Downsizing a Business: How to Do It Successfully


When you first started your business, you likely didn’t consider that one day you might need to downsize. Unfortunately, the coronavirus pandemic has forced many business owners to downsize their workforce just to stay afloat. Workforce cuts like this have left over 58 million Americans filing for unemployment.[1]

Besides this specific event, companies downsize for a number of reasons and at various times. If downsizing a business is on your agenda, you may not know where to begin. Here is what you need to know about how to downsize a business successfully.

What Is Downsizing a Business?

Downsizing a business is the reduction of a company’s labor force. There are several reasons for downsizing:

  • Economic recession
  • Industry or business decline
  • Cash flow issues
  • A global pandemic

Downsizing a business, however, isn’t always associated with an economic downturn. It can also be voluntary. Some business owners want to learn how to downsize a business to streamline workflow and improve efficiency.

For example, let’s say you have an entire team underperforming. It may be worth cutting those employees and reinvesting the money you save into nurturing your other employees or expanding your business. “Trimming the fat” from your company makes for a lean enterprise.

Learning how to produce the same output or more with fewer resources requires you to be innovative and creative. But if done right, you can boost your profit margins and position your company for more significant growth in the future.

The Downside of Downsizing a Business

It’s important to learn how to downsize a business properly, because, when enacted recklessly, it can negatively impact your business. You may experience:

These are risks you incur when downsizing a business. The trick to successfully downsizing is learning how to weigh the long-term consequences of downsizing against short-term gains (saving capital). If you want to figure out how to downsize a business while mitigating these risks, be sure to follow these tips.

How to Downsize a Business Successfully

1. Understand Your Reason for Downsizing

Your reason for downsizing will help you identify the solution to your small business problems. For most businesses, downsizing is the result of not generating enough revenue.

By first identifying your business’s problem, you might realize that downsizing isn’t the answer. Instead, your business may be struggling because you have an inferior product, or your marketing strategy needs an overhaul.

Many small business owners want to avoid the stressful process of downsizing, when possible. Identifying the root of your business problems will help you formulate a targeted solution. If you discover that downsizing is your only option, keep reading.

2. Choose the Right Time to Start

You decided that downsizing is the answer to keeping your business afloat. Your next question is: When do you downsize?

Do you do it right away? Or should you wait until the next business quarter?

Take inventory of your ongoing projects. If your team is in the middle of a critical project, you may need all hands on deck. If you run a seasonal business selling ski gear, you might experience a spike in sales and need extra support in the fall and winter season.

Another tip to help you decide when you should downsize is to wait for your next revenue report. Strong numbers might indicate that downsizing isn’t as urgent as you previously thought. But you’ll still want to remain vigilant. While you wait for your next report, make plans to decide who you might let go of.

3. Decide Who to Let Go

Laying off employees can easily be the most challenging part of downsizing a business. Unfortunately, it may be a necessary step to help save your business. So, who do you let go? 

Don’t fall into the mistake of terminating employees based on who has the highest salary. Many business owners might do this, thinking that they can meet budget demands while firing fewer employees. It’s often more prudent, however, to look at performance and attitude. Ask yourself the following questions:

  • Which employees aren’t meeting expectations?
  • Which employees are not aligning with your company’s culture and mission statement?
  • Which employees are team players?
  • Which employees provide the most value?

Using these factors to evaluate your employees can help you better understand which ones are assets and worth keeping onboard. You’ll often find that keeping a top-performing but higher-paid employee is more beneficial to your business than two underperforming employees.

Also, keep in mind what will happen when you let somebody go. How critical is that individual to your business? If they’re in a crucial position, firing that person can temporarily disrupt business operations. Remember to analyze whether the workload of the employee is coverable by somebody else.

4. Give Notice as Soon as Possible

Figuring out how to let an employee go is no easy task. 

As an employer, it’s tempting to wait until the last minute to give your employees notice that you’re letting them go. When employees learn that their employment days are numbered, they may feel unmotivated to work. Consequently, their performance and attendance may suffer. Moreover, some employees might even act out in resentment or anger, creating a disruptive and hostile work environment.

Know that these are real possibilities should you let go of one of your employees. Still, sooner is better than later with news like this. You’ll want to make the transition process as seamless as possible, which includes giving your employees time to wrap up projects or catch up other team members on their progress. On the employee’s side, the more notice they have, the sooner they can start looking for a new job to hopefully decrease the amount of time they’ll be out of work.

WARN Act Compliance

As an employer, you should also keep in mind that the WARN Act enacted by the U.S. Department of Labor mandates that you notify your employees with 60 days written notice of massive layoffs. This regulation applies if:

  • You employ 100 or more full-time employees
  • Layoffs affect at least 50 employees and one-third of the worksite’s total workforce
  • Or if layoffs affect 500 or more employees at a single site of employment during a 90-day period

What About Temporary Furloughs During COVID-19?

