated increase due to the extra wages, as well as the employers PAYE contributions.
On the Bright Side
It’s not all doom and gloom though, as the government are reducing corporation tax to 18%, a net minus of 2% to help accommodate the new NLW. Another scheme to take advantage of is the NI pay back scheme each year which could see businesses get £2000 a year (max). The NI pay back scheme, known officially as employment allowance, will be increasing to £3000 to accommodate the changes, but get your accountant or tax expert to advise you on this. This all helps towards a brighter future.
Theoretically, the NLW will increase an employee’s motivation to work. So with happier employees, but slightly less profits, there is a lot to take on board with the changes to the NLW, and coming up with a solution can be a slow and arduous task. However, not an impossible one.