Downsize your business

Some of the main reasons businesses downsize:

• financial pressures – declining revenue or profits, cash flow difficulties, rising costs or unsustainable debt levels
• market or industry changes – reduced demand, disruptive technologies, changes to regulation or an economic downturn
• strategic reasons – refocusing on your most profitable areas, managing business risks, shifting to a more sustainable business model or preparing to sell your business
• lifestyle reasons – semi-retirement, a better work-life balance, reduced stress, having children or taking on caring responsibilities.

Downsizing can be a smart business move, but it also comes with risks. It’s important to understand these risks before making any major changes.

For example, you might have to manage:

• reduced revenue (if you cut products, services or locations)
• disrupted operations during the transition
• extra costs, such as redundancy payments or lease exit fees
• impacts on customer service or staff morale.

Downsizing can also affect your brand and customer relationships if you don’t manage the changes carefully.

There are many options to consider when downsizing, depending on what you want to achieve. You may take more than one of these actions.

Reduce your premises costs

Rethinking your premises and location can be an effective way to downsize your business.

For example, you could:

• move to smaller or cheaper premises
• share your premises or sublet unused space to another business
• sell your premises (if you own them) and rent space instead
• encourage remote work to reduce office costs
• close your shopfront and instead sell online, at markets or by doing pop-ups.

Streamline your products or services

Limit what you offer customers to focus your time, money and energy on the things that provide the most value.

For example, you could:

• focus on products or services that are in most demand or have the highest profit margins
• stop selling products that are underperforming
• merge similar offerings
• serve fewer locations or a smaller geographic area
• narrow your target market rather than trying to sell to everyone
• prioritise local sales rather than the national or international market
• sell standardised products instead of custom solutions
• offer subscriptions.

Reduce your staffing costs

Wages and salaries are a major part of a business’s expenses. But reducing staffing costs doesn’t always mean forced redundancies.

For example, you could:

• rely on natural attrition (not replacing staff who leave) to reduce staff numbers
• restructure roles for better efficiency
• offer voluntary redundancies to staff who are thinking about leaving anyway
• use contractors, freelancers or casual staff to cover variable workloads
• limit employee perks (but make sure you still provide required entitlements).  

You must follow the laws around ending employment if you plan to make anyone redundant. This might include making redundancy payments to impacted employees.

You may also need to consult with staff before making any significant workplace changes – check your relevant award or enterprise agreement.  

Reduce operational costs

You might be able to find savings in the day-to-day operations of your business.

For example, you could:

• review your suppliers to see if you can find cheaper options (or renegotiate your current contracts)
• limit how much inventory you keep on hand to reduce warehousing costs
• use digital tools to automate repetitive tasks
• check your processes and procedures for bottlenecks, duplication and unnecessary steps
• review and cancel any unnecessary services or software subscriptions
• review your insurance to see if you can reduce costs. For example, you might be able to pay lower premiums in exchange for a higher excess.

It’s important not to rush into anything. Analyse your current situation, make a clear plan and go about downsizing sensibly and thoughtfully.

Take a closer look at your business

Before you start downsizing, you need a clear picture of how your business is performing.

Review your profit and loss statements, balance sheet and cash flow forecasts to understand trends over time. Also make a list of your debts, fixed costs and ongoing expenses.

Use this information to work out how much revenue you need to break even. This can help you decide where and how to cut costs or scale back.

You should also talk to your accountant or a business adviser. They can help you make a plan and understand the financial, tax and legal impacts of downsizing.

Identify the core of your business

Decide what parts of your business matter most and provide the most value.

Analyse your sales data to understand which products, services or customers generate the most profit (not just revenue). Look for ways to simplify your offerings and stop spending time on things that don’t add much value.

Think about what keeps your customers coming back – this is often your biggest strength or competitive advantage. Identify which business activities support that advantage and see if you can focus on those while dropping anything non-essential.

A useful question to ask yourself: if you had to describe your business in one sentence, what would you keep?

Set clear goals and decide on ‘the right size’

Define what success looks like after downsizing. Be specific with your goals, such as:

• profit margin or revenue level
• exact staff numbers
• total costs
• products and services you will (and won’t) offer.

Consider your personal and lifestyle goals too. For example:

• What do you want from the business?
• How should it fit with the rest of your life?
• How many hours do you want to spend on your business each week?

Make sure your goals are realistic for the current market conditions and your resources.

Create a timeline and transition plan

Now that you’ve set your goals, plan how you’ll transition from your current business to your new, downsized version.

Start by deciding on the actions you’ll use to achieve your downsizing goals. Identify any dependencies and put the actions in a logical order. Set a realistic timeframe for your plan, making sure you build in buffer time for things like notice periods and finding new premises.

If you have partners or key staff, assign clear responsibilities for managing the transition.

Make sure you understand all your legal and financial obligations, which may include:

• redundancy payments
• penalties for ending leases or contracts early
• tax implications if you’re selling assets
• updating business registrations and licences.

You should also update your business plan so it reflects your new goals, focus and structure.

Support your people through the process

Downsizing can be stressful for everyone involved. It’s important to communicate early, honestly and respectfully with your staff, customers and suppliers. Let people know what’s happening, why you’re doing it and what it means for them.

Be ready to answer people’s questions and concerns. Give them as much certainty as you can but avoid making promises you might not be able to keep.

Provide support and plenty of notice if you’re planning redundancies or making major staff changes. Consider the impact on remaining staff (including workloads and morale) and how to support them.

Review and adjust

Decide on key metrics to measure how you’re tracking against your goals, such as:

• revenue
• costs
• cash flow
• customer retention
• staff wellbeing
• hours worked.

Check these metrics regularly (for example, once a month) to monitor how the transition is going. Be prepared to adjust your plan as you go – downsizing rarely goes exactly as expected.