Q:

Why do companies downsize?

A:

Companies downsize in response to declining revenue, rising costs, poor economic conditions, bad profit forecasts, elimination of divisions and for strategic reasons. In general, the goal of downsizing is to reduce the labor force and cost in a way that doesn't adversely affect profitability. When revenue falls, cutting costs may allow a company to maintain near-term profit.

Since labor is one of the greatest expenses of a typical company, cutting staff is a fast way to reduce overhead costs. In some cases, downsizing is a response to desperate economic conditions at present. Other times, companies try to act proactively by downsizing based on poor projections for the industry or the company.

Companies also downsize for more strategic reasons. In some cases, a company performs well, but it has divisions or business units that don't. Eliminating unprofitable units may boost the bottom line of the business and preserve capital to invest in upgrading remaining operations. Companies may also downsize as part of a restructuring plan or major change in strategy.

A reduction in workforce based on poor employee performance, unethical activities or criminal behavior is not considered downsizing. Downsizing is based on a broader strategic move of the company to control costs or to positively affect long-term profitability.


Is this answer helpful?

Similar Questions

  • Q:

    How do I calculate incremental revenue?

    A:

    Incremental revenue is the increase of funds between a new or complimentary project or service over the previous revenue of the initiative. The calculation looks at the additional revenue generated from promoting the line versus the marketing costs associated with promotion. The calculation requires evaluating the basics, creating a baseline and subtracting costs.

    Full Answer >
    Filed Under:
  • Q:

    How do companies motivate their employees?

    A:

    Common strategies used by companies to motivate their employees include acknowledging and rewarding accomplishments, providing learning and training opportunities and involving employees in the decision-making process, according to the Guardian. Because contented employees are seen as more productive in the workplace, a company's motivational game plan is most effective if it makes employees happy.

    Full Answer >
    Filed Under:
  • Q:

    What is the importance of compensation and benefits?

    A:

    Compensation and benefits are two of the best tools for companies to recruit and retain quality employees. Enticing benefits and compensation also help existing employees stay motivated to excel each day at work.

    Full Answer >
    Filed Under:
  • Q:

    What is revenue reserve?

    A:

    Revenue reserve refers to profits that publicly owned companies do not distribute to shareholders, according to The Law Dictionary. Instead, companies hold onto the reserve to promote further growth in the business.

    Full Answer >
    Filed Under:

Explore