The impact of rising wages

Mar 14, 2017 by Edward L. Blach, DVM, MS, MBA

Twenty-one states will raise their minimum wage in 2017.  Some are relatively minor adjustments, while others are significant increases that could have a dramatic impact on the financial performance of veterinary practices.

In considering the impact of rising minimum wages, first of all, it is important to recognize the need to help entry level workers to meet their financial needs.  Cost of living adjustments are important to help team members keep up with the rising cost of living.  Some adjustments are the result of voter referendums, and are quite sizable.  Consider the impact of an increase from $10 per hour to $15 per hour in some states.  Fortunately, many practices already pay in excess of minimum wage, so they may not be impacted as much.  For those practices with workers who are making minimum wage, it is important to proactively consider the impact and to make adjustments early.

As we've discussed, all of your workers depend upon you to ensure the health of the practice.  Without prudent financial decisions, jobs and potentially the entire business would be at risk.  Therefore, when you are faced with rising wages, make sure that you plan accordingly when building your budgets.  Determine the impact of increased wages on your Profit & Loss statement.  Use your budgeting process as a way to establish appropriate fee increases to account for rising labor costs.  Yes, this means that your fees for services will rise.  Yes, that means that your customers will be paying more for services they receive.  This is the reality of rising wages.  The increased costs of labor will typically be reflected in one of two ways.  First, the increased costs will be passed on to your customers in the form of higher fees.  Second, if your customers will not tolerate higher fees, then you are faced with a decision to reduce your over-all labor costs or maintain them at what they are now by either decreasing hours worked, or decreasing head count of workers on your payroll.

As a manager, it is important to remember your rules for maintaining your labor costs as a percent of revenue within an acceptable range for your practice.  Typically, the healthiest practices maintain labor costs as a percent of revenue at less than 40%.  Determine what your optimum labor as a percent of revenue is to optimize profitability, and make decisions necessary to maintain it in that acceptable range.  This may occur from increasing fees or decreasing costs.

Rising wages do have an impact, and it's not always the impact that is intended by those who initiate the increase.

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