How An Unexpected Increase in Minimum Wage Affected This Business Owner
Unforeseen changes in the law can drastically throw off a business owner’s anticipated cash flow forecast. I was recently approached by a business owner, who I’ll call Steve to protect his identity. Recent changes to New York minimum wage laws affected his business by requiring a significant increase in his payroll, as a number of his employees were making minimum wage.
Steve works in the healthcare space and owns a few assisted living facilities. In July, he decided to purchase a new facility, as business was increasing to the point where he needed more available space for patients to fit the rising demand. He went to his investors and asked to borrow money based on how much he expected to need. This money included payroll for new employees. Unfortunately, this was before the law shifted toward a higher minimum wage, which completely threw off his predictions. He quickly realized that he did not ask his investors for enough money.
Steve was already in a difficult position at the start of running his new facility. He needed to pay his employees after their first two weeks of working there. However, Medicaid was not going to reimburse them until three weeks later. This timing gap was already creating complications for making payroll on time. Even though he was going to have the funds to make payroll just a week later, he could not pay his employees late, or he would face instant resentment from new workers and hefty Federal and State fines
In September, Steve was notified that beginning October 1st, New York state was going to require any company with a Licensed Home Care Services Agencies (LHCSA) license like his was, to increase the minimum wage per hour by two dollars for every Home Health Aid (HHA). While two dollars does not seem like a drastic change per hour, business owners could be looking at tens, or even hundreds of thousands of dollars in payroll increases per month depending on their employee count. This created a huge obstacle for business owners who planned out their cash flow management strategy according to the current minimum wage.
He considered several options when waiting for information from Medicaid, which like most governmental departments will leave you in the dark around their timing and decision making process. The simple option was for Steve to explain the issue to the investors and ask for more money. But this wasn’t a guaranteed way to get more money and could cause the investors to lose faith in the business. He considered two alternative options: he could either get a loan from the bank, or get a short-term, low interest payroll loan from a private payroll financing company. Steve was approved for extra funding from the bank, but this was not an easy process. Looking back on it, he also ate the cost of a higher interest loan that took him too long to pay off, but at least his new facility was safe, for now.
The upside of the story is that by December 1st, Medicaid finally did increase their reimbursement rates. It would be much smoother sailing for his new location going forward, even though going for two months without the extra funding drastically threw off his cash flow projections and continued to make the investors nervous as they brought in less than anticipated.
For any business owners going through the growing pains of expanding, you may relate to this story all too well. Know that there are options out there, other than reaching back out to your investors and asking for more money – especially if your revenue isn’t producing the way you expected it to.
Morris Reichman is the founder and CEO of Payro Finance. Former Vice President at Infinity Capital Funding an alternative finance company, Morris possesses a versatile background in the finance industry. Having spent 7+ years working across global macro-operations and start up corporate finance Morris’s expertise is in business accounting, risk management and investment analysis. Morris founded Payro Finance to support business owners and ensure their business continuity. Book a meeting with Morris here to discuss your cashflow management strategy.