Friday, November 07, 2008

Cleaning up under Obama

I was looking at Obama's transition-team site, looking for some hope. I came across a section of promises to families where Obama says that a person who works full-time should not have to live below the poverty line. Sounds noble enough. Current minimum wage pays around $13,000 for full-time work, and the poverty level for a family of two is $14,000. So, Obama wants to increase the minimum wage. Sounds good for the worker.

But let's run some numbers,and see how this works out for the person who employs the worker.

Since the plumbing business is in a slump, let's look at a hypothetical office-cleaning service with 55 employees. 5 employees make $30,000 - they're the office folks who keep the business running, doing the the account management, ordering supplies, accounting, etc. 10 employees make $10/hr, or $20,000/yr - the shift managers. And there are 40 workers who are paid minimum wage. (Let's face it - while cleaning offices is honest work, it's not particularly difficult or demanding work.) That's $6.55/hr now, going up to $7.25 next summer. Assume a full-time worker works 2000 hours a year.

So the administrative and supervisory team has a combined payroll of 5*30k + 10*20k or 150k+200k or $300,000. The workers have a combined payroll 40*2000*6.55, or $524,000.

There are 20 teams of two workers each, with a shift supervisor responsible for two teams. Each team works all night cleaning office buildings. The cleaning service charges $200 a night. Labor and supplies costs run about $150 a night, which yields a profit of $50 per team. Times 20 teams, that's $1,000 a night. There are 260 business days in a year, so that's a tidy profit of $260,000. Nice, huh? Too bad he'll have to pay an extra 3% in taxes.

Wait - the front-office team has to get paid. Their payroll is $150,000, so the net profit is down to $110,000.

At least he doesn't have to worry about that tax bump from 36% to 39%. But he does have to pay taxes, which cuts profit down to $70,400. Social security takes another 7.6% of the gross, reducing profit to $62,000. Worker's comp insurance comes out of that. Let's say that the premium is $5 per employee per week. That's 5*52*55 or 6875, round it to $6800. So the net profit is now $55,200. That's what the business owner takes home.

In exchange for providing over four dozen jobs and keeping twenty office buildings clean, he gets a decent middle-class, just-above-the-median paycheck of about $55,000. Livin' the American Dream.

But next summer the minimum wage is scheduled to go up to 7.25/hr. That will bump the payroll of the hourly workers to $580,000, an increase in direct costs of $56,000, or about 9%. As you can see, the business is going to have to increase what it charges the customer by about 9%. That's gonna be a tough sell, because the buildings are not going to be 9% cleaner.

Now let's look at what Obama's plan does to this business. He wants to raise minimum wage to $9.10 an hour. The minimum-wage boost increases the payroll of the hourly workers to $728,000, an increase of over $200,000. That $200,000 will have to come from somewhere.

The business owner could raise his rates, say from $200 a night to $280 a night. But increasing his rates by 40% just might result in his customers reducing their demand on his services - after all, they have budgets, too.

He could cut payroll. Each worker now makes $13,000 a year. A shift supervisor is needed for every four workers, earning $20,000. He could lay off six teams - 12 workers and 3 supervisors, saving $216,000. Of course, that reduces his ability to earn money, because instead of having 20 teams now he has only 14. So his gross is now down to $700 a night, $182,000 a year. The administrative payroll is $150,000... looks like someone in the office has to go, too.

Change? You betcha.

Hope? Notsomuch.


Anonymous said...

All you've proven is that you are unable to run a successful successful cleaning business even pre tax / wage changes. This hypothetical business needs to substantially increase it's worker productivity if it expects to survive. I suggest following your lazy workers and shift supervisors to their jobsite and determing why it takes them 8 hours to clean an office building. Either you have substantially underbid the jobs or they are substantially underutilized. The rule of thumb is 2.7 times the labor rate generates an appropriate margin for an employee. Furthermore you should cut the number of shift supervisors down. One shift supervisor should be able to handle at least 20 guys. Next by properly accounting for equipment depreciation expenses this business should reduce tax exposure relative to cash flow. Keeping effective tax rates below 10%. Don't forget the owner is also an employee. Their salary is also a business expense. By properly managing their taxes they can further reduce their overall tax burden. In executing the revised business plan the employeer can reduce his net labor costs from 874,000 / year to 379,600/year. Running with the improved crew of 16 cleaners, 1 shift supe, and keeping the 5 office drones. With revenues of 1million 40K / year the company is able to geneate an appropriate return for its owner. Even after the Obama changes are taken into account your margins are close to 30% which is a fabulous return for someone who sits on their ass all day and presumably doesn't actually do the office work, clean the buildings or supervise the workers. What does this virtuous business man do in this scenario exactly, sales?

SkyDaddy said...

You're hired.