Very Basic Business

First Law Personnel Management

For those who’ve been reading this blog for more than a week or so, the admonition above is redundant.  For this I apologize, however since the discussion is trending toward increasing the federal minimum wage level it’s time for yet another repetition.

Forget for a moment all the blather that passes for Business News in the broadcast media.  What the High Flyers are doing on Wall Street makes precious little difference to most of the businesses in these United States.   The Census Bureau tells us that as of 2008 there were 22,614,000 non-farm sole proprietorship businesses in this country, along with 3,146,000 partnerships; compared to 5,847,000 corporations.   Granted that the big money is gathered toward the big corporations, but in terms of sheer numbers of enterprises, 81.5% of the companies doing business in this country are sole proprietorships or partnerships.  [Census 745]

These are precisely the kinds of enterprises which are acutely tuned to DEMAND.   What do most people cut back when times get tight?  If the business in question is a restaurant or movie theater — expect times to get more restrictive, because one of the first things slashed are entertainment expenses.  When wages aren’t keeping up with inflation the economic fall out can be witnessed in a wide range of small business operations from accounting and tax preparation to dog grooming, to dry cleaning, and on to window replacement and home contracting services.

Focusing down on the restaurant business, the profit margins are exceedingly tight.   Low tab operations can expect a margin of about 3%, mid-range tabs yield about 3.5%, but the high end establishments may be functioning on as little as 1.8%.  Those restaurants classified as “limited” service may make as much as 6%.  [HoustonChron]

The Complaint Department

It’s entirely too simplistic to argue that because the profit margin of the hypothetical Pandemic Pizzeria is a tenuous 2% that it cannot “afford” to pay its employees a higher minimum wage.  This complaint works IF and only IF no one else’s wages are increasing at the same time.  After all, it’s the wages of the other people which create the demand for the pizza, no restaurant would ever make a profit selling only to its own staff.

Another overly simplistic complaint is that raising the minimum wage will “cost jobs.”  Stop and think for a moment — don’t most firms, especially small businesses, already follow the first law of personnel management?  I’ve yet to eat in a family owned restaurant in which I didn’t have to be patient for a few minutes before the wait staff could get to me.   The most common expression I’ve heard is, ” Be with you in just a second.”  Thus, I’d conclude that there is no one working there who isn’t engaged in cooking or delivering the food; meaning there are no extraneous staff members.   Now think, what do we do when the wait time isn’t a matter of a few minutes of menu reading — when the wait time is more than 30 minutes?

The prized “speed of service” goal in our hypothetical casual pizzeria is 10 minutes. [FSW] The “sos” time will be longer in a full service establishment, and shorter in a “smoothie shop.”  Slower service (usually a function of being short staffed) cuts two ways: There is a higher probability of lost repeat customers; and, slower table turnover — cutting further into the profit margin.   This concept applies to other kinds of firms as well:

“It might seem obvious to people that raising wages will cause companies to hire fewer people. But not when you think it through. Well-run companies employ the right number of people to handle the demand for the goods or services they produce. They don’t just have extra people sitting around reading the newspaper, who they will lay off if they have to pay a couple of dollars more an hour.

Picture a store with only one cashier and 20 people in line. Pretty soon people get impatient and leave. A sensible manager is going to put the right number of cashiers at the checkout lanes to handle the number of customers in the store.”  [Alternet]

In short, what these examples are attempting to illustrate is the obvious:  Those companies which have hired the right number of people to staff their operations determine the correctness of that number in terms of customer or client service — the foundation of creating a demand for their products and services.  Bottom Line: A well run firm will hire the number of people it needs to meet customer demand at an acceptable level of customer service.

Therefore, we ought to be extremely cautious when reading “studies” of the reactions of business owners who quickly proclaim that increasing the minimum wage would “cause them to not hire people.”  If I ask the question: Do you think you would cut back on hiring if the minimum wage were increased?”  Don’t we all believe that the instant answer would be “Yes?”

However, there’s a difference between the Instant Impression Answer and the hard reality of running a small business, and the difference is — how does the business owner manage customer service?

If the small grocery owner decides its acceptable for customers to be lined up 10 deep at the registers, what happens to his or her trade?  If a restaurant owner presumes that people will sit 30 minutes before an order is taken, what happens to his or her traffic?  If one small contractor can get a bathroom renovated in one week while another with fewer employees can only guess the job will require two weeks or more, who gets the contract?

These aren’t questions which are answered by looking at the wages and benefits of the employees, they can only be addressed as functions of how much demand can the firm create and sustain.

Class dismissed.

1 Comment

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One response to “Very Basic Business

  1. As usual, brilliant, and worth passing on — and when IS there going to be at least an eBook of ‘The Essential Desert Beacon?’ I’d love to have a collection of about 25 of your best columns to give to friends.
    On this one, it might be fun to nitpick a little — you DO hire Aunt Maudie’s nephew, if she’s bankrolling you, and put him somewhere where he can’t hurt you too much. More seriously, you do, sometimes, hire someone before the demand exists for her services simply because you have to have her on your staff to create the demand. (A pizza chef or a baker — if you expand into those areas — will cost more than the demand will support at first. You only hope the demand will pick up because you have put yourself in position to satisfy it — and that you reach the break-even point soon enough.)
    It might — barely, theoretically — be possible to imagine a tax policy that would help in that specific area, by paying a diminishing supplement to a business to hire employees needed for an expansion into a new product line or area but that’s a long way from what anyone wearing an (R) is suggesting.
    You might keep in mind for future columns that not all of us have actually run real-world businesses — and some of us don’t like to remember the idiots we were when we tried. But almost all of us have at least run businesses in computerized games, from “Lemonade” to “Capitalism” but mostly ‘time management games.’ And even the simplest of those teaches the look of exasperation a customer gets if he’s kept waiting too long. That visual memory may help make your point.