May 18, 2022
6 Factors to Consider Before Downsizing Your Business
Additionally, even if downsizing helps your business survive, it can make a recovery more difficult.
To help you weigh this difficult decision, we’ve assembled a list of pros and cons to consider as you think about downsizing.
Downsizing a Business, By Definition:
Simply put, downsizing can mean reducing the size of your business in a few different ways. If your company is downsizing, it doesn’t mean you’ll have to lay employees off or reduce work hours, although those are two of your options. In addition, downsizing can include moving into a smaller office space or liquidating certain assets. In any case, rest assured that if you’re considering downsizing, you’re not alone. Due to the disruptions caused by COVID-19, downsizing is on the table for many small businesses.
The Pros of Downsizing
1. Reduces Overhead Costs and Buys Time for Recovery
Runway means having the right business funding for a suitable period. As Vice President at J.P. Morgan, Mimi Ghosh explains, you want to have enough runway to manage your business until you can secure more funding. The runway is typically something you think about when you start a business because survival is the priority. However, when tough times hit, survival becomes paramount again. By reducing your expenses through downsizing, you extend your time to create and execute a recovery plan.2. Provides an Opportunity to Restructure and Maximize Efficiency
Although it might not seem like it, choosing to downsize can create a golden opportunity for your business to refocus. After all, if you need to downsize, your business is likely going through a significant transformation. Moreover, it’s unlikely that the conditions that caused you to downsize won’t have at least some lasting effect. With that in mind, you’ll want to set your business up not just to survive tough times but to thrive when they’re over. Downsizing gives you that opportunity.3. Frees Up Cash From Existing Business Assets
Although it often does, downsizing doesn’t have to mean laying off a large number of employees. If you have valuable assets that you can liquidate, you can bring cash into your business by selling them. Assets like unused tools, restaurant equipment, inventory, machine parts, and more can help infuse your business with some necessary working capital. If that’s not enough, downsizing your staff will also unlock significant cash flow.
The Cons of Downsizing
1. Can Negatively Effect Employee Performance
Evidence from researchers published in the Harvard Business Review suggests that downsizing hurts surviving employees’ creativity. When creative problem-solving is critical, this is a severe concern for business owners. Although this doesn’t mean you’re doomed to stagnate if you downsize your business, you should mitigate the potential negative impact of reducing your remaining employees.2. Can Be Bad for Public and Investor Relations
Even if it’s the only way you can survive, the public and investors will judge your business for downsizing. For example, the public may perceive laying off employees as unfair—especially if the workforce reductions spark destructive behavior from ex-employees. Similarly, if you have investors, they’ll take your downsizing to signify that your business is in trouble, leading to increased scrutiny. The same goes for prospective investors who may be scared away by your need to cut costs.3. May Lead to Day to Day Operational Struggles
If you downsize, your business won’t require the same production and service capabilities. However, finding your company’s new balance is going to take time. On top of that, you may face unpredictable surges in demand that your downsized staff has trouble meeting. While you can mitigate the impact of reduced staff on production with seasonal or contract workers, it’s a challenge you’ll need to consider.A Final Note on Downsizing Business Strategies
While poor economic conditions and sagging performance are often the driving force, downsizing can also be part of a broader strategy. For example, in a merger or acquisition, one or both companies may have to eliminate redundant staff. In this scenario, downsizing is part of a broader strategy to ensure companies merge efficiently. Still, regardless of the reason, the best way to mitigate the adverse effects of downsizing is to handle the process with care. The Harvard Business Review recommends adhering to the following principles:- Show compassion for your employees and stress that layoffs aren’t their fault.
- Think carefully about whether layoffs are necessary and reflect on ways your organization can save as many jobs as possible.
- Seek out a peer or a colleague outside your organization to whom you can ask for help in coping with your uncertainty.
Editor’s Note: This post was updated for accuracy and comprehensiveness in May 2022.