What do you do when you are faced with an economic mess and a downturn in receipts? I've seen this question numerous times lately with a wide variety of answers. The other day though, I received one of the many ezines I subscribe to and found an extensive list of actions this particular person was taking to offset the decrease in his business income. This person is a very accomplished and successful businessman which is why I was so surprised by his list of actions. His first two actions were to eliminate his own salary and cut expenses. Sounds right. His third action was to cut staff. After that he had a bunch of actions that are normal business process such as predicting cash flow and talking to customers. But hold on there, the third action was to cut staff? Before doing all the other analysis?

Cutting staff seems like a great solution. You can always hire them back when things get better, right? Maybe. Maybe not. Do you think those people are sitting at home waiting for you to call? Unless you had one heck of a severance package, those people are out looking for another job. They have to eat you know. If they aren't there when you want them you'll have to hire new workers. What's it going to cost to train that new replacement? Guess how long it takes to replace five or ten or even two years of experience. Are you really saving money or just transferring expenses to later years? Moving expenses into future years is a legitimate tactic, but you need to make sure you understand that is what you're doing.

There is an even greater cost associated with cutting employees so early in the game. We hear a lot about customer loyalty but employee loyalty is also important. Think about the ones who are left after you cut staff. The ones that saw what happened. They're thanking their lucky stars it wasn't them. At the same time though, there's a thought developing in the back of their minds. It goes something like this: "The boss didn't fire me this time but he was sure pretty quick about letting the others go. Am I next? I thought I had security here, but I guess not. I really thought the boss would wait until he had absolutely no choice before letting people go. Jane worked really hard for the company and now she's gone. Obviously, hard work isn't what's important here." You think I'm exaggerating? I'm not. Once employees get it into their head that your loyalty to them is uncertain, their loyalty to the company begins to wane. But I cut my own salary to zero you say. They appreciate that. They also expect it. They probably think your rich anyway.

But I really do have to cut staff if I'm going to survive. Right? Maybe so, but before you do consider some very important questions.

1. Have you completely analyzed your situation and cash flow? The economy is tough to predict, but when you made the decision to cut staff you predicted it wasn't going to improve soon. Is that really the best projection? Not nationally. Just for you.

2. How much will it cost to hire replacements for the people you let go? Don't forget you'll have to train them. When your situation improves, will you be ready to forge ahead with the staff that remains?

3. How will you regain trust in the people who are left? Can you explain your action in a way that will convince them you had no other option?

Letting people go is a very hard choice. You agonize over it and probably lose a little sleep. Hopefully though, you've done a very careful analysis and cutting those people really is the best decision.

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