According to CNNMoney.com today, voters in six more U.S. states agreed to a minimum wage that exceeds the federal rate of $5.15 per hour. The six states: Arizona, Colorado, Missouri, Montana, Nevada, and Ohio. Separately in California, the state was already scheduled to increase its minimum wage to $7.50 per hour, up from $6.75 per hour, an 11.1% increase effective January 1st, 2007.

What does this mean for the small business CFO?

To start with, it’s a stark reminder of the “grow or die” maxim. In the face of rising labor costs, it’s difficult to survive, much less flourish, with a flat revenue curve. You must grow revenues to keep pace with rising labor costs. Even if none of your employees are paid the minimum wage, this still affects your business. Chances are that some of your vendors pay their employees at the minimum wage, and they’ll pass this increase on to you in the form of higher material or services costs. This is the impact of wage inflation on your business.

You grow revenues by raising prices P or selling more quantity Q. But sometimes that won’t be enough to solve the problem. You need to increase revenues generated per dollar of labor input i.e. labor productivity. Common ways to do this:

• Automation – labor-saving hardware, software, and equipment.
• Streamlining – eliminate unnecessary steps in your work flow.
• Quality control – reduce failures and the associated costs of re-work / warranty work.

On the other side of the question, you can hire less expensive labor:

• Automation (above) may let you deliver the same product with lower skilled and less expensive labor
• Move production to a state with less expensive labor
• Move production offshore.

Switching perspectives now to one of bookkeeping and human resources compliance, changes in the minimum wage mean you need to stay on top of labor laws that vary by state and sometimes by city or type and location of government contract. Your accounting department should monitor such changes.

The bottom line is that with respect to labor costs, you have to always be looking ahead. California, for example, has already scheduled another minimum wage increase for 2008. So before you finish next year’s budget, before you submit a bid on a multi-year contract, look ahead and be the guardian of your company’s future profits.

Minimum wage information on the internet:

California — History of California Minimum Wage
Federal — Federal Minimum wage
All states — Minimum Wage Laws in the States
San Francisco — San Francisco Minimum Wage