A parable of two restaurants
In capitalism, the purpose of a business is to maximise profit.
A business may have other purposes (e.g being indefinitely sustainable, having a positive effect on human life, improving soil fertility) but secondary purposes do not exist without the primary purpose of profit maximisation.
Despite the simplicity of the single dollar metric defining profit, there are multitudes of variables that affect it. The state of the economy, access to consumers, legislation, geography, advertising, business longevity, debt, credit, competition, innovation, access to technology, supply chain, rent, and expenses such as paying employees – all these factors, and many others, impact a business's profit.
Because almost all businesses use humans acting as decision makers, often profit maximisation is far from optimal. Businesses that may not have access to large-scale data analysis must make decisions based on limited data. These decisions are vulnerable to human error. This can and does compromise profit.
A common and much discussed form of human error arises in cost minimisation. Specifically in the cost of employee wages, simplistic cost-minimisation logic may be used:
The appeal of this logic is its simplicity. But by focussing on money paid to employees, it ignores other directly relevant variables such as the financial benefits of employee retention, recruitment costs, training costs, and the cornicopia of brand and indirect revenue benefits of having loyal, long-term, passionate, happy staff who want to work and who will go above and beyond their resposibilities to ensure the business succeeds.
The parable below illustrates the variable of employee wages in a comparison between two small business owners; one who focusses on wage cost minimisation, and another who welcomes the complex value generated by well paid employees.
Thanks for learning!
Michael
The content below this line has been published with permission from contributing author Richard Neate
A business may have other purposes (e.g being indefinitely sustainable, having a positive effect on human life, improving soil fertility) but secondary purposes do not exist without the primary purpose of profit maximisation.
Despite the simplicity of the single dollar metric defining profit, there are multitudes of variables that affect it. The state of the economy, access to consumers, legislation, geography, advertising, business longevity, debt, credit, competition, innovation, access to technology, supply chain, rent, and expenses such as paying employees – all these factors, and many others, impact a business's profit.
Because almost all businesses use humans acting as decision makers, often profit maximisation is far from optimal. Businesses that may not have access to large-scale data analysis must make decisions based on limited data. These decisions are vulnerable to human error. This can and does compromise profit.
A common and much discussed form of human error arises in cost minimisation. Specifically in the cost of employee wages, simplistic cost-minimisation logic may be used:
- I want my profit maximised.
- I need to minimise costs.
- I will pay employees minimum wage.
- This will avoid money being wasted by paying employees more than the necessary amount to get them to work.
The appeal of this logic is its simplicity. But by focussing on money paid to employees, it ignores other directly relevant variables such as the financial benefits of employee retention, recruitment costs, training costs, and the cornicopia of brand and indirect revenue benefits of having loyal, long-term, passionate, happy staff who want to work and who will go above and beyond their resposibilities to ensure the business succeeds.
The parable below illustrates the variable of employee wages in a comparison between two small business owners; one who focusses on wage cost minimisation, and another who welcomes the complex value generated by well paid employees.
Thanks for learning!
Michael
The content below this line has been published with permission from contributing author Richard Neate
| Business 1 | Business 2 |
Proprietor: Michael Manager Mike’s Place! | Proprietor: Lisa Leader  Lisa’s Place |
Mike and Lisa are opening identical restaurants in Smalltown. They will have the only two restaurants in town.
Both have 30 tables. Both need 12 staff. Both serve similar food, of similar quality for the same prices. The only difference is:
Both have 30 tables. Both need 12 staff. Both serve similar food, of similar quality for the same prices. The only difference is:
| Mike is an excellent manager. He understands that business success come from maximizing income and minimizing costs. | Lisa is a leader. She trusts that if she builds a good team and looks after them everything will turn out OK. |
Both restaurants are in the high street of Smalltown, and both are the same size. Therefore, their property costs are identical. Ingredients and décor must match their place in the market, so their costs are identical, except for wages:
| Michael knows there will be a steady stream of young people keen for work so he only pays the minimum wage. Therefore, his weekly staffing costs are:
| Lisa likes to get the best people and look after them. She also has to be careful with money so pays the living wage at the start. Therefore, her weekly staffing costs are:
|
SCORE
| +$1,920 | +$0 |
On average, 40 groups of people go out for dinner in Smalltown. Therefore, during their first few weeks they both average 20 covers each. BUT.....
