Should Small Businesses Cut Headcount Due to Recession Warnings?

Is it time to start conserving costs by laying off staff?

Will a recession end up battering the U.S. economy in 2023? It's something small business owners and consumers alike would no doubt like to know. But if you own a business, you may have some important decisions to make in the near term. 

In January, small businesses shed 75,000 jobs, according to a new report by ADP. And most of the jobs that were eliminated stemmed from companies with one to 19 employees. 

But should you start slashing jobs at your company? You'll need to weigh the pros and cons carefully.

The upside of cutting headcount

When you reduce your staff, you don't just save money on salaries. You also save money on benefits. If money has gotten or is getting tight, reducing your headcount could be a good way to compensate without having to resort to drastic measures like moving your place of business to a less expensive location to save money on rent, or cutting ties with long-term vendors to save on material costs. 

The downside of cutting headcount

You might save your company some money by shrinking your staff. But you'll also then have fewer people on hand to help. For a small business, that could end up being a pretty bad thing.

Imagine you have a staff of 15 employees and you decide to let three people go. That means 12 people will have to somehow divide up their work. That could end up putting a huge burden on your remaining employees -- and on you.

Remember, when a large company with 300 people lets three people go, it tends to be easier to find remaining employees to pick up that slack. When you have a small staff to begin with, you need to think carefully about what it means to lose out on manpower.

What's the right call?

If you have financial concerns or are worried about a recession, then you may be thinking about reducing your headcount. But before you do, crunch the numbers. Look at your bank account records to figure out how much financial wiggle room you have, and see if there are options that don't involve laying workers off completely.

For one thing, some of your staff members may be willing to take a pay cut if that enables them to keep their jobs. You can also look at reducing your employee benefits, whether by switching to a different health insurance company or eliminating perks like free onsite meals.

Also, some of your staff members may be willing to move from full-time workers to part-timers. That's a discussion worth having. It could save you money while also helping to ensure your remaining employees won't have to scramble to get things done in the absence of that extra help.

It's important to take steps to conserve funds ahead of a recession -- especially as a smaller operation with limited financial resources. But before you start letting workers go, see if there's a better way to achieve the goal of securing your company's finances.