3 Signs It’s Time to Downsize Your Small Business Staff

It may be time to reduce your headcount.

When you own a small business, it's often on you to do everything. That means mapping out a marketing strategy, following up with vendors, taking inventory, and doing all of the hiring.

The latter can be a particularly challenging thing. When you own a small business, it's imperative that you hire workers who are trustworthy, because chances are, they'll become an integral part of the team.

But there may come a point when it's time to reduce your staff. And that can be a difficult thing to face, especially if you personally sunk many hours into interviewing employees, training them, and working alongside them to help their performance improve. But if these signs apply to you, then it may be time to reduce your headcount.

1. Money has gotten tight

These days, many small businesses are getting squeezed due to inflation. If higher costs are eating into your profits, to the point where they're being whittled down significantly, then it may be time to do what you can to cut costs. And if you can't lower the cost of inventory, utilities, or rent, then you may have to look at reducing your payroll costs.

Granted, if money is an issue and you're hesitant to let staff members go, you can try seeing if anyone is open to a pay cut. But chances are, that won't fly, so you may have to resign yourself to taking a few employees off of your payroll.

2. Business has slowed down

Maybe you hired a bunch of new employees at a time when business was booming and your regular team couldn't keep up. If business has since slowed down, then you can probably go back to your old setup -- and let go of the people you hired to pitch in when things were busier.

3. You have specific employees who aren't being kept busy enough

Perhaps your business is doing fine from a cash flow standpoint and you have a steady stream of customers to service. But if you have specific people on your payroll who never seem busy enough, then it pays to eliminate those roles. Otherwise, you might continue handing over a salary for 40 hours of work each week when you're only really getting 20 out of those employees. That's not exactly a good deal.

How to downsize compassionately

Losing a job can be a major blow. If you have to reduce your headcount, approach it in a compassionate manner.

For one thing, don't let workers go during or right before the holiday season if you can help it. If anything, aim to wait until the new year so your workers can celebrate the holidays without the stress of unemployment hanging over their heads.

Secondly, if possible, give workers some notice that they're being let go. Although you may not be required to do so, if you're able to give your employees some lead time, they'll have a chance to find a new job so they don't have a gap in income.

Finally, if you're downsizing workers through no fault of their own, offer to be a reference for a future job. That could help them get hired more quickly.

Letting go of employees isn't easy. But if you go about it the right way, it'll soften that blow for everyone involved.