Mike’s staff aren’t as good as Lisa’s. Because Lisa is paying more, she gets the best. Mike’s staff don’t like Mike very much because they can see how much money he makes and yet he pays them as little as possible. What does this mean?
| Mike gets more breakages because his staff don’t really care, maybe ten plates, glasses, etc per week, say $100. Mike’s staff also make more mistakes when taking orders and prepping so he wastes a couple of items a night. 2 items @ $10 x 7 nights = $140 | Lisa sells more ‘extras', an extra drink, dessert or side, because her staff care and try and help the business. Maybe one item at $5 per table per night = $5 x 20 x 7 nights. |
SCORE
| -$240 Mike’s staff take more sick leave because they aren’t committed. 1 day each per year. Equivalent to 0.25 days per week, cost $16.5 x 8 x 0.25 | +$700 Lisa’s staff are a good team and cover each other so they manage when one of them is away so they don’t pay a temp to cover. Say, 1 day per month, 0.25 days a week x 8 x $20.55 |
SCORE
| -$33 Mike has to watch his staff like a hawk and has to do his paperwork when the restaurant is closed. 8 extra hours at $20 | +$41 Lisa can trust her staff so can have the odd night off or do other tasks while at the restaurant. |
SCORE
| -$160 | + More free time |
| Mike’s staff retention isn’t great. Average retention is 6 months. Mike needs a replacement every 2 weeks.
| Lisa’s staff retention is 2 years. She doesn’t need to advertise because everyone who works for Mike would rather work for her. So she gets to pick the best staff in Smalltown. |
SCORE
| -$78.4 | +$0 |
Both restaurants have been trading for 3 months now. If we look at the scores, we see that Mike is winning at the moment – in monetary terms at least. But Lisa is happier and works fewer hours.
But now the restaurants are starting to build their reputations. Lisa’s staff are happier, they care more about the business, and this all means that they are better with the customers.
But now the restaurants are starting to build their reputations. Lisa’s staff are happier, they care more about the business, and this all means that they are better with the customers.
PROFIT TOTALS SO FAR
| $1408.6 | $741 |
Wind the clock forward…
| Mike’s staff costs stay the same: 12people x 40hours x $16.50 = $7,920 | Lisa likes to get the best people and look after them so she starts to pay senior staff more. Her average rate goes up. Therefore, her weekly staffing costs are: 12 people x 40 hours x $25 = $12,000 |
SCORE
| +$4,080 | +$0 |
Well done Mike! $4 grand a week!
On average, 40 groups of people still go out for dinner in Smalltown. But now Lisa is getting better reviews and building more customer loyalty:
| Mike’s averaging 18 tables a night at $400 per table= 7 x 18 x $400 = $50,400 a week | Lisa is averaging 22 tables a night at $400 per table= 7 x 22 x $400 = $61,600 a week |
SCORE
| +$0 Mike has to work really hard:
| +$11,200 Lisa is having fun!
|
And Lisa is making much, much more money every week.
The trend will continue. Lisa will get better reviews. She’ll get a better share of the 40 locals but also a few visitors and they’ll pick the place that looks to be humming and has the best reviews. She’ll probably continue to increase her staff wages which might costs a bit more but...
Wind the clock forward another year…
| Mike’s staff still costs stay the same: 12people x 40hours x $16.50 = $7,920 | Lisa is sharing the love around and is now paying an average of $30 an hour. Therefore, her weekly staffing costs are: 12people x 40hours x $30 = $14,400 |
SCORE
| +$6,480 |
Well done Mike! $6½ grand a week, but:
On average, 40 groups of people still go out for dinner in Smalltown. But now Lisa is getting better reviews even in National and international websites and has a big and loyal customer base because her staff do such a good job of looking after them:
| Mike’s now averaging 15 tables a night = 7 x 15 x $400 = $42,000 a week | Lisa is averaging 25 from locals and 2 visitors = 27 tables a night = 7 x 27 x $400 = $75,600 a week |
SCORE
| +$33,600 |
FINAL PROFIT TOTALS
| $42,000 a week | $75,600 a week WINNER |
GAME OVER!
Lisa wins hands down.
Lisa is thinking of opening another restaurant…
RSS Feed
