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The Six Biggest Downsizing Mistakes Whether you are trimming your operation to streamline your successful business or save your recession-affected enterprise, consider these tips.

By Donald Todrin

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Not every business suffers during a recession. Some industries even thrive because they are recession-proof. But many others experience reduced revenues and lower profitability, even as the economy slowly recovers. But regardless of which side of the downturn you are on, you should downsize, tighten procedures, control expenses, and hold on to profitability as best as you can.

The idea is to take out the cleaver instead of the surgical knife and cut deep, deeper than the revenue reduction may require. Overcutting, some may claim, with unnecessary layoffs is taking advantage of the downturn to lose excessive employees and reduce overhead -- making the business leaner and meaner at the cost of employees. In reality, it is making up for years of unnecessary growth and development, cutting out the fat and leaving the meat.

Cut your payroll, workforce, and overhead. If your efforts are focused on getting better, not getting bigger, you will be around a lot longer, irrespective of the economic climate. Focus on training, incentives and teamwork, all of which contribute to greater productivity without increased overhead and payroll. Batten down the hatches and market like crazy. There's a smaller pie to divide up than there was during flush times, but you can get a larger share than you had even before downsizing.

Downsizing a business is a difficult task and rife with dangers to your business and your team. Here are half a dozen major stumbling blocks to avoid in your downsizing plan.

Mistake 1: Underestimating the Severity and Length of an Economic Downturn
Be stone-cold realistic. Acknowledge immediately that this is not a trend that will soon reverse itself. Our economy is severely damaged, and growth will be slow.

Redesign your company based on a realistic evaluation of your worst case. Protect your core, the most profitable parts of your business that make up most of your volume and serve most of your customers. Identify your top customers and make certain you are satisfying their needs. Reduce your debt in the face of reduced revenues. Not getting small enough quick enough is a short path to disaster.

Mistake 2: Implementing Across-the-Board Cuts
Avoid making across-the-board cuts or reductions or shutting down entire divisions unnecessarily. You should cut your employee force in half, but your business must be able to perform the same functions. Letting go of the entire marketing department is not the way to downsize properly. Isolate and pinpoint reductions.

Mistake 3: Communicating Too Infrequently
It is important that you communicate with your employees early, often and honestly; it's the right thing to do and will create great loyalty and support if done correctly. You must acknowledge the need to downsize in order to survive. Explain that the reasons are beyond anyone's control. Thus, there is no finger-pointing, only working together, digging in, and winning the war for everyone's best interest.

Tell your employees you have the plan that will save the day and support your emergence. Demonstrate that you believe in your plan. If you are convincing, they will follow your lead. They will judge the situation by your conviction and commitment to your plan. This is a key communication.

You must also communicate your understanding and appreciation for the pain this is putting your people through and thank them for their support and sacrifice. The potential cost to everyone involved is huge.

Mistake 4: Failing to Handle Layoffs With Caring
Go out of your way to demonstrate that you care about the employees being laid off by creating the best possible exit program you can. This will make this entire process much less painful and easier for all concerned. Also, your remaining employees are watching and assessing how you handle this matter. If you do it with great care and concern, they know you will be kind to them as well.

These actions help teams come together. Employees will move into their discomfort zone and perform better than they think they can.

Mistake 5: Hoarding Inventory
Do not hoard inventory; liquidate. Inventory is an expensive security blanket. Sell it and take the loss; access your locked-up capital. The cash is more valuable. Business owners feel more secure with inventory, and so they invest much too much money in it and then hate to part with it. In a downsizing, get rid of it.

Mistake 6: Failing to Demonstrate How Cost-Cutting Hurts You More Than It Does Your Employees
If you ask for reductions in pay or benefits, somehow demonstrate how you are sacrificing more than you are asking your employees to do. Do something dramatic and showy that demonstrates this sacrifice. Sell the Mercedes.

Donald Todrin is the author of Successfully Navigating the Downturn published by Entrepreneur Press. Todrin is president of Second Wind Consultants Inc., a business-debt solutions firm in Hadley, Mass.

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