Laying off employees is one of the most difficult decisions a business owner can face. Before making this decision, it is worth evaluating alternative strategies that may help control costs and preserve your workforce.
While it may sometimes be necessary, reducing headcount is often viewed as a way to quickly manage rising costs, as labor is typically one of the largest expenses on a company’s income statement.
However, layoffs can introduce significant additional costs and challenges, including severance obligations, legal considerations, decreased productivity, and potential reputational impact. There are also future costs to consider, such as recruiting and training new employees when business conditions improve.
Last-resort thinking
Think of layoffs as your company’s last resort. For example, is it possible to first trim some perks? Eliminating unnecessary travel, executive seminars, holiday parties and staff retreats may provide some budgetary breathing room. Provide managers with reasonable cost-cutting targets and completion dates. At that point, you can reassess your company’s situation.
Pruning employee benefits can also yield cost savings. Ask your HR staff to scrutinize benefit use and think about discontinuing the least popular offerings. Just be careful about removing benefit options. Your business may be subject to certain contract terms and other legal obligations, particularly when it comes to retirement and health care plans. Consult knowledgeable benefits experts and your attorney as needed.
You might also need more drastic cost-cutting measures, such as temporarily furloughing workers or implementing a four-day work week. Or you may be able to trim salaries. Would a 5% across-the-board wage reduction solve your business’s financial troubles? Could you offer stock options to compensate and incentivize affected employees? Just make sure that any sacrifices you mandate are shared. For instance, if you lower hourly wages and sales commission rates, your senior executives should also forgo any bonuses.
Beyond workers
Be sure to look beyond employees for solutions. You might be able to restructure your business to enhance performance or change your business form to improve tax efficiency. And if you haven’t already, sunset:
- Unprofitable products and services,
- Obsolete production lines, and
- Duplicative efforts.
You may be able to sell equipment you no longer use or nonstrategic assets such as real estate. Also consider divesting or spinning off any noncore business lines.
Act strategically
If, despite all your best efforts, staff reductions appear inevitable, act strategically. Take advantage of any attrition and look at employees who may be willing to take early retirement. To protect your company’s public face, try consolidating back-office operations before terminating customer-facing employees.
We know how heart-wrenching such decisions can be. So contact us to review your financial situation and suggest ways to enhance cash flow, manage budgets, deal with debt and restore your business to good health without taking any unnecessary actions.
We Can Help
If you have any questions about alternative cost management strategies, or would like to discuss individual tax planning strategies that apply to your situation, do not hesitate to contact your Rudler, PSC advisor.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Alyssa Monson, Staff Accountant and Alexis Ludtke, CPA.
If you would like to discuss your particular situation, contact Alyssa or Alexis at 859-331-1717.
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