Employment, poverty

How Poverty Affects the Bottom Line

By Mark Borkowski

Wednesday, January 17, 2007

In October, 2006, Statistics Canada estimated that the national GNP almost reached C$ 1.1 trillion dollars. It also estimated that in 2004, about 11.2% of all Canadians had incomes after tax living below the national cutoff levels for poverty.

Yet, after-tax profits for non-financial industries were falling.

How do these facts relate to each other?

Are small to medium-sized enterprises (SMEs) and their bottom lines affected by so many people living below the poverty line? And if so, can SMEs be concerned enough to try to help to alleviate this segment of the population?

The Bank of Canada suggests that the overall capacity utilization rate is hovering around 83%, meaning that about 17% of available capacity to produce goods and services in Canada is not being employed at all. This further emphasizes the question how can SMEs use more available capacity to increase sales and profits?

And this leads to choices for action:Can SMEs increase exports, cut costs (meaning usually labour layoffs) or seek mergers?

Increasing exports can be an expensive affair, especially if the usual United States market target is showing some sign of a slowdown and thus showing less interest in buying more Canadian goods and services.

Cutting costs to increase profits may appear to be inviting at first glance, but there can be some caution about this choice. Due to increased foreign competition and the rising Canadian dollar in recent years, most SMEs have already cut out the "fat". Cutting more could be dangerous in that choosing this route could also cut the "meat". Furthermore, when foreign demand changes, will too lean SMEs be able to respond quickly enough to take advantage of the new situation?

Seeking a potential partner can be a good choice if it is in the long-term interest of that SME. However, reality usually suggests that finding the right partner can be a difficult if not impossible, time-consuming chore with no guarantees of successfully increasing sales and profits.

So, what's left?

Let's look at that statistic of just over 11% of Canadians living below the so-called poverty line.

What this statistic really means is that this segment is a negative contributor to the Canadian economy. This means this segment may spend, but are usually spending dollars receivedfrom government sources such as social assistance, employment insurance and other benefits and not from "gainful" employment.

Thus, this segment acts as a negative drag on the economy.And, as any good businessperson knows, any negative drag hurts sales and profits.If this segment can be converted to a positive contributor, meaning a surplus of self-earned incomes over received non-earned incomes, then this segment can be also a positive contributor to SME growth by being able to purchase more goods and services than is the case now.

But, in reality, what can SMEs do to help turn this negative into a positive?

As a whole, the Canadian SMEs can lobby for effective tax system changes that will encourage this segment to seek "gainful" employment at above-normal wage levels, such as elevating the minimum income levels for imposing income taxes.

As the various governments have recognized, combining all their efforts into a so-called "one-stop" contact centre to offer their various services to SMEs has increased efficiency and cut red tape.In the same manner, all governments can offer the same approach for all their services and programs to this segment, including income support programs, housing, training and other personal and family assistance.

On the local business side, SMEs can work together to provide an assortment of apprenceships, co-op employment and training seminars to under-skilled, under-employed and lowly-paid persons in this segment, keeping in mind that paying higher wages than the standard minimum wage is an investment rather than a short term expenditure.

Most importantly, it is key that SMEs seek the active participation of members of this population segment in designing and implementing these programs. It is when these population members recognize and accept that they not only can be part of the problem but also part of the solution that will make this combined approach really work in the long term.

Henry Ford recognized this principle many decades ago.