3 Signs You may Need to Downsize your Company

Human Resources Team making a note

Author: Dean Hunter

Published: 14th November 2016

As a manager or business owner, it can be hard to accept the need to downsize and reduce the workforce. You may be focusing on the company’s strengths and ignoring the warning signs. Whether the market has changed and you’re noticing negative trends in the sector, or the labour budget simply isn’t stretching enough – there are plenty of reasons why companies downsize. Business needs change, which means a company’s labour force needs to also adapt with it.

Downsizing isn’t limited to downturns. Many fast growth businesses move at such a pace they build ‘fat’ in the organisation that is slowing them down and hindering profitability.

Have you noticed that money is particularly tight recently? Have you had to reduce spending on employee benefits and socials? You might have even noticed staff sitting around if there isn’t enough work to go round. Here are three signs that you may need to think about downsizing.

  1. Labour spend is never on target

Each week or month, you should be working out how much income you generate as a business, and how much of this should make up the labour budget. Targets will differ by industry, but you should always try and hit these targets, otherwise you’ll be overspending on paying staff. If this continues over a long period of time, labour costs will be eating into profit and you could possibly be heading for a deficit.

  1. Personal Relationships

Many entrepreneurs fail to call it time for some staff because of their gratitude for the loyalty and performance shown to date. Downsizing is a common business cycle and you have a duty for the long term sustainability of the business for those remaining with you. It’s about managing the downsizing in the right way, with the right approach and doing everything possible to help secure these leavers new jobs. Equally don’t see headcount reduction as the only option; there’s lists of ways to reduce cost relating to your people without increasing workload for those left behind.

  1. Business is on the decline

Are your clients or customers dwindling away? Perhaps you’ve been outpriced by a competitor or you’ve been the victim of a bad online review. Whatever the cause, if the custom isn’t there, then you can’t afford to be paying staff to do nothing. Respond to the market, focus on your strategy; ask what do you need to change and then decide which staff you need to make that happen.

  1. Market uncertainty

Sometimes external factors should influence business decisions. For example, if there’s an economic crisis such as the financial crash or a recession, businesses need to cut back in preparation. A more recent example is Brexit – this could affect businesses in a number of ways, which could cause them to choose to downsize.

There are other options to explore to cut costs, before reducing headcount. For example, reducing staff benefits, asking staff to work part time and other initiatives can be effective at managing the labour costs. If you recognise these warning signs, speak to the experts in cost reduction and downsizing who can advise on the best way forwards.