QUESTION: I am facing increased costs of operations and am considering downsizing. Are there options that will enable me to avoid layoffs of good workers?

ANSWER: You should only consider downsizing if you are confident you can provide the same level of service your customers have come to expect.

If by downsizing you increase the workload of the remaining employees, you run the risk of creating a major morale problem, which may result in the further loss of valued employees.

You will then be faced with having to recruit and train new employees which, depending on their level of expertise, can be quite expensive. Statistically, it costs four to six months’ salary to replace an employee.

You could find that you have to pay the new hire more than the one being replaced. There also are “under the radar” costs that may include recruiting agency fees, advertising expenses, interview costs and signing bonuses. Don’t forget about the loss of productivity while you or another employee brings the new hire up to speed.

After all is said and done, you may have spent more money than you would have had you found other ways to cut your costs of operation.

Here are a few tips to lower your labor costs:

  • Consider performance bonuses in lieu of salary raises. Bonuses are one-time events as opposed to raises, which are cumulative.
  • Consider, as an alternative to more pay, reduced hours, personal time or flex time to accommodate individual lifestyle needs
  • Where possible, convert salaries into commission-based compensation. Those who are commission-based essentially pay for their own salaries.
  • Where possible, outsource or automate nonessential tasks. Also consider part-time help if this is an option.
  • If you have a defined benefit pension plan, consider a SEP IRA as an alternative. Also, a high-deductible health insurance plan, combined with a Health Savings Account, in lieu of one that offers first dollar coverage.

In addition to employee costs, you also should take a hard look at other major expense items like machinery and equipment. Does it make more sense to lease than to buy? Also, renegotiate contracts with your suppliers on both price and payment terms.

Remember, in the long run, it is less expensive to keep your current employees motivated and productive. They are, by far, your most valuable asset.

______________________________________________________________________

Gray Poehler is a volunteer with SCORE Naples. Business counseling on this and other business matters is available, without charge, from the Naples Chapter of SCORE. Call (239) 430-0081 or visit https://naples.score.org/mentors .The SCORE business office is located at 900 Goodlette Road North, in the Fifth Third branch bank building.