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How will increased wages affect SMEs?

Paying your workforce fairly

The National Living Wage raises the minimum wage for employees over 25. SME owners, Stuart and Frances, discuss its impact.

In this year’s Summer Budget, the Chancellor announced the National Living Wage. From April 2016, the minimum salary for over 25s increases from £6.50 to £7.20 an hour, and will rise to £9 an hour by 2020 . Although a fifth of the UK population is expected to benefit, what does the National Living Wage mean for SMEs?

John Allan, national chairman of the Federation of Small Businesses, expects the National Living Wage to have a big effect on small businesses, claiming it “will pose significant challenges for many small firms particularly those in the hospitality, retail and social care sectors .”

For other sectors with higher existing salary levels, the impact may be minimal, or may even see revenues grow as customers have more pounds in their pockets.

Meanwhile, SME owners are still determining the long-term impact the National Living Wage will have on their business.

Impact on growth

Frances Bishop of Pud, a children’s designer outlet store, expects the National Living Wage to affect her business growth. Pud currently employs 9 members of staff; 4 will be eligible for the wage increase. ‘We were looking into opening more stores and hiring more staff, but an increase in wages is another cost to consider,’ Frances says.

Founded in January 2014, Pud is still in its infancy. ‘We want to expand and grow, but our forecasts are based on our current wage bill. With the increase, we’ll be under pressure to take more on quieter days,’ says Frances. 

To help achieve this growth, Frances is taking business online. ‘We believe this is a good way to ensure increased revenue to help cover rising wages,’ she explains. 

Stuart Smith of Aspire Coaching, a sports coaching company, does not expect the introduction of the National Living Wage to have an adverse effect on business – they already pay higher wages to attract the skills their customers demand. However, when combined with other recent government legislation, the increased wage costs may begin to pose challenges.

‘We try to pay a competitive salary, but increases to insurance premiums and statutory pension payments are having an impact, so we’ll have to continue to monitor our wage structure,’ Stuart says.

Motivating staff

For Stuart, the National Living Wage provides a security that will have an overall positive effect on business by increasing morale and reducing staff turnover and absences. Stuart says: “Your staff is your most important asset and, whether through wages, training or additional benefits, an employee that feels valued will be far more profitable in the long term.”

Frances, however, thinks employers should incentivise staff on performance. Part of Pud’s success can be attributed to good in-store customer service, and Frances believes that work ethic and productivity should be rewarded: “We want to reward staff who work well. If our employees are happy and comfortable in their role, and believe in the product, we find this passion is passed on to customers. Our concern is that wage increases will create a sense of employee entitlement.”

Tips for SMEs concerned about increased wages

1. Create an online presence

The National Living Wage announcement prompted Pud to launch their website earlier. Frances hopes revenue generated through online sales will help to encourage growth, as selling online can help companies reach new customers – nationally and overseas.

Active social media channels are also a valuable resource, allowing businesses to connect with customers and create a community of online followers.

2. Offer good customer service

A loyal customer base is vital to a company, especially for smaller businesses. ‘We rely on customer loyalty and providing a personal service helps us achieve this,’ says Frances. ‘We track employees’ customer service records and reward them when Pud is given good reviews via social media or in store.’