Osborne’s living wage might well leave businesses wondering

Now that the dust has settled on the budget, Britt Lintner, Global Head of Supplier Sales, Tungsten Network, looks at what the living wage proposals could mean for UK SMEs.

As Chancellor George Osborne sipped his coffee and read the newspapers the day after the budget was announced, he may well have been pleased as the news of an increased living wage made the headlines. Adults over the age of twenty-five earning minimum wage will see their pay rise to £7.20 per hour as of April 2016.

Osborne predicts Great Britain will be debt-free by the year 2020 and as announced in the first blue Budget since 1996, the new living wage will rise to £9 per hour that same year. Fantastic news for Britain’s workers but what about the small and medium enterprises who will foot these outgoings?

Tungsten works with thousands of SMEs, who will no doubt now be wondering where they are going to find the money to meet these increased wage demands.

The retail sector, for example, accounts for more than a third of all SME turnover and employs one in ten people in the UK. This means ensuring those businesses can pay their workers is of national concern.

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If Osborne’s predictions for the UK economy are to be believed – growth of 2.4% this year, 2.3% in 2016 and 2.4% the following year ad infinitum – businesses will hopefully be able to absorb the costs in the long term.

In the short term, however, careful management of finances is going to be key. Businesses in retail, hospitality, and caregiving in particular, will need to look carefully at their cash flow situation. These have highly labour-intensive business models and often require cash to be paid upfront to employees.

Unfortunately, Osborne didn’t make any announcements in his summer Budget to ease the funding gap faced by SMEs in the UK.

Figures from the Bank of England continue to show that accessing traditional bank funding, in the form of loans with set repayment terms, is a struggle for many businesses. From my own experience as a small business owner in the retail sector, obtaining access to working capital was a constant challenge. The higher risk of less fluidity in businesses’ cash flow due to higher spending commitments in the form of wages, is likely to make this problem more acute.

Many businesses have been waiting patiently for the changes to be brought about by the government’s Small Business, Enterprise and Employment Act, which means banks must pass on details of alternative finance options when a business applying for funding doesn’t meet their requirements. While the act became law earlier this year, there has been little development in terms of the details of how this process will be managed. As businesses get passed from pillar to post, the risk remains that businesses will once again lose confidence in funding themselves towards growth altogether.

In the meantime, business owners would do well to acquaint themselves with the alternative forms of finance available to them.