The situation: Your small to medium sized business is in a tight squeeze. To stay alive, you need to cut costs. But if you aren’t wise about it, your pain will get worse instead of better.

Let’s look at how I have seen big companies tend to handle cutbacks, how that turns out, and how you can do cost cutting more effectively.

Cut Non-Staffing Costs

Step one is to cut non-staffing costs where possible and improve efficiency where possible. (In a moment we’ll look at why staffing is not the first place for reductions.) There are a few guideposts to keep in mind:

  • Maintain safety. If you do not, the result can be both emotionally terrible and financially expensive.
  • Keep up the quality of what you sell.
  • If conditions must be unpleasant for a while, make sure your workers understand why. Honor your pledge to relieve those conditions as early as you can.

Slow the Bleeding

While you work on the first step, also analyze where money is coming in and where it is going out. See what you can do to staunch the worst bleeding.

This is where you begin to part ways with big companies. They tend to simply wait longer to pay their bills. If a supplier doesn’t like that, too bad.

You have less weight to throw around and probably a smaller geographic region. If you become a chronic late payer, some of your suppliers might dump you. That could hurt your reputation enough to give you a hard time finding new suppliers. If you start delivering late to customers, that will hurt your reputation and make new sales more difficult.

Talk with anybody who might be willing to give you a break. Some suppliers might be willing to let you pay on more lenient terms for a while instead of losing you entirely. Some customers might be willing to let you delay delivery a little. You may be told they can’t give you a break, but you will have shown that you operate above board. That is a positive contrast to businesses which hid enormous problems until they exploded into everyone’s living room during the past couple of years.

Let Go of Staff Where You Should

The next step, if you need to go this far, is where you should move farthest away from what I have seen big companies do over and over. When you need to reduce your staff, do it wisely.

Big companies tend to start downsizing their staff by offering a financial incentive for workers to volunteer to leave. Who volunteers? The brightest, most capable, self-starting people are the ones most inclined to take the incentive. They are sure enough of themselves to grab the extra money and leave to find a new opportunity. When trouble is not limited to your company and widespread upheaval is in play, by the time your industry hits bottom, the workers who took the enticement to leave have found new positions where they can ride out the worst.

The business is left to get through the rest of its crisis staffed by its weakest, least adaptable workers. Maybe a big company has enough momentum to survive that way, but a small to medium company needs all the brilliance it can muster to get to better times.

Incentives for voluntary departure are presented as kinder to people who are not well positioned for going out into a tough job market. I have seen that backfire repeatedly. The business suffers more than necessary because, at the worst of times, it must make do without the cream of its crop. The weaker workers who passed up the departure incentive suffer because reduced staff leads to a heavier workload. They are less able to handle it than the people who left. Finally, if they are eventually let go during an economic downturn, the storm is at full fury by then. A mob is vying for every scarce job opening and they are the weakest competitors.

On the whole, the strongest workers do well with that scenario, but both the business and its weaker employees suffer more than necessary.

Make your staff cutbacks wisely. Find out who your weakest links are and let them go. There is nothing emotional or discriminatory about this. Performance records will tell you most of the people who should go, and why.

In rare instances you might be required to keep someone who is not a great performer, but that isn’t the only reason to keep someone whose productivity is not at the top of your charts. As an example, a worker who is ill may be performing poorly, but may be protected by the Americans with Disabilities Act… and that same worker may bring something to the team that is irreplaceable. For this reason, review your list not only with your attorney but also with your common sense before notifying the workers you are letting go.

An exemplar of that type of worker is a dishwasher who worked for a restaurant in which I was an owner. He had a learning disability. He needed to stick with the routine that took so much effort for him to learn. He needed extra supervision. He wasn’t great at washing dishes. Despite all of that, we wouldn’t consider getting rid of him. He loved his job with all his heart and radiated enthusiasm constantly. If we had been foolish enough to send him away when times got tough, we would have been tossing out a major engine of staff morale.

Provide the people you release with all the support you can reasonably offer in their hunt for new jobs. Write recommendations. Advertise on their behalf. Give them help to brush up their job hunting skills. They were good enough for you until hard times came, and they have not become worthless. They are simply not a good enough fit for your business any more. They may fit well elsewhere.

Reduce Compensation

The last resort may bring you and some of the big companies back to the same path. If previous steps were not enough, you could need to reduce compensation pay and/or benefits. If sales have dropped, you may need to reduce working hours so that production falls in line with actual sales and labor costs fall at a similar pace. But if you need to keep production up and cannot reduce working hours, you may need to cut the amount you pay (directly or indirectly) to workers.

At best, that is an uncomfortable conversation to have with your workforce. Be forthright about it. Anything less could lead to a workplace revolt. But if you reach this step, the alternative is likely to be shutting down entirely, and that would throw everyone out of work. In the right circumstances, your staff might accept a reduction in their pay or benefits as a temporary measure to help the company get through a crisis. In that case, honor any promise to make it up to them later and you can emerge on the other side of the trouble with a better business than ever before. It takes a superb team to make a business great and sometimes going through hell together turns a workforce into that type of team.

Remember to Flex

This step-by-step walkthrough is only a general outline, not a detailed guide. It should not be used as a rigid checklist.

When you have an idea for coping that seems better than a recommendation in this outline, explore it. Think it through. Check whether it might open you up to legal problems. If it still looks right, don’t let a checklist keep you from trying it. As you just saw, the best way for your small to medium business to survive is not by copying what big companies do. You will survive by making smarter choices.