The WARN Act does not always apply to “unforeseeable business circumstances,” such as what we are experiencing during the COVID-19 pandemic. 

“An employee who is laid off does not suffer an employment loss unless the layoff extends beyond six months,” the WARN Act states. “Therefore, a temporary layoff of six months or less does not trigger the need for the employer to issue a WARN Act notice.”

If you’re significantly downsizing a business, we recommend conducting further research on the WARN Act on the U.S. Department of Labor website, or consulting with a business attorney and your HR department to ensure you’re proceeding legally.

5. Communicate Changes to Remaining Employees 

After downsizing a business, it’s time to touch base with the employees that stayed. We recommend that you hold a meeting with your team to discuss the changes.

Being transparent with your team is critical after downsizing a business. Be honest with why you’ve chosen to downsize. If you didn’t hit your revenue goals, say that. If you’ve lost your highest-paying clients, explain that to your team. 

Employees feel more comfortable in their roles when their leader is open and communicative. Downsizing a business can introduce stressful changes. As their business leader, it is your responsibility to keep your employees informed.

Next, explain how their roles might change in light of recent changes. Some employees may have to shoulder the work left behind by the employees you’ve let go of. You want your team members to feel secure in their roles and responsibilities.

You might also need to shift your company objectives. Perhaps, your new direction might be to throw your sales and marketing efforts into high gear. Explain this to your team so they know what to focus on. 

6. Be Empathetic

Downsizing a business can be emotionally draining for your team. When employees see their co-workers let go, they might feel anxious and fearful about their positions. They worry that they’re next on the chopping block. These emotions are to be expected.

It’s best not to let negative emotions, like resentment, fear, or anger, brew among your team. Again, do your best to help your remaining employees feel secure. Regularly checking in with your employees can help you tune into the overall vibe of your team.

If you notice that employees are feeling frustrated, have an open-door policy. Let your employees know that you are available to discuss work-related issues and how they feel about their jobs. These one-on-one meetings can also be opportunities for you to request feedback. 

Don’t wonder what you can do to better support your employees. Ask them directly. You might learn that one employee is overworked and needs additional help. Or you might learn about a bottleneck in your business that you need to address so you can improve efficiency.

Downsizing a business is an adjustment for both your and your employees. Listen to them, and you can help facilitate a smoother transition into the “new normal.”

Alternatives to Downsizing a Business

Downsizing a business doesn’t always mean you have to let go of employees immediately. Instead, you can opt for softer downsizing alternatives. Instead of cutting staff, you can:

Implement a Hiring Freeze

Halt the hiring of non-essential personnel to cut costs. Use this opportunity to brainstorm ways to review your business budget and financial situation. 

While this is a softer alternative to downsizing, your employees can still feel overwhelmed if they have an excessive workload. During the hiring freeze, be sure to remain attentive to your employees’ needs. 

Cross-Train Employees

Cross-training synergizes well with hiring freezes. Instead of hiring a new employee, you can train an existing employee to perform other job functions.  Remember to be mindful of employees’ current workloads. Piling on additional responsibilities can cause your employees to burn out.

Reduce Hours

Instead of cutting an entire employee’s salary, you can meet budget cut demands by reducing the number of hours each employee works. Many small business owners follow this approach before undergoing the arduous task of downsizing a business.

Cut Wages

This goes hand-in-hand with reduced hours—when employees work less, they get paid less. Temporarily cutting salaries and hourly wages can help your business stay afloat while you navigate a tricky time. 

Keep in mind that if you move forward with this, employees will expect wage cuts across the board. This shows that everybody is making sacrifices for the betterment of the company. You should also be prepared to share a timeline of when wages can expect to be restored and if there will be any additional compensation down the road to offset this hit.

The Bottom Line

Sometimes downsizing a business is involuntary. You have no choice but to downsize to keep your business up and running. It’s the unfortunate choice many companies made in response to the COVID-19 pandemic.

Downsizing, however, isn’t always a terrible thing. Outside a recession, downsizing your business can offer several benefits. It can help you analyze your business with a critical eye. You’ll notice where you can trim the fat, how you can reduce bottlenecks, and ways to be more innovative.

Still, downsizing can be a stressful process. Hopefully, these tips on how to downsize a business will help you and your business remain in the black and able to continue growing in the future.

Article Sources:

  1. BusinessInsider.com. “U.S. Weekly Jobless Claims Stay Above 1 Million for a 2nd Straight Week as Labor-Market Recovery Stalls

The post Downsizing a Business: How to Do It Successfully appeared first on Fundera Ledger.


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