When your business is feeling financial pressure—whether it’s due to market changes, an unexpected economic downturn, or some other reason—as a business owner, you’ll need to find ways to reduce your expenses to stay afloat. However, many obvious ways to cut costs can hurt employee morale, potentially leading to lower team productivity, employee disengagement, and increased employee turnover. Fortunately, there are ways to reduce your business expenses without sacrificing the happiness and motivation of your team.
Why you should avoid cost cutting with layoffs
Laying off people is one of the most obvious and often the easiest ways to reduce business costs. However, this could be very damaging to employee morale. Layoffs cut costs quickly, especially if demand has recently dropped and you now have more employees than you need. You might be able to let some people go and save money, but that doesn’t always work as well as you think. Employees are an investment; you have invested time, money, training and resources in creating the perfect workforce. If you suddenly let them go, you will waste that investment and reduce your return on investment. If you have to hire a replacement employee when demand eventually picks up, you’ll have to start that investment all over again.
Laying people off also has a negative impact on workplace culture, as remaining employees are likely to worry about job stability. If they’ve just seen a few of their peers get fired, they’re likely to worry that the same fate awaits them. They will also have to say goodbye to dear colleagues and make new connections at work, worrying about whether they will be fired the next time. Because of this, it’s usually best to cut costs in other ways, ways that don’t hurt employee morale.
Cost reduction without damaging employee morale
Here are some of the best ways to reduce business costs without affecting your team’s morale.
- Switch to a virtual office – Many companies have saved money by adopting a business model that uses a virtual office. Not only does a virtual office make it easier for employees from different locations to work together, it saves the business money by reducing the size of the physical office needed. Instead of renting a large office space and paying a lot for energy, equipment and personal services, you can reduce costs by giving people the freedom to work remotely.
- Rethink bonus structures – If your company is struggling financially, it may be time to rethink the way you structure your bonuses. Performance-based bonuses naturally decrease when targets are missed, but you should prioritize keeping base salaries and sales commissions because they are a big part of maintaining employee engagement and trust. Try to align bonuses with the company’s current financial situation, ensuring that rewards remain tied to sustainable results. If the business is bringing in less money, you may have to reduce bonuses without getting rid of them entirely.
- Combine contractors and employees – You can reduce costs by combining contractors and full-time employees, a combination that allows you to scale up and down your workforce depending on your current needs. Instead of sudden layoffs, you can have a team of full-time employees who are supported by contractors when they need support. Contractors provide knowledge and talent without having to commit to providing permanent full-time employment.
- Reduce non-essential spending – You may be surprised at how much non-essential spending your business has, and cutting those costs can free up a lot of money. Identify areas where costs can be reduced or deferred, such as reducing travel, entertainment and non-critical training and development programs. You might consider putting new hires on hold for the time being, or look into employee benefits and see if there’s any money to be saved there. Of course, many unnecessary expenses are there to boost employee morale, so keep the ones that are most beneficial and have a positive effect on company culture. You need to find non-essential costs to cut, but only those that won’t negatively impact the business or employee morale.
- Optimize your workforce – Look at your workforce and determine who is the best and who could be better. Organizing performance reviews to improve and streamline your workforce allows you to cut costs without negatively impacting overall morale. You can reduce costs while retaining your most valuable team members.
- Reduce leadership fees – When you cut costs, you have to be an example. Employees will feel frustrated if you cut their pay and benefits, but you don’t do it for those in leadership positions. Many executives receive large salaries and bonuses, and even a small cut can keep a lot of money within the company. Not only is cutting executive compensation a way to cut costs, it also shows that everyone is committed to helping the company weather the financial uncertainty.
- Consider downsizing your workforce strategically – If all other cost-cutting measures are not sufficient, it may be necessary to reduce your workforce. Layoffs are never easy, but try to prioritize retaining employees with unique skills or knowledge that will help the business thrive. Plan layoffs carefully to ensure you don’t have to do another round in the future, which can further hurt morale and productivity.
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