Downsizing has become a word no one wants to say or hear regarding business. Though not every company will experience downsizing, it becomes necessary for a company to survive in some cases. Companies may hit financial difficulties caused by poor business management, difficulties in the industry, natural disasters, or uncontrollable circumstances. An example would be the COVID-19 pandemic of 2020. The pandemic affected businesses of all sizes and, in some cases, decimated industries. To survive, many businesses had to downsize. COVID-19 is one example, but many factors can cause a company to consider or implement downsizing.
Common reasons for downsizing
A large-scale disaster like COVID-19 is a rarity when it comes to reasons for downsizing. Here are some common reasons for downsizing.
- Mergers: Mergers combine two separate businesses into a single new legal entity. True mergers are uncommon because it’s rare for two equal companies to mutually benefit from combining resources and staff, including their CEOs. Often after companies merge, there are double positions. This doubling of employees means there will need to be downsizing to streamline the business and cut salaries.
- Acquisitions: Acquisitions have one company purchasing all or part of another company with agreements by both companies. An acquisition could be that the acquiring company needs to strengthen the company or department or that the selling business is having financial difficulties or has no need for specific aspects of the company. In some cases, downsizing becomes necessary due to dual positions or streamlining.
- Takeovers: Takeovers are when one company is financially vulnerable, and the acquiring company exploits the vulnerability by appealing to stakeholders through financial relief. A takeover downsizing is often inevitable because, in many cases, if a company is dying, the acquiring company will break it apart rather than attempt to revitalize it.
Regardless of downsizing, there are myths and facts about downsizing that are important for a business owner facing downsizing needs to understand. Here are some myths and facts about downsizing you and your company’s decision-makers need to know before deciding to downsize.
Myth: Larger, financially strong companies never downsize.
Fact: Larger, financially strong companies downsize to boost company performance by reducing headcount.
Myth: Companies don’t hire while they are downsizing.
Fact: Companies may lay off two of their non-productive employees and hire one competent employee in their place of them.
Myth: Downsizing is always about the economic crisis.
Fact: Downsizing can sometimes be about overstaffing or eliminating a position.
Myth: Downsizing is permanent.
Fact: Downsizing is often temporary; in some cases, the original employees will be rehired if they are valuable.
Myth: Downsizing is always profitable.
Fact: Downsizing can sometimes be costly if done incorrectly.
Myth: Downsizing is the only solution to the financial problem.
Fact: Downsizing should be considered the last option to solve a financial problem.
Myth: Only the downsized department suffers after downsizing.
Fact: Other departments often pick up the slack for the downsized department.
Myth: The employees that are retained perform better to survive further downsizing.
Fact: Generally, retained employees suffer from lower morale and become demotivated.
Myth: Downsizing is a quick and easy process for a company.
Fact: A lot of work and planning goes into downsizing to keep the company running smoothly.
Companies should go through self-analysis before downsizing. There are several ways to prevent downsizing and overcome the financial or performance crisis. It is better to hire smartly rather than go through downsizing later since a company invests time and resources when it hires an employee. Many factors can cause downsizing, and if you are aware of the myths and facts, it will help you and your decision-makers to know whether downsizing is the answer to your company’s needs.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.