As 2024 dawns, Arizona’s business landscape braces for yet another change: the state’s minimum wage is set to climb by 50 cents, reaching $14.35 an hour.
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The upcoming hike, though less seismic than last year’s $1.05 surge, packs its own punch.
For Arizona’s small businesses dancing on the razor’s edge of bankruptcy, neglecting to plan for this swell could corner them into tough choices — cutting employees or merging employee roles.
Who’s In, Who’s Out
Not every Arizona business is affected the same way with this wage increase. Exceptions include:
- Family Employment & Casual Babysitting: The increase doesn’t affect people hired by family or casual babysitting in a home setting.
- Low-Revenue Businesses: Businesses with less than $500,000 annual income can sidestep the new minimum wage standards.
- Tipped Employees: Employers can pay these workers up to $3 less per hour, provided their total earnings keep pace with or exceed the standard minimum wage.
Five Key Impacts on Arizona Businesses
Inflation and a tight labor market have already nudged many Arizona employers to offer wages that eclipse the current minimum. In a market where competitive salaries are now standard to attract top talent, just how impactful is this leap to the new minimum wage?
High Labor Costs
The primary and most direct effect businesses will encounter is a notable increase in labor costs. This shift is set to ripple beyond those on minimum wage, potentially prompting a payroll pyramid shuffle to maintain internal stability.
Reduced Profits
Smaller entrepreneurs often lack the leverage to offload these heightened costs onto their customers, unlike deeper-pocketed companies. Caught between climbing wages and static pricing, the profit margins for small businesses are set to shrink even further.
Widespread Wage Increases
The push for businesses to raise wages triggers a domino effect, reaching up to the more lucrative roles. Veteran employees, equipped with their experience and unique skills, understandably anticipate recognition and fair compensation for their expertise and service.
Decreased Hiring
Some small businesses might be forced into making a tough choice: scaling back on hiring. While this might seem like a practical move for managing costs, it means fewer job openings in the workforce and a heavier load for current employees, who end up shouldering additional responsibilities.
Automation Adoption
Raising the minimum wage incentivizes companies to adopt automation, especially in low-skill, labor-intensive jobs, such as self-checkout lanes in grocery stores, digital kiosks in fast-food restaurants or automated customer fulfillment centers (CFCs) like those emerging in our own backyard in Phoenix.
Strategies for Businesses on the Brink
Arizona’s enterprises need innovative, strong strategies to thrive in these shifting times. Key strategies for businesses looking to navigate the ripples of the minimum wage hike with resilience and foresight include:
Streamlining Expenses
- Reduce Payroll Expenses. The business must consider reducing overall payroll expenses and face the tough decision of whether every employee is worth keeping or should be let go because there is a more economical way to handle the services the employee currently performs. This can be a very difficult emotional decision for management, but a crucial consideration, nonetheless.
- Tap into State Assistance. The Arizona Department of Economic Security’s Shared Work program assists employers and employees navigating job reductions. This initiative lets staff collect partial unemployment benefits while on reduced hours, recently enhanced to offset COVID-19 impacts. For further details, reach out to the Arizona Department of Economic Security at 877-600-2722 or visit www.azui.com.
- Address Pending & Long-Neglected Expenses. Be proactive with contingent expenses, which are costs associated with warranty claims or product issues. Likewise, tackle deferred maintenance —essential tasks that were put off, whether intentionally or not. Don’t wait for a crisis, like a roof collapse, to discover lease obligations for maintenance and repairs. Act now to renegotiate and manage these responsibilities before losing leverage.
- Negotiate Reduced Expenses. Instead of cutting ties with products or services, consider requesting temporary or partial cost reductions. Many creditors, suppliers and even employees and customers may prefer this approach over complete discontinuation.
Enhancing Revenue Streams
- Leverage Asset Liquidation to Trim Debt. Maximize income by strategically divesting non-core assets. Explore options like licensing proprietary software you’ve developed or renting out your business space when it’s idle. This approach not only declutters your portfolio but also transforms dormant assets into capital for reducing debt.
- Adapt Your Pricing Strategies. In terms of pricing, now’s the time for a calculated reassessment. The current market landscape — potentially marked by increased demand or lesser competition — presents an opportunity for price optimization, directly impacting your profit margins.
- Broaden Your Service or Product Range. Diversifying your offerings can be a game-changer. Analyze current trends and needs. Ride-sharing platforms have encapsulated exactly how to successfully diversify as they moved into delivery services. Identifying and tapping into new product or service niches could open lucrative revenue streams.
Restructuring Business Capital
Think about converting debt into equity. This can be an innovative approach to financial restructuring. Creditors, suppliers, employees or even customers could potentially become investors. It’s especially viable for loyal, steadfast stakeholders who believe in your business’s vision.
Bracing for Bankruptcy
If bankruptcy turns into an impending reality for your business, strategic financial planning becomes paramount. Take these essential steps to navigate the challenging road ahead:
- Build a Robust Cash Reserve: As you brace for bankruptcy, ensure you have a substantial cash reserve set aside. This will prove invaluable during the early bankruptcy stages and cover a range of fees to help you navigate the process.
- Avoid Overreliance on Credit Cards: Resist the temptation to lean heavily on credit cards. Instead, focus on prudent financial management to minimize additional debt.
- Protect Your Personal Assets: Bankruptcy laws often shield personal assets like home equity and retirement savings. Safeguard these assets to prevent a double loss — your business and your personal nest egg.
Change is coming on Jan. 1, so taking immediate action is essential for Arizona businesses, especially those operating on razor-thin margins. While the minimum wage increase is expected to help boost some Arizonans’ paychecks, for businesses, planning for the impending minimum wage hike is critical to ensuring they’re well positioned for resilience and growth as they enter 2024.
Author: D. Lamar Hawkins is an attorney with Guidant Law Firm in Phoenix. Hawkins is also chair of the Arizona Board of Legal Specialization’s Bankruptcy Law Advisory Commission and one of Arizona’s foremost experts on bankruptcy law, debt restructuring, loans and loan workouts. For more information about Guidant, visit guidant.law.
