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When and How to Downscale a Business

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When and How to Downscale a Business

When they start a business for the first time, most entrepreneurs fantasize about scaling that business indefinitely, growing into new markets, reaching new customers, and opening new offices and storefront locations. And some businesses are able to accomplish this, taking over the world with new locations and a stronger brand.

But for some businesses, this accelerated growth trajectory is unsustainable – or counterproductive. You may get to a point where it’s important to downscale the business, or prune it back, ultimately saving money and occupying a more economically viable niche.

So how are you supposed to know when the right time to downscale is? And how should you go about doing it?

What Is Downscaling?

Let’s start by explaining what downscaling is and what it looks like. Sometimes called downsizing (especially in reference to reducing a labor force), this is primarily a cost-cutting measure; your primary goal as a business is usually to reduce your operating expenses and overhead, ultimately allowing you to operate more profitably and/or recover from a tough financial situation.

There are Several Strategies that can help you Downscale:

1. Cutting Jobs

One of the biggest expenses in your business is going to be your labor force. Businesses sometimes overextend themselves by hiring a vast workforce before they truly need one, resulting in overspending and lack of profitable activity. Accordingly, one of your best options to downscale the business is to cut some jobs. Depending on the situation, that could mean laying people off, letting them go entirely, or simply reducing hours and reshuffling positions.

2. Closing Locations

If your business has multiple locations, you may need to consider closing some of them. Each new location is going to come with a lease and new operating costs – and if it’s not making money, it’s going to represent a massive roadblock to your profitability. It’s often better to focus on your best locations and close the underperforming ones down.

3. Selling Equipment

If you’re closing certain locations or if you’re restructuring resources in a primary location, you can sell your equipment to raise cash and minimize ongoing expenses. For example, you could sell your used network equipment and make some extra money while reducing overhead.

4. Eliminating Certain Products or Services

If your business has many different product and service offerings, you can consider pruning some of those away. Focusing on your core competency can be a positive business move for the brand and eliminating some production lines can save you a massive amount of money. If a product or service isn’t profitable, it may not be worth offering.

5. Centralizing your Focus

You can also refocus the business on one specific niche, rather than targeting many different segments at once. For example, you can work to target one specific audience or work in one specific city. You can always expand again in the future, but if you’re facing financial hardship, it may be better to scale back temporarily.

Signs You Should Consider Downscaling

You shouldn’t downscale a business just because you feel like it. You need a good reason to motivate this effective, if drastic, action.

These are some signs that should trigger you to consider downscaling:

1. Shrinking Profitability.

What kind of profit is your business making? How has that profit changed in the past few years? In the past few months? If you see a steady decline of profitability, or if you’re not making the money you expected, it’s a sign you should consider cutting costs.

2. Unreliable Cash Flow

What about your cash flow? Are you making money consistently, or are you dealing with financial volatility? The more unstable your finances are, the more seriously you should consider scaling back.

3. Silos and Poor Communication

Business owners are always eager to grow, but business growth can occur too quickly. When you scale too much, too fast, it leads to the development of departmental silos and poor communication within the team. It’s another sign that you should reevaluate your priorities and refocus.

4. Inconsistent Branding

Similarly, when businesses expand quickly, they often lose consistency in terms of branding and product quality. If different locations are offering different experiences to customers, or if you’re not able to hold your brand standards consistently, you may need to downscale.

5. Excessive work demands

As a leader in your business, expanding too quickly or too much can also leave you feeling overworked. If you’re constantly pulled in different directions or if your work-life balance has completely disappeared, downscaling could be a conceivable solution – or else, you’ll need to hire some help.

Downscaling isn’t the right move for every business experiencing hardship, and some businesses won’t ever truly need to consider it. But it’s a valuable option to keep your business afloat – and possibly help it thrive in a new environment – that’s certainly worth considering.