Managing Your Cash Flow

National Living Wage: How to prepare in 5 steps

4 min read

28 September 2015

Brace yourself. The National Living Wage arrives in April next year, raising minimum hourly pay to £7.20 from £6.50 for any worker over the age of 25. Here's how to get ready.

What looks like an unwelcome burden may actually have long-term advantage for employers. There may even be an argument for firms in some sectors to follow the example of Lidl and exceed the government’s requirement.

The insurgent grocery chain announced recently that it would pay UK staff £8.30 an hour, £9.35 in London, from October this year, an amount set by the Living Wage Foundation.

Generous employer? Altruism is probably only part of the story. Research suggests that staff paid well work more efficiently, take initiatives and feel a responsibility toward their company. Profitabilty rises.

Lidl is also sending a powerful, confident signal about its own prospects, one that will resonate with employees and, in a further benefit, help attract good staff.

Whatever businesses feel about the national living wage, which the government intends to rise further, it is coming any way. Employers should be thinking carefully now about what their minimum wage staff contribute and how to get more from them.

This is also the time to look at operational systems company-wide, making sure that business objectives are being met at every level as efficiently as possible.

In other words, the keys to next year are preparation and perception. The national living wage is an opportunity as well as a cost.

There are five important ways to get ready for the changes:

1. Increase productivity

Although many businesses will instinctively consider cutting staff levels, another option is to increase their value. Ask a very basic question: Are people involved in tasks that waste time and do nothing to grow the business?

Human resources teams should look closely at how every department in a firm operates, including their own. Training and hiring are vital to success, manual form filling and filing less so. But they can often take up a lot of working hours. Everything should be examined to reduce tasks that add nothing to growing the business.

2. Think about technology

It may seem counter-intuitive to add a further cost. But there are good arguments for investing in technology, which make it worth exploring what digital options there are for handling payroll, online marketing or ordering processes.

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3. Manage costs better

Every business has controllable outlay. For services firms payroll is probably half of operating expenses. But not all are good at getting invoices out in a timely manner. There is technology that reduces lost and unbilled hours and inaccurate billing.

4. Improve staff retention

Losing workers to employee churn is a significant cost, particularly if recruitment agencies are needed to find replacements, The bill is bigger once training is included. Some estimates suggest that even an entry level employee can cost up to half their annual salary to replace. The figure for senior executives rises to 400 per cent.

It is important to keep staff at every level happy and motivated through a culture of decency, support and training programmes. A move to cut staff could damage morale and reduce commitment to the company at all levels.

5. Deliver a better service

Better pay means better employees and service to customers. Even a small retail outlet can look at developing all the customer interaction points which improve service and sales.

The pay rise next year for some six million UK workers is focusing attention on the main cost for most businesses, but also their main asset: Employees. The national living wage is above all a chance to get more out of that asset.

Tim Levey is head of business advisory, and Kelly Roberts is head of human resources at accountancy firm Kreston Reeves.