Why Do Companies Downsize?

Why Do Companies Downsize1

Whether you’re an employee or employ workers, you need to know why companies downsize. This knowledge can make the difference between recovering or going bankrupt.

To Reduce Costs

The primary reason is to keep the costs down. Business enterprises usually have long term forecasts. These are used to make decisions in the present. If the forecast is that it will lose money, cutting jobs or shutting down factories may be the only option.

Sometimes this takes place without the result of a long term study. An unexpected event like an economic crisis can happen. In this situation, the corporation may be forced to make mass layoffs. This is one reason why companies downsize.

To be More Profitable

In some cases a firm might decide to do it to make more money. It can happen that a company expands in operation (i.e., opens branches overseas). If it doesn’t make money, the firm will shut it down. Another reason is that the company will lay off workers or factories to increase their profit.

Entering into a New Business Partnership

Mergers often take place among corporations. When this happens laying off workers can take place. The joining of two firms usually means new goals and tasks. It signifies that employees and personnel may be added or removed.

If the economic situation forces the business to move in an entirely new direction, more layoffs will ensure. Thus, the need to join up with another firm is one more reason why companies downsize. This doesn’t always occur of course. If the merger is between two healthy corporations, there might even be the need for more workers.

To Restructure

When a firm is heavily in debt or struggling financially, restructuring may be required. There are several elements in a typical restructuring program. This can include cutting down jobs, selling off assets or get government bailout funds.

In the latter case, the corporation will get some money from the government. In return it must make a pledge to change its operations and return to profitability.

Help doesn’t have to come from government though; the financial aid can come from another private company. But the conditions are usually the same; reorganize from top to bottom, which is why companies downsize.

Pay off Debts

Lowering costs is also used to make debt payment easier. Usually the first step is to sell off non performing assets. These are usually priced low (obviously) and can’t help much.

Subsequently, other actions must be taken. This can include terminating contractual / temporary workers and closing down dealerships or suppliers. The money earned will then be used to pay off the debt and any incurred interest.

Handling the Situation

For a businessman / employee, the first step to coping with the situation is accepting it could happen anytime. The best time to prepare would be when the economic situation is rosy.

By making decisions based on long term thinking one can ease the burden when the economic crunch comes. By learning why companies downsize, you’ll have a less difficult time making the right choices.

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