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Lee Murphy, owner of accountancy software Pandle

Since it was introduced by the UK government in April 2016, the National Living Wage has been as disruptive as it has been welcome. Hiking earnings for workers facing growing living costs, and who are less and less likely to save, is a good thing. But the Office for Budget Responsibility, at the time, warned stretched employers would shed 60,000 jobs as a result.

Comparing the cost

Since April, many companies have indeed felt the combined pinch of wage inflation and increasing cost of goods in the Brexit economy. But the impact has affected some more than others.

Whilst larger businesses with economies of scale can fall back on cost cutting or price increases, smaller firms with a handful of employees and customers have fewer tools in the box.

Although the Employment Allowance has helped by reducing some employers’ National Insurance liability by up to £3,000 a year, the next wave of National Living Wage (NLW) increases may offset the assistance. This April’s 4.2% NLW hike was the first in what may be a series of mandated annual increases up to 2020, when the government expects NLW to reach 60% of typical earnings.

Businesses which employ low-skilled workers in large numbers should take note. NLW was not a one-time event, it is a series of cost increases that will last for at least the next two years.

Plan for the worst, hope for the best

Small businesses should urgently plan for the increases in their budgets and forecasts. Next year’s increases, recommended by the Low Pay Commission, are not yet known as its recommendation will depend on economic circumstances closer to the time – but accounting for a cost growth scenario in line with this year’s is prudent.

Larger businesses must look at how the effect may hit the bottom line. Should they absorb the increase in customer pricing? The answer depends substantially on the sector in which they operate; those in high-competition areas will find themselves challenged. Regardless, after a couple of years of prior price hikes to end consumers, the tactic – for many – may be reaching a natural ceiling.

What further weapons do businesses have in their armoury with which to tackle the next wave of rises, if not simply with reductive layoffs? I think the answer lays in exploring the untapped resources of external advice and increase efficiency.

Increasing efficiency at home

In its simplest form, UK workers are not productive enough. In fact, according to the Office for National Statistics, output-per-hour here is 16% lower than in the other six nations of the G7. Worse, according to latest data, UK productivity is actually negative, falling to the same levels seen during the economic collapse a decade ago.

With this kind of performance, it is plain to see we have plenty of room for improvement. Now, with growing wages inescapably required for low-productivity workers, increasing their efficiency is more important than ever.

If wages have to go up by 5% and tactics for recouping the extra outlay through sales growth, price hikes or layoffs are off the table, finding a 5% output efficiency gain from those same workers should be considered the solution.

How can businesses find their productivity uptick? If the last decade of efficiency stagnation is anything to go by, many are incapable of doing so under their own steam. But there is a class of professional that can help.

The changing face of accounting

Accounting professionals may commonly be thought of as the bookish, mild-mannered service providers who are there simply to run payroll and file tax returns. But the accounting trade is changing.

Increasingly, cloud accounting platforms allow business staff to manage the basics of accounts for themselves, allowing accountants  to pivot toward a new type of service. In 2017, the modern accountant is not just a number-cruncher – he or she is a high-value strategic thinker who come in to a business, examine it as an external consultant, investigate all potential efficiency gains and put together a detailed plan of action.

That is going to be incredibly valuable. Many businesses out there are contemplating more wage rises with dread, planning to solve the problem within the same cost line – by reducing headcount. But, if they just increased their own intrinsic efficiencies, they may be able to self-generate the savings required to absorb the hikes.

If a business is still dealing with paper, for example, implementing digital systems would likely generate savings by boosting productivity. Automating tasks could free employees to take on new work that could generate valuable extra sales.

I hope the UK government, in its autumn budget statement, puts together an extended assistance package to small businesses that may be most affected by the changes to the living wage. For example, if they a new business was allowed to offset part of its first-year payroll against their tax liability, like many can with respect to maternity pay, we would create an environment in which the very newest of businesses would not be discouraged from starting up in a time of growing costs.

But, as external measures to ease the wage inflation peter out, the best solution may lay underneath management’s feet.