Whether we like it or not the $15.00 minimum is a reality and it will be here before we know it. As of January 1, 2017, the California state minimum wage is $10.50 an hour. Keep in mind most cities and counties are on their own accelerated schedules and will be well above the state minimum come this summer. San Francisco is already outpacing the state and will be the first to hit $15.00 an hour in 2018. In order to anticipate how this will affect our bottom line and adapt to these aggressive changes before it’s too late we present the following 5-year case study.
For this case study, we used a full-service restaurant in Los Angeles County; which is on track to have a $15.00 minimum wage by July 1, 2020. The first of these increases arrives on July 1, 2017, at $12.00 an hour. In this scenario, the operation has annual revenues of $3 million with a net check average of $100.00. Their Cost of Goods is 26%, Salaried Labor is at 10% and Other Payroll Expenses such as Taxes, Workers Comp, Sick & Holiday Pay are 25% of their total cost of the labor. Using an average of 55,500 hours of labor per year let’s take a look at our bottom line – past, present, and future!
As you can see the 2016 increase made a nominal dent in the overall profitability of the operation. But the upcoming increase to $12.00 an hour on July 1, 2017, has a profound effect. This 14% increase translates to 2.5% off the bottom line. And this is the change that will trigger a shift in how we hire, manage and organize our employees.
By 2018 our profitability is less than half what it was in 2015 with a $10.00 minimum wage. And by 2020 we are looking at only 1.5% to our bottom line. Let’s take it one step further and assume this 3% increase in sales trend continues. What is our breaking point? It’s closer than we think, $15.75 puts us at break even and after that, we are in the red.
So what are our options? Raise prices? Eliminate tipping? Service charge? This is a serious issue that requires serious attention and is a discussion you need to be having with your CPA now. Payroll Advisor and Management team to find a strategy that works for your business. We have tools designed to help you navigate these decisions. Including several models for what a non-tipping environment looks like and how it can help you offset the rising cost of labor.
For more information, please contact us.