Downsizing Definition

Learn more about what downsizing means in business.

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downsizing definition

It’s inevitable to have ups and downs throughout your business journey. Plus, the economy itself goes through seasons of growth and contraction. Downsizing is one way to keep your small business in a good financial state during economic downturns and unexpected business reversals. In this article, we’ll explore the word downsizing, including its definition and business meaning. We’ll also discuss both downsizing advantages and disadvantages. 

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What Is Downsizing?

According to the Merriam-Webster dictionary, the general definition of downsizing is “to undergo a reduction in size.” Downsizing has a business definition as well: To fire employees with the intention of decreasing the size of the business. Downsizing is closely related to layoffs. However, layoffs are usually viewed as only a temporary reduction of employees, while downsizing is a more permanent measure. Businesses downsize for a variety of reasons. Sometimes downsizing occurs in response to changing economic conditions. Other times, it occurs because a business is shifting its products or services. 

Whatever form it takes, downsizing is common to all legal and business entity types, including corporations, professional partnerships, and limited liability companies.

Downsizing Advantages and Disadvantages

Downsizing brings a variety of benefits to businesses. In some situations, it can even mean the difference between bankruptcy and continued successful expansion. Yet downsizing can sometimes cause more harm than good.

Downsizing Benefits

The benefits of downsizing are obvious. Downsizing reduces costs, meaning that it can help businesses improve their profit margins and even stay afloat during challenging times. Downsizing can also improve the business’s administrative efficiency by cutting out unnecessary organizational complexity. Finally, downsizing in one section can help a business expand in other areas or departments. 

Downsizing Disadvantages

Downsizing too little or too much can cause significant harm to a business. Downsizing too little fails to achieve any real savings, while downsizing too much can overburden employees and reduce the business’s productivity and revenue. It is also important for businesses to downsize only unprofitable and costly personnel. Firing experienced, high-performing personnel could be disastrous. Even if downsizing is done correctly, it often reduces worker morale. Finally, downsizing can harm the business’s public image and reduce local goodwill. For all these reasons, downsizing is something that businesses need to do the right way and at the right time.

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Downsizing Examples

Downsizing occurs on a continual basis, so it isn’t hard to find recent examples. Between 2008 and 2010, General Motors let go of tens of thousands of employees due to the fallout of the Global Financial Crisis. In the 1990s, Boeing downsized more than 50,000 people. And General Electric CEO Jack Welch famously fired more than 100,000 employees throughout the 1980s and 1990s. In each one of these examples, the massive workforce reduction helped the company live on to fight another day. 

Summary

Downsizing occurs when businesses fire a significant amount of employees to reduce costs and improve profits. Although business owners should use downsizing carefully, it can be an invaluable tool for long-term success. 

We Can Help

Before you look at downsizing your company, consider whether you can make more minor changes first. We can help you streamline your business and meet a variety of other needs. For example, we can help you set up either a corporation or a limited liability company with our Business Formation Services. We can also help your company keep tabs on its finances with ZenBusiness Money. And we can even help you stay compliant with state administrative requirements with Worry-Free Compliance Service. Whatever your needs, we are happy to give you a hand. 

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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