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Is now the time to downsize

Q. How long should I maintain the scale of my business in the hope that demand will return to its previous level? A. Deliberately shrinking the business today by a greater amount than sales have deteriorated is a tough call. It feels as if you are sacrificing years of hard work by abandoning customers to competitors and that it will be difficult to rebuild when better times return.  There are no reliable forecasts of when the recession will end and how deep the contraction will be so you have to use your judgement. Generally recessions last for around 24 months until the annual rate of economic growth returns to the level at which it began to fall and on this basis we are, at best, about half way through. Normally it is difficult to see what the exit conditions will be like, whether growth will be strong or weak, until about 80 per cent of the event has unfolded. This rather rough and ready guide suggests that the third quarter of 2009 will be the earliest time at which you will be able to make a reliable assessment of the damage caused and the shape of things to come. If your sales are falling now, you should therefore expect them to fall further but at a slowing rate. Assume that your margins will not stabilise until the autumn. Given this, you should be able to estimate the financial consequences if you do not take deliberate downsizing shortly.  Sometimes it is better to take a big and radical step today to ensure survival rather than risk a disorganised retreat as sales get progressively worse. Giving away low margin business to competitors is good as it pressures their balance sheet. Rejecting their customers who are trying to acquire a better deal is also good. In turbulent times, chasing marginally profitable sales to absorb capacity is not as attractive as reducing capacity to the level at which sales are comprised of fewer but more secure reasonable margin customers. You should look carefully at the profitability of both customers and products and not be afraid to approach low margin customers with the proposition that, unless you can negotiate better terms of business, you will unfortunately