Downsizing your business is not a decision to be taken lightly. It involves actively scaling back on personnel and operations in order to stay afloat. And even then, there’s no guarantee that downsizing will help you pull through stronger on the other side.
Before you decide to downsize, there are several things you’ll need to take into account. This guide will prepare you for downsizing and also to understand other available solutions that could help push you in the right direction.
Downsizing Definition
Downsizing is the process of a company reducing overhead costs, often by laying off employees or selling assets. Many small business owners choose to downsize during economic recessions or if their industry is declining.
There is no standard process when it comes to downsizing, and it may occur differently in various types of businesses. For instance, some companies may combine teams, reduce hours, or even ask employees to retire early. Some businesses may even decide to close a physical location or eliminate certain products or services.
The end goal, however, is always the same—to drive profits by reducing spending. So, is downsizing the right move for your small business?
Pros of Downsizing Your Small Business
If your business is strapped for cash, downsizing can help you stay afloat. Here are some of the ways businesses can benefit from downsizing.
| Pros | Description |
| Reduce Operating Costs | Downsizing can be one of the most effective ways for businesses to cut costs. For most small business owners, labor is a major expense. With fewer employees, you’ll be able to divert savings into other essential channels.
And unlike selling machinery or other assets, laying off employees still allows your business to remain operational – albeit on a reduced scale. The same goes for eliminating specific products or services. Even though downsizing can help you save money, it’s typically accompanied by a decrease in revenue. You could even end up accidentally cutting off a major source of profit or growth or a minor revenue stream that drove customer loyalty. |
| Opportunity to Restructure Based on Your New Needs | Many business owners see downsizing as an opportunity to restructure and refocus. In the midst of all the changes your business is going through, you may be able to identify areas of weakness or pivot towards long term goals.
Some companies may decide to redirect resources toward channels that show greater potential. It can also be a good time to adapt to changing consumer demands or hone in on a specific niche. While it’s true that downsizing offers potential for transformation, the unfortunate reality is that downsizing also hurts your business’s growth potential. So even if you’ve taken positive steps towards restructuring, the positive results may not outweigh the slowdown downsizing causes. Instead of a large-scale process, taking this transition one step at a time could ultimately help conserve your profits and growth momentum. |
| Eliminate Areas of Your Small Business That Don’t Drive Revenue | No matter how well you manage your business, it’s always possible for certain areas to slip through the cracks. Maybe you have too many employees working on the same job, or you don’t really need a retail space that large.
In either case, downsizing will force you to identify channels that aren’t driving revenue and eliminate them. Reducing costs in certain areas can be a good thing. You may be able to improve your cash flow and divert resources towards proven revenue streams. Unfortunately, it also means you won’t be able to invest in long term initiatives that take time to generate profit. |
Cons of Downsizing Your Small Business
Even though downsizing can help you cut costs, it’s also associated with a number of drawbacks. Here are some cons to watch out for.
| Cons | Description |
| Employee Morale and Performance | Research published in the Harvard Business Review suggests that downsizing can hurt your remaining employees’ creativity, open communication, perception of your company, and overall morale. Downsizing can even push employees to leave your company and work elsewhere.
As a business owner, it’s important to remember that trained employees who understand your goals and processes are your best asset. All in all, downsizing your business has a negative effect on your staff members and can ultimately hinder their performance and productivity. |
| Downsizing Your Small Business Can Lead to a Momentum Loss | Most businesses downsize in order to cut costs and save money. However, one of the many repercussions of downsizing is the inevitable shock to momentum.
With fewer employees and less operational capacity, your business won’t be able to grow at the same pace. You could wind up falling behind your competitors and harming your long term potential. All in all, you’ll want to do your due diligence beforehand. You should also try to envision what your business will look like as a result of downsizing. If downsizing could affect your ability to reach certain goals, then it may not be the right move. |
| Could Take Time to Turn Your Small Business Around | Downsizing your business inevitably dampens growth and revenue levels. Once the process is complete, it can be difficult to grow your business back up again. This is especially true if you’ve downsized as a result of short-term economic factors and better times are within reach.
