Every business owner dreams of their enterprise growing indefinitely, with minimal challenges and interruptions along the way. But the reality is a bit more bleak, as most entrepreneurs are frequently challenged by plateaus, periods of stagnation, heavy challenges, and times of decline. If you’re facing an especially difficult hardship, you might feel incentivized to downsize your business.
But when is this the right move?
The Basics of Business Downsizing
When most people think of downsizing, they think of firing or laying off employees. Because labor expenses tend to be so excessive, this is usually one of the first areas to be cut in a business. However, it’s only one way to downsize the size, scope, and expenses associated with the business. For example, you can also downsize your physical space by moving to a different location in a less expensive area or decreasing the amount of office space you have to work with, thereby decreasing your rent costs.
No matter what, downsizing is focused on decreasing business expenses without impacting the core operation of the business. This can help you increase profitability, which may be able to get you out of the red or help you through a particularly difficult circumstance.
When to Consider Downsizing
When should you consider downsizing your business?
These are some of the most common trigger points:
- Rising costs. Many business leaders start to consider downsizing when they face rising costs. There are many potential origin points for this phenomenon, such as the rising costs of materials, rising operating expenses, or rising labor costs. In any case, if costs begin to eclipse your revenue and compromise your productivity, the natural move is to cut unnecessary costs in favor of necessary ones.
- Stagnating revenue. If growth seems to be stagnant, you may also consider downsizing. If you want your business to continue growing, you need to find some way to press forward; downsizing can help you do this by maximizing profitability, so you can continue reinvesting in the expansion of your business.
- Difficult strategic positions. It’s also possible to integrate downsizing as a reaction to a variety of different difficult strategic positions. Perhaps a new competitor is beginning to threaten your market share. Perhaps you need to pivot your business as a gambit to survive in the long term. Perhaps consumer preferences are changing and you need to buy time for your company to figure out how to respond. In any case, downsizing can help you save some money and maximize efficiency while you’re sorting out other problems.
Best Practices for Downsizing
If you’re going to downsize your business in any way, make sure you follow these strategies:
- Plan ahead. Business environments favor companies that are capable of thinking far into the future. If you want to be successful in your downsizing efforts, you need to plan ahead. That means downsizing in a way that’s going to favor your business years, or even decades from now, rather than planning only in a way that solves your immediate issues.
- Understand your priorities. Next, you need to understand your priorities. How many expenses do you want to cut, and how necessary is it for you to cut them? Who are your most important and most talented team members and how important is it for you to preserve them? Which aspects of your business are you not willing to cut at all?
- Be transparent. As much as possible, exercise transparency. Be clear about your motives for downsizing and your long-term goals. If any of your employees have questions about what’s happening or why it’s happening, answer them. It will help establish and rebuild trust in your organization.
- Clearly communicate. Similarly, you need to communicate clearly with your employees. Be objective, concise, and direct with your messaging as you prepare for the forthcoming changes.
- Provide severance. If you can afford severance packages, consider providing them. It’s a gesture of good faith that can make the downsizing news much more palatable, and it will help you preserve your company’s reputation during this time of crisis.
- Support your remaining employees. Don’t forget that many forms of downsizing are associated with decreased team morale as well. Provide support for your remaining employees if you want them to stick around with your business.
No entrepreneur likes the idea of downsizing a business. This is especially true for a business that you started from scratch. In some ways, it feels like an admission of defeat and a step backwards, but the truth is downsizing might just be a temporary and necessary hiccup on your journey to long-term success.
As long as you approach downsizing with the right mindset and the right timing, it can ultimately work in your business’s favor.
