South Africa is a unique economy. In some areas, costs are comparatively low. Housing, for example, is cheaper here than in many other countries. One can buy a large house with a rolling lawn and a sparkling swimming pool for a third of the cost in another country. The cost of living in terms of food and domestic assistance is much lower than in Europe or the US too. But there are other factors in the economy that are higher than its peers. One of those things is the cost of labour.
Labour costs a ‘key deterrent’
A report released by the World Bank in 2010 said that high labour costs were a key deterrent to foreign investors, who were moving towards other emerging economies where labour costs were lower. The tragic events in Marikana in 2012 acted as a mobiliser of sorts for labour, with several industries demanding wage increases of more than double inflation, and some in mining petitioning for a raise of more than 60%. The platinum industry was brought to its knees for five months last year until the Association of Mineworkers and Construction Union (Amcu) was granted a historically high increase. South Africa’s sovereign rating has been downgraded by several agencies over the past year, with all of them citing “labour unrest” or “labour instability” as one of the contributing factors.
The result of this is that companies offering financial management services in South Africa cannot afford to simply oversee the traditional areas of the business. They have a special function to perform: they need to keep a handle on labour costs and oversee the retention of employees.
Keeping a handle on labour costs and retention
Companies or individuals who provide traditional financial management services will pay attention to things like sales figures, operating costs, fixed capital and margins. But bespoke financial management services will pay attention to labour costs, how much the company can afford to raise wages and salaries every year and how much money should be ploughed into retaining employees as well.
As was evident with the platinum mines last year, sometimes it is worth retaining your employees even if it means acceding to expensive demands – especially when, as was the case with the mines, the company can’t afford to let them go or there are political reasons for retaining them. But a good financial manager will help you understand what the inflection point is: where retaining employees becomes more expensive than getting new ones, or when old employees are costing more than they are worth.
Understanding the labour cycle and predicting wage increases
Insightful financial management services in South Africa now involve an understanding of the labour cycle. For example, your financial manager should know when labour negotiations are taking place within your supply chain. If your company is reliant on postal services and there’s a strike planned by the South African Post Office, your financial manager should anticipate the implications of that.
Valuable financial management services will also provide you with insight as to the factors that could trigger a demand for higher wages in your company. Going back to the mining example: the Amcu standoff with Lonmin in 2012 resulted in a so-called 10% increase in wages (in reality, it was less than this for most workers). This sparked a tidal wave of demands across the industry that gained momentum and spilled into other sectors such as gold and coal. The following year, Amcu made a blanket demand for a basic wage of R12 500 for all workers. While this was never met, it did result in a comparatively high settlement in the platinum industry.
Wage negotiations do not have to be contained to your sector to affect your employees. An extraordinary wage settlement in one industry often sparks a similar demand in another one. Following the mining strikes, there were large-scale strikes in the automotive industry, the components industry and even companies such as South African Breweries saw long-term work stoppages. A great financial manager should be able to spot these waves months before they come, plan for them, and put contingency plans in place.
If your company is looking for insightful financial management services which not only provide you with traditional finance management but also direction around managing your labour costs, contact The Finance Team. We have a team of highly experienced finance executives who can assist your company on an interim or part-time basis.
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