Five strategies for SMEs to navigate record wage rises

By Jon Sutton (pictured), Chief Executive Officer at ScotPac Business Finance

Wages growth of 4.2% in 2023 was the largest annual increase in Australia in 15 years. It is also the number one thing that keeps SME owners awake at night. But there are solutions SMEs can adopt when faced with record wage hikes, including working capital solutions for businesses of all sizes.

In late-2023, more than 60% of respondents to ScotPac’s SME Growth Index Report listed wages growth as their leading cost concern. Unsurprisingly, the figure was highest in NSW (67%) where cost of living pressures are felt more acutely in the nation’s most expensive housing market.

Steep rise in wage and award rates

From 1 July 2023, wage pressures for employers multiplied as the Fair Work Commission increased national minimum wage rates by 8.65% to $23.23 per hour. Award rates also jumped by 5.75%. That equated to higher rates of pay for around three million Australian workers, many of whom are employed in SMEs, and contributed to our largest wages growth figures in 15 years.

While the Commission’s ruling was celebrated by unions and employee advocates as a sound response to rising inflation, it posed a big challenge for SMEs already dealing with increased costs on a range of fronts. Insights provided to ScotPac by SME owners and operators demonstrated the wage hikes have had a significant impact on their attitude and intentions when it comes to employment. Most notably:

• 69% planned to reduce their intake of new employees
• 64% planned to reduce employee numbers and / or hours
• 33% said wage increases were negatively impacting their growth prospects
• 17% said they would increase reliance on contractors rather than employees.

At the extreme end, 4% of SME owners said wage pressures had ‘pushed them over the edge’, to the point of considering closure.

National employment picture

Some SMEs have managed to maintain employee levels by absorbing rising costs or charging more for goods and services. However, national employment numbers are clearly starting to soften in line with the sentiment above. Australia’s unemployment rate ticked above 4 per cent in January 2024 for the first time in two years. While that figure remains low in historical terms, a deeper dive into the data raises some red flags.

The number of unemployed people in January rose by 22,300 to more than 600,000, a 15% increase year on year. The underemployment rate – those who are employed but would like to work more – edged up to 6.6% of our total workforce. And the total number of hours worked by people in our labour market in January was down by 50 million hours from December.

Sustainable payroll strategies

Making sure adequate funds are available to pay wages and other payroll commitments can be time-consuming and stressful for SME owners, particularly with new award frameworks to implement. Cutting employee numbers or hours might look like an easy fix, but it may not be the best decision for your business. Fortunately, even in a climate of record wage rises, there are strategies available to SMEs who want to maintain or even grow their employee base. So before making major changes to staffing structures, here are five options for SMEs to consider.

1. Boost working capital

Despite a threefold rise in non-bank business lending in the past five years, many SME owners remain unaware of the range of finance options available to support them. ScotPac has been customising business finance solutions to help SMEs optimise their cashflow and meet payroll requirements for more than 35 years. Invoice finance, for example, is a powerful working capital tool that can effectively synchronise invoice payment times with employee payment obligations. SME should ask their broker for more information on payroll support options.

2. Embracing Technology and Automation

Automation and technology solutions – including AI technology – can be powerful tools for SMEs looking to manage rising wage costs. Implementing technology-driven processes can streamline operations, reduce manual labor requirements, and enhance overall efficiency. While the initial investment may look daunting in some cases, the long-term benefits in terms of cost savings and increased productivity can far outweigh the upfront costs.

3. Flexible Work Arrangements

Employees increasingly value workplace flexibility. Offering a trade-off of remote work options or flexible schedules can be a strategic way for SMEs to attract and retain talent without increasing wages. This approach may not only satisfy employee expectations, but it also creates opportunities for SMEs to tap into a broader, borderless talent pool.

4. Bonuses and incentives

Steep increases in base salaries may not be sustainable for a lot of SMEs. Nevertheless, some employees may be open to alternative compensation strategies that reward outcomes. Performance-based bonuses, profit-sharing programs, and other incentives that are tied to individual or team achievements can attract top talent who are prepared to back their ability. As long as employees feel supported, this approach aligns their interests with the company’s success, creating a win-win scenario.

5. Employee Engagement

Transparent and proactive communication with employees is essential in times of change. They can’t be expected to understand the rationale for changes in the name of financial management if they have no context. Try talking with your employees about the challenges you are juggling as a small to medium business owner. This can help to foster a sense of collective responsibility and enhance employee loyalty.

Summary

Australian SMEs are famous for their resilience. However, when they are called on to shoulder the burden of record wage increases, owners will understandably review their staffing structure. By taking a holistic approach that considers workforce, technology and finance needs and options, SMEs have the best chance of adapting and thriving in times of rapidly rising wages. ScotPac’s experienced lending specialists have been providing SMEs with payroll solutions since 1988. Talk to us today about how we can support your business.