Recently I spoke to Sue, a small business owner who had spent the last few years expanding her business from a small home based business that was just her to a larger business in an outside location where she employed several people to provide services. Now that Sue had arrived at her vision, she wasn’t making as much money as she hoped and she was spending more time marketing and managing the business than she expected. In short, she was disillusioned and tired.
Sue wanted to know if it was okay to downsize and how to know if it was the best course of action. I reassured Sue that sometimes making a company smaller is the best course of action.
We are sold on the fairy tale that bigger is better. Unfortunately, being a bigger company does not guarantee increased net income at the end of the year. It’s not uncommon for rapidly growing companies to experience expenses and costs of sales that outpace revenues leading to their early and untimely death. At a very minimum, they experience challenges like Sue’s where she’s working harder and longer and not making any more money than before she expanded.
So, how do you know when or if it’s a good idea to downsize? It all comes down to looking at the numbers. Sue needs to look at her sales and her expenses.
Sue’s sales are disappointing her. They are not where she wants them to be. The question is why?
· Are her facilities being used efficiently?
· Is it possible for her to generate more revenues?
Sue must also look at her expenses, especially her fixed costs. When companies take a leap in size, it’s not uncommon for fixed costs to rise dramatically. In short, fixed costs are those costs that are the same every month regardless of the sales that you have or don’t have. For Sue, who went from working out of her home to an outside location, she added the fixed cost of rent.
Fixed costs are both a blessing and a challenge. In the short run, as sales are ramping up, it can be difficult and stressful to sell enough to pay the fixed costs every month. It can be demoralizing to be selling just enough to cover expenses with little or no money left over for you.
In the long run, as growth becomes steady, the fixed costs become a much smaller percentage of your income (because they don’t grow with your revenue like some expenses) and enable you to keep more money. The questions here are:
· Did Sue choose too large or pricey a location?
· Are there opportunities for her to sublet and offset her expenses?
· How long will it realistically take to raise revenues to a level sufficient to create profit?
Sue’s final point to consider is: How is she feeling about the situation? If Sue is mostly optimistic and just has some down days dealing with the growth challenge, sticking it out could be a really good choice as long as the numbers seem promising. However, if she is losing sleep, unable to focus, and finding it impossible to move forward and grow the business, taking a step back may be the best move at the moment.
Should Sue downsize and go back to her home office? That is a question only Sue can answer. All I can add is that there is no disgrace in making the move to go back. It’s entirely possible that any of the following situations are true:
· An outside location is not necessary for growth
· The outside location chosen is not consistent with the brand
· Sue was premature in her expansion plans
In the end, it’s better to survive and be around to grow another day. In other words, sometimes you need to go back in order to go forward.