Downsizing changes your business’s production and service capacities. This means that even once the economy picks up again, you won’t be able to immediately capitalize on rebounding demand. Studies have even shown that downsizing can actually make a business more likely to declare bankruptcy. Instead, it will take time, and you may even have to invest additional funds in order to get your business back to where it once was. |
| Negative Reaction From Customers or Clients | Downsizing not only affects employee morale but can also be detrimental to your company’s overall public perception.
Most people hold a negative view of downsizing. This is especially true if your business is laying off staff members or cutting work hours. While job losses generally lead to unemployment benefits, noticing people losing their jobs can create a negative reaction nonetheless. Customers and clients may not approve of the way you’re handling the situation and decide to take their business elsewhere. Even worse, they may even feel you no longer have the capacity to serve them effectively because your operations have shrunk. Refraining from downsizing can help you avoid this negative perception and remain in a positive light with the public. |
Important Factors to Consider When Downsizing Your Business
Downsizing isn’t something you should do on a whim; It needs to be a calculated decision. Here are a few factors to consider before downsizing.
- Purpose – Do I really need to downsize?
- Timing – Is this the right time to make this move?
- Specifics – What areas of my business will I cut? Which ones will I keep?
- People – Who will I let go?
- Future – How will I replace the people I’ve let go? Will I do those jobs myself or outsource them?
- Legal – Are there any legal implications for my plan?
Asking yourself these questions will put you in the right headspace. If you’re going to let people go, you should also consider the method by which you’ll go about this. It’s important to remember that the business plan will have implications for their future, so make sure to be human about it.
Is It Necessary to Downsize Your Business?
It depends. Are you operating outside of your financial capability? Would continuing at your current pace be the reason you close your doors for good? If so, the answer is likely yes.
There’s no blanket answer; The need to downsize will depend on your specific circumstances. If you do need to downsize, make sure to approach the situation strategically. Formulate a plan of how your business will operate post-downsize, and try to forecast your expenses as accurately as possible.
Remember – The level of productivity you operated at before the downsize likely won’t carry over. You may see an increase in the time it takes to complete tasks. While this can be frustrating at first, remember that you’re doing this for a specific reason.
What Areas of My Business Should I Downsize?
The answer will depend on your specific circumstances, but it’s best to cut money-draining areas and those that aren’t driving revenue. For the latter, this can include ideas or experiments you’ve tried that didn’t work out as you intended.
Here are a few areas that are commonly cut during downsizing:
- Marketing
- Unnecessary staff
- Subscription services
- Accessory equipment
- New projects
- Excess inventory
You can also reduce your rent expenses by moving to a smaller office space. Once again, remember that this will affect productivity and profitability after the downsizing.
What Are the Legal Considerations Should You Follow While Downsizing?
Legal compliance is an important piece of the downsizing process. If you’re not careful about the way you approach your challenge, you could find yourself dealing with a lawsuit.
Here are a few legal items to consider as you formulate your plan.
- Observance of federal, state, and local laws regarding layoffs, severance, and minimum wage/salary thresholds
- Adherence to internal company policy and employee contracts
- Discrimination law
- Compliance with the WARN Act
It’s always best to have everything in writing before you take action. You should also speak with an experienced attorney about the legal implications of your strategy. This way, you’ll have the information you need to make an educated decision on your next steps.
How to Avoid Downsizing Your Small Business
Downsizing may seem like a viable solution during tough economic times, but it can also reverse years of growth and prove difficult to recover from. Thankfully, there are ways to avoid downsizing your small business even when times are tough.
Securing additional funding can be a great way to keep your cash flow healthy and still maintain your current growth trajectory.
If you haven’t already, make sure to check if you’re eligible for a Small Business Administration (SBA) solution or other type of financing. There are a variety of options that you can leverage to steer your business in the right direction.
Get the Funding You Need to Keep Your Business Growing
Securing additional funding can help your business avoid the pitfalls of downsizing. Instead of shrinking your business, you can reinvest in promising areas to become a competitive player and dominate your industry. You’ll also be in a better position to regain momentum once demand rebounds.
Curious about what your options are? National Business Capital can help you find personalized financing solutions that will allow you to avoid downsizing and focus on growth. Whether you need a business loan or business line of credit, we can help you find the perfect fit.
Our Business Finance Advisors are here to guide you through every step of the process and answer any questions you may have.
Get started by applying now!
Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from National Business Capital and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.