When to Consider Downsizing Your Business

Rachel Blumenfeld
Upset Businesswoman

Although financial necessity is one of the main reasons why businesses choose to downsize, there are other reasons as well. What leads business owners to make the decision to lay off employees, and how do they know when it's the right time to do so? There are many different reasons owners might choose to downsize, from loss of profits to poor work-life balance.

Financial Instability

The most obvious reason to downsize a company is that the business isn't financially stable. Consider General Motors, which cut 10% of its workforce in 2009 to avoid bankruptcy. When customers reduce orders and either delay or stop paying their bills, it can be difficult for the business to continue, especially as the company has to continue paying its employees.

At this point, according to Entrepreneur, the company should work harder to make new customers or increase revenue, and might attempt to save money by cutting back on expenses, but these steps are not always enough to keep the company afloat. If the company cannot support itself, the owners must consider furloughing employees or selling departments or units if possible. If the owners find that even these steps are not enough to stabilize the company, it is probably time to start downsizing.

Reduced Profitability

A company doesn't have to be at risk of failing to downsize. If a company is seeing reduced profits, either because of fewer customers or because of increased overhead, it may not be as successful as it once was. This is a perfectly legitimate reason to downsize.

According to Chron, if a business owner knows that a company can be more profitable because it was previously, or because employees could be more productive, it may be time to see whether the company can be streamlined to reduce costs and therefore increase profits.

Maintaining Product and Service Standards

General Electric's CEO Jack Welch is known for laying off 10% of the company's employees every year, choosing the most underperforming, as a "strategy for maintaining excellence." While it sounds harsh, this isn't an unreasonable plan. When companies grow too big, it may be hard to maintain control over products and services offered. Quality may start to decrease and, while the company may still be making a profit, the company's initial goals may not be achieved.

At this point, a company may want to downsize to ensure that it is providing the best possible products or services to its customers. It is easier for a business owner to oversee a smaller staff that is more focused on one or two products or services than to oversee many employees who are all focused on different projects. It is also easier to ensure that a few projects are being completed according to the company's standards than it is to look deeply at many projects and give them each the attention that they require.

Work Life Balance

The goal of many business owners isn't just to be successful; it's also to be able to enjoy their lives. To do this, owners must find the correct work life balance so that they aren't spending every waking minute working on their businesses.

Businesses don't have to be large to be successful, and in fact, working too much might actually be detrimental to the company, so if a business is so all-consuming that the owner isn't doing anything besides working, it may be time to hire someone else to oversee the company or to consider downsizing.

Outsourcing

As reported by Chron, companies often downsize because of outsourcing. They either take jobs overseas (like Cisco did in 2009) where labor is cheaper, or they hire other companies to do some of their jobs. For instance, a restaurant may hire a bookkeeping company to do its accounting rather than have in-house accountants because it means there are fewer employees to provide office space and materials for and to spend valuable resources managing.

If outsourcing some tasks makes more sense for your company than having in-house employees handle them, it may be time to downsize your workforce.

Downsize Carefully

No matter what your reasons for downsizing, be sure to choose the employees you lay off carefully and lay off those employees in accordance with current employment laws. It won't save your company any money to have to defend a wrongful termination case or to have to rebuild its reputation when an ex-employee begins publicly chastising your business and its practices.

When to Consider Downsizing Your Business