When an entrepreneur starts or takes over a business, they naturally envisage a growth trajectory that creates employment. However, just as one of the most satisfying aspects of running a business can be the benefit it brings to others in the community, one of the toughest decisions an owner can face is the need to make staff cuts. If possible, these should be avoided.
It is not just the human aspect of cuts that is negative: there are sound business reasons why SMEs should do all they can to avoid making redundancies. Sometimes, changes in circumstances such a major drop in demand make serious downsizing imperative to save the business, but often, better options are available.
Is your business really struggling?
Many SMEs get into serious financial difficulties despite theoretically enjoying profitable trading. This is because the vagaries of their cash flow situation means they sometimes struggle to meet their payment obligations to employees, landlords and lenders even-though they themselves are owed money by their clients.
In fact, as many as two thirds of Australian small business failures are caused by poor cash flow. There is often a solution: by using invoice finance to get invoices paid immediately instead of waiting weeks and months, an SME can ensure it is always ready to pay its own bills, on time.
If your business regularly experiences cash flow crises despite being profitable, it is time to sit down and discuss the matter with a professional advisor: get a good accountant; consider hiring an experienced chief financial officer even if only part time and talk to both about the possibility of using some form of cash flow financing.
Is it just a bad patch?
If your sales are significantly down, it’s worth asking yourself whether it is likely to be permanent. If you know trade is likely to pick up soon, it’s well worth avoiding the cost and disruption of making redundancies, only to then have to expend yet more resources hiring again.
The costs associated with redundancy and with hiring, are often larger than first expected. Even if you correctly calculate the amount of redundancy pay required, just how much will it cost your business to get new employees up to speed when trade picks up again?
Again, invoice financing could be one way to smooth your business’ cash flow in order to ride a known, short-term bad patch. If you are able to do this, you should not only gain considerable goodwill from the workforce but also seize the chance to address any training, maintenance or catch-up work that might have built up when everyone was concentrating on getting goods or services to customers.
Coping with a real downturn
Businesses older than ten years will be familiar with the kind of economic downturn that forces even very healthy enterprises into making cuts. Unless you are lucky enough to be in a recession-proof business, you’ll sometimes face circumstances where sales fall and are unlikely to recover in a matter of months.
Even in a downturn however, there may be positive alternatives to staff cuts. Remember that redundancies are very bad for morale and therefore productivity and it really is no use assuming that won’t be the case in your business. Also, once you strip away the skills base from your business, it will be a major effort to build it back up.
Therefore, when you absolutely must cut staffing costs, it is worth considering the following alternatives to redundancy:
• Bring contracted work back in-house at the earliest opportunity
• Use ‘natural wastage’ by not replacing employees that leave or retire
• End overtime requirements and stop hiring seasonal staff
• Offer extra holiday in lieu of pay or pay rises
• Cut working hours. You’ll have to negotiate but you’re in a strong position and your workers will thank you for
trying to save their jobs.
So in summary, SMEs should do all they can to avoid making redundancies as there are other options that will benefit both the business and its employees for the longer term.