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The national living wage: how can franchises prepare?

Written by Alex Littner on Wednesday, 03 February 2016. Posted in Finance

Many businesses will be fearing the introduction of the national living wage but there’s plenty that franchises can do to lessen its impact

The national living wage: how can franchises prepare?

One of the merits of running a franchise is that many carry an established brand name. But while franchisors offer reputation, experience and support to those who invest in them, franchises are still operated by self-employed people who share many of the worries of the typical SME. 

Among the headaches looming for franchisees is the introduction of the national living wage (NLW) this April. With sectors well-populated by franchise systems set to be hard hit, what is the likely impact of the new rules? And, with a few months left before the legislative change, what can franchisees do to limit their exposure to the pay hike?

A big problem for small companies – and franchises

When George Osborne announced last summer that workers over the age of 25 would be paid a living wage of £7.20 an hour from April 2016 – 50 pence more than the current national minimum wage – employers were up in arms. The new pay structure will go further – increasing to £9 an hour by 2020 – and critics have pointed out that industries with smaller employers, high staff costs and relatively low-paid workers will suffer. 

Hospitality, retail and support services, such as residential care homes and cleaning firms, were singled out by the Resolution Foundation as areas set for the biggest wage increases. All of these are sectors populated by a large number of franchises. 

And when it comes to franchising, there’s one other sector that will probably feel the real impact of the national living wage. According to the latest data from the British Franchise Association, food and drink accounts for six out of ten of the UK’s biggest franchises by unit. 

Subway tops the list, boasting more than 2,000 stores across Britain. Such industries employ a lot of staff, many of them at the lower end of the pay scale. According to the Resolution Foundation, the hotel and restaurant industry’s total pay bill will grow by 3.4% by 2020 as a result of the NLW rules – the largest of any sector – while retail’s wage costs will increase by 2% over the same period.

What will happen?

There has been much talk about how businesses may cope with the higher salary costs on the horizon. Tim Martin, head of pub giant JD Wetherspoon, predicts pubs in poorer areas will be forced to close due to the new pay rule, while the UK Care Home Association has written an open letter to the government asking for more public funding to counter the huge expense of the changes to their industry or risk seeing institutions shut. 

When the Confederation of British Industry asked business owners how they would address the pay regime in practical terms, more than a third said they planned to pass on higher employment costs by bumping up prices, one in five said they would change employee reward packages to compensate and about 28% said they expected to employ fewer people. 

The last of these approaches is difficult to reconcile for business sectors that require human beings to function, whether it’s carers looking after elderly residents, bar staff pouring drinks for thirsty punters or shop assistants working the tills at busy times in the retail calendar. Many franchisees will wonder if their staff costs are sustainable but will also question whether they can maintain service standards if they cut numbers. Some may opt to hire more workers aged 24 and under who are not affected by the NLW pay rate. However, another alternative is to reduce unnecessary running costs and employ better cashflow practices in an attempt to make up some of the expected shortfall. 

Balancing the books, chasing cash and best practice

The best place to start is to examine your current overheads to see if there are any areas of obvious waste, be it raw materials or unsold stock. Many smaller companies also haemorrhage cash by failing to seek out the best utility or insurance deal, so shop around for suppliers. Likewise, ensuring that staff have environmentally sound habits to reduce energy use can make a big difference to annual bills. This could simply be switching off lights and equipment not in use.

If you’ve already trimmed company expenses to the bone, consider your cashflow management. How much are you in control of the firm’s finances? A successful business owner will not only know current and recent profit and loss figures – plus their break-even point – but they will also conduct regular cashflow projections to spot potential problems looming. Software exists to do this number crunching and can also help with chasing late payments – another bane of smaller companies’ lives. Good payment practices, such as issuing prompt invoices, tracking the progress of unpaid bills and persistently following up on money owed can be the difference between your company bank account being in rude health or in the red.  

Recent digital developments might help transform performance and cut costs. Automation of payment, for example, has been successfully adopted by larger retailers and smaller operators could take heed. Restaurateurs might also improve service by embracing digital ordering and ways of paying, developments that customers increasingly crave, according to research from Boost Capital.

Silver linings… in time

It is worth emphasising the living wage is not necessarily all bad news for employers. One expected side effect of higher pay is better staff retention, while others predict a likely increase in motivation and productivity. This means that franchisees could feel the pinch on their wage bill while the NLW is being phased in but will then see their books rebalanced as a result of increased productivity. Also, some of the sectors set to be most affected are those that struggle to recruit decent candidates due to poor pay rates. It’s possible that improved salaries could attract better-skilled workers, which itself could improve the performance of businesses over time.

Regardless of how franchisees choose to address the NLW, they must not forget that April’s pay changes are compulsory, with those who flout legislation liable for fines or even expulsion as a company director. Pay bills look likely to increase in the near future and some businesses may need to accept that their profits will be lower in the medium term. This could mean taking on temporary debt to fund the rise in wages while the company adjusts to the new payment system. It certainly requires having a plan of action as soon as possible, meaning it’s time to start scrutinising costs, making healthy cashflow a priority and facing up to uncomfortable financial truths ahead of time. Most franchises want a happy, properly remunerated workforce, so do the right thing before the law forces your hand. 

About the Author

Alex Littner

Alex Littner

Littner certainly has pedigree when it comes to finance. Currently managing director at Boost Capital, a business funding company, he previously spent eight years at American Express working on its Small Business Card Portfolio across EMEA, Asia-Pacific, Latin America and the Caribbean. Away from work, Littner is a family and football man: he has a two-year-old daughter and an Arsenal season ticket.

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