The Procrastination Penalty (Part 6 – Workforce Reduction)

The Procrastination Penalty

(Part 6 – Workforce Reduction)

Hope is not a strategy!  When work is slow decisions must be made, and putting off those decisions only makes the problems worse and can have a huge effect on both your business and its cash-flow. Laying off employees is not always the answer, but it is usually at least part of the solution.  There is a huge loss to the company’s ability to perform at its highest level when we start to terminate employees, through no fault of their own.  Each employee holds a certain amount of special expertise and institutional knowledge.  The loss of these people is not to be taken lightly.

When a business chooses to retain employees during slow periods, there are both costs and potential benefits. The decision to hold onto employees can be financially taxing, but it might also provide long-term strategic advantages.

Here’s a breakdown of the potential “prices” of this decision:

1. Financial Costs

• Salaries and Benefits: The company continues to pay wages, healthcare, retirement contributions, and other benefits, even when revenue is not covering these expenses.
• Reduced Profit Margins: Keeping employees on payroll during slow periods may strain cash flow and reduce profitability or employees may be underutilized, leading to inefficiencies in labor spending.

2. Opportunity Costs

• Missed Alternative Uses for Funds: Money spent on maintaining the workforce could be used for other investments, such as marketing, technology, or expansion opportunities.
• Delayed Cost Adjustments: By not reducing staff during downturns, the business might miss chances to align expenses with current revenue levels.

3. Operational Challenges

• Morale Issues: Employees may feel uncertain or demotivated if there’s a lack of work, which could lead to disengagement.
• Skills Atrophy: If employees are not fully engaged in meaningful work, their skills may stagnate, leading to a decline in productivity over time.

4. Competitive Risks

• Vulnerability to External Shocks: Maintaining a larger workforce during downturns can make the business less agile and more vulnerable to prolonged slow periods.
• Reduced Flexibility: High fixed labor costs may limit the company’s ability to pivot or invest in other areas during challenging times.

5. Long-Term Strategic Costs

• Missed Downsizing Opportunities: Sometimes, reducing staff during slow periods can lead to leaner operations and greater efficiency. Holding onto employees might delay necessary restructuring.
• Increased Pressure During Recovery: If the business emerges from the slow period with strained finances, it may struggle to ramp up operations effectively.

Although there are several potential benefits you can balance against those costs. Examples include the following:

• Employee Loyalty and Retention: Retaining employees fosters loyalty, reduces turnover costs, and avoids the expense and time associated with hiring and training new staff when business picks up.
• Preparation for Recovery: Keeping a skilled and trained workforce ensures the company can quickly capitalize on opportunities when demand rebounds.
• Protecting Brand Reputation: Avoiding layoffs can strengthen the company’s reputation as an employer that values its workers, which can be a competitive advantage.
• Preserving Institutional Knowledge: Long-term employees often have valuable knowledge and skills that can be difficult to replace.

Here are a few vital strategies to minimize the costs of reducing your workforce:

• Cross-Training Employees: Use slow periods to train staff in new skills, enhancing their versatility and productivity.
• Temporary Cost Adjustments: Consider furloughs, reduced hours, or temporary pay cuts with a clear timeline for restoration.
• Creative Utilization: Redirect employees to focus on internal projects, customer outreach, or process improvements that might be neglected during busier times.
• Flexible Staffing Models: Employ a mix of full-time, part-time, and contract workers to create a more adaptable workforce.

Let’s say that your company is currently struggling with a lack of sales and strained cash-flow… what is a business owner to do?  We now know the future of the company is at risk and the decisions that you make may spell success, or failure.  So, let’s first ask why we have a downturn in sales.  Is it likely to be different tomorrow, or any time soon?  If our marketing is not outperforming our competitors then we have work to do, but solving the likely time-frame until sales return question is still critical in this decision.

If we believe that this is a short-term problem, then we should probably still take this opportunity to weed the garden.  Let’s evaluate each of our employees into three categories:  High Performers, Average Performers, and Low Performers.  This lull in sales is a perfect opportunity to remove the low performers, and with things being slow the rest of the workforce should not have a problem picking up the duties of this layoff.

If we believe this could go on for a while, then we need to cut deeper, frankly, until we can get close to cash-flow positive.  This will require difficult decisions to be made, and no doubt some hurt feelings.  Please make sure that people know that this is no fault of their own, we wish then the best, we are happy to provide a positive reference, and that it is simple business conditions that require that we make some cuts.

The earlier we make these decisions the more cash-flow we preserve for sustaining the business through this downturn.  The longer we can stay cashflow positive the longer our business is viable, without cash-flow we are vulnerable to attacks from the competition and other market forces.  You have a duty to yourself, investors, and the remaining employees to protect the company, and making decisions earlier rather than later will make this job easier than it might have otherwise been.

How many times have we observed a business in trouble?  Sometime there after they tried to turn it around but near the end, we say “too little, too late”.  Remember, if you go out of business NONE of your employees will have a job.  So do the right things, do the hard things, and do not procrastinate on the important things.

 

 

 

979