Four mistakes to avoid when downsizing your business

It’s been a tough post-pandemic season for the South African business landscape – forcing most businesses to downsize as an attempt to keep doors open amid rising inflation, high interest rates and load shedding.

FNB Business Development Head of SME Funding, Palesa Mabasa, said it makes business sense to downsize in a difficult economic environment rather than closing doors altogether.

“Load shedding, inflation, and the current high interest environment have left little disposable income in consumers’ pockets, making it very challenging for SMEs to be as profitable as before,” said Mabasa.

Down-scaling a business may result in better profitability in the short to medium term, Mabasa said, adding that entrepreneurs looking to downsize must consider a number of factors to avoid “backlash”.

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Don’t compromise on quality and standard of service

The business expert said smaller companies are more likely to cope with the possible effects of downscaling on the quality of their product and service and offerings.

“If your company is smaller, you’re able to maintain tighter control,” Mabasa said.

“Larger companies may find it more difficult to retain control over the products and services they offer,” she added.

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Mabasa strongly advised against the “last in, first out” approach, said alternatively business owners should lay-off staff based on performance levels, not length of service.

“This will allow you to trim your workforce to retain the most efficient staff [members],” Mabasa explained.

“Also consider voluntary retirement where possible,” she added.

Outsource rather than hiring full-time

Outsourcing for a job as opposed to hiring full-time employees can reduce costs, “since you’d be paying for work done and not for any fringe benefits,” said Mabasa.

“This can help you raise capital for your business,” she explained.

“But be sure to draw a clear contract with specific deliverables, so that both parties are clear on what they’ve committed to,” Mabasa added.

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Get legal advice

Cautioning business owners against wrongful termination, Mabasa said employers must have a concrete reason for laying-off staff members. Alternatively, she advised entrepreneurs to adopt “a strategy of periodically downsizing” to keep their companies small.

“For example, you can set certain key performance indicators for employees and review every six months,” Mabasa explained.

“If an employee fails to meet or achieve anything near their key performance indicators (KPIs), you can use this as a legitimate reason to let them go when you downsize,” she added.

“The last thing you want is a lawsuit for wrongful termination, or a bitter employee [tarnishing] your reputation,” said Mabasa.

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Learn from history

Mabasa advised entrepreneurs to take notes from companies who’ve had to downsize in the past, by looking at processes followed and learning from their mistakes.

“You aren’t the first company to downsize, and unlikely to be the last,” she said.

Reminding employers to be considerate towards employees, Mabasa said although downsizing may be in the best interest of the business, employees are directly affected.

“Be compassionate and treat them with respect,” Mabasa concluded.

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