Downsizing Your Small Business
Reading Time: 6 minutes

As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.

Challenges like economic downturn has forced many small business owners to make hard choices in order to keep their businesses moving forward—including downsizing. The downsizing process can be a difficult one—but it can also be the right choice for your business. The question is, how do you know when (or if) to downsize—and if you do decide to move forward with downsizing, how do you downsize in a way that minimizes negative impact and maximizes your business’ potential to grow and evolve in the future?

Knowing when to downsize

Before you move forward with downsizing, you need to determine if it’s the right choice for your business—and, if so, if now is the right time to downsize your company. There are a few questions you’ll want to ask yourself when trying to determine if and when to downsize your company, including:

  • Are the issues facing my business short-term or long-term problems? Identifying whether the issues facing your business are long-term issues—or are issues that are likely to resolve themselves in a short time—can help you determine whether downsizing is the best choice.
  • Are there any staffing alternatives to downsizing? There may be staffing strategies you can leverage in your business to save money and keep yourself above water without moving forward with layoffs, like reducing hours or implementing temporary pay cuts to the executive team. If there are alternatives that could make sense for your business, they may ultimately be less disruptive than downsizing.
  • Are there ways to pivot my business model to increase profit? Your old way of functioning as a business may not be working—but just like many restaurants shifted from in-person dining towards delivery and takeout, there could be ways to pivot your strategy to increase profitability and prevent downsizing.
  • How precarious is your business’ financial situation? You may try everything you can to avoid downsizing—but at a certain point, if your business’ financial situation is unsustainable, reducing your staff may be the only remaining option.

Ultimately, there’s no formula for knowing if and when to downsize; only you can make the call as to whether it’s the best option for your business. But if you do decide to downsize your company, you want to do it the right way. Here are some tips to make the downsizing process as good as it can be—for you and your team:

Identify the reasons for downsizing

While downsizing your business can help with cash flow issues, it’s not going to immediately solve the problems that led to the need to reduce head count to begin with. It’s important to recognize the specific reasons and issues that led to the need to downsize. For example, maybe you’re downsizing because the impacts of COVID has limited your business’ abilities to serve your customers in person, which has caused your profits to significantly decrease. Or maybe you’re struggling with supply chain issues, which has made it more challenging to operate your business. Whatever the reasons behind your need to downsize, it’s important to identify them from the start. Because once you know the specific circumstances that are causing you to downsize, you can…

Create a downsizing plan

Making the decision to downsize is a tough one. But if you want that decision to be the right one for your business, you can’t just impulsively start laying people off and hope for the best. If you want your downsizing to ultimately help your business, you need a plan. While every company’s downsizing plan will be different, there are a few elements every business needs to address in their plan, including:

  • Which and how many employees are facing layoffs? Arguably the hardest part of creating a downsizing plan is figuring out who to layoff. First, you’ll need to determine how many employees you’ll need to let go—and from there, determine which departments and which employees are going to be laid off during the downsizing process.
  • How are layoffs going to be handled? Layoffs can be an extremely challenging experience—both for you and the employee. Before you move forward with layoffs, you’ll want to have a plan in place to handle the layoffs—including who is going to notify employees, how your business is going to help exiting employees through the transition, and how to support your remaining employees.
  • What are the legal implications of downsizing? Depending on where you operate your business, there may be legal issues to consider before downsizing (for example, using a specific set of criteria to determine which employees are laid off). Before you move forward with a downsizing plan, make sure to consult an attorney to make sure your plan is fully compliant with any relevant laws.
  • How is the business going to manage operations with fewer employees? Just because you’re downsizing doesn’t mean there isn’t still plenty of work to be done—and now, you’re going to have to get that work done with fewer employees. Having a plan in place for how you’re going to manage your workload after layoffs (for example, by outsourcing tasks or spreading job responsibilities across your remaining team members) will help your business better navigate the transition.

Do right by your employees

Once you do decide which employees within your company are going to be laid off, it’s extremely important to do everything you can to support them during the transition. What that support looks like will depend on your company and the resources you have available. For example, if you have the resources, you might consider offering your employees a severance package that includes a month’s wages and an extension on their health care. Or, if you don’t have those kind of resources at your disposal, you might have your HR department put together a list of job-seeking resources to help your ex-employees on their new job search or offer to write a letter of recommendation that outlines explains termination was due to corporate downsizing—and that your decision-making process had nothing to do with job-related issues or performance. The point is, getting laid off is hard—and as a business owner, anything you can do to make it easier on your employees should be on the top of your priority list.

Support your remaining staff

Layoffs are (obviously) hard on the employees who are being let go—but it can also be challenging for the remaining employees, who watched their co-workers positions get eliminated. Downsizing can cause employee morale to drop for your remaining team, which can lead to all sorts of issues—including issues with productivity, performance, and retention. If you want your downsizing to ultimately have a positive impact on your business—and to keep your company moving forward—you need to bring that morale up and provide support to your remaining staff. Again, this support may take different forms depending on your business, your team, and the resources available. You may want to hold an all-hands meeting to explain the restructuring and what it means for your business moving forward. You may want to schedule one-on-one meetings with individual employees to check in and see how they’re handling the downsizing (and reassure them that their job isn’t at risk) or ask human resources to put together a plan to boost morale post-downsizing. Supporting your employees that have been laid off is important—but if you want your business to emerge from the other side of downsizing successful, providing support to your existing team through the transition is just as important.

If you downsize, downsize the right way—for your business and your team

Downsizing your company is never easy. But there are ways to downsize that can make the process a bit easier—so if you do have to make the decision to downsize, you can at least have a plan that makes the best of a challenging situation, both for your company and for your team.

Learn about the Biz2Credit financing process

Find more blogs

Apply Online in Minutes

Applying does not impact your personal credit score.