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Downsizing Your Business? 6 Factors to Consider
December 16, 2020

Downsizing Your Business? 6 Factors to Consider

Deciding to downsize your business may be the toughest decision you make for your company. Some of the people who helped you build your business will lose their jobs, and your company’s growth may stall.

Additionally, even if downsizing helps your business survive, it can make recovery more difficult.

That said, downsizing is better than closing your business which, as of April 2020, 42 percent of small business owners had to do this year.

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, although that is one 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.

Pros of Downsizing

1. Reduces Costs and Buys Time for Recovery

Runway means having the right business funding for the right period of time. 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.

Runway is typically something you think about when you’re first starting a business because the priority is survival. However, when tough times hit, survival becomes paramount again.

By reducing your expenses through downsizing, you extend the time you have to create and execute a recovery plan.

2. Provides an Opportunity to Restructure and Maximize Efficiency 

Although it might not seem like it, downsizing can create a golden opportunity for your business to refocus.

After all, if you need to downsize, your business is likely going through a major 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 the 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 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 a significant amount of cash flow.

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Cons of Downsizing

1. Can Negatively Impacts Employee Performance

Evidence from researchers published in the Harvard Business Review suggests that downsizing hurts surviving employees’ creativity. In a time when creative problem-solving is key, this is a serious concern for business owners.

That doesn’t mean you’re doomed to stagnate if you downsize your business. However, it does mean you need to take steps to mitigate the potential negative impact of downsizing on 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 your laying off employees as unfair—especially if the workplace reductions sparks destructive behavior from ex-employees.

Similarly, if you have investors, they’ll take your downsizing as a sign that your business is in trouble which will lead 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’re downsizing, that means 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 downsized 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 of the companies may have to get rid of redundant staff. In this scenario, downsizing is part of a broader strategy to efficiently merge two companies.

Still, regardless of the reason, the best way to mitigate the negative effects of downsizing is to handle the process with care. The Harvard Business Review recommends adhering to the following principles:

  1. Show compassion for your employees and stress that layoffs aren’t their fault.
  2. Think carefully about whether layoffs are necessary and reflect on ways your organization can save as many jobs as possible.
  3. Seek out a peer or a colleague outside your organization to whom you can ask for help in coping with your own uncertainty.

Finally, remember that, if it makes it possible for your company to survive, downsizing will ultimately bring more value to your customers and employees in the long term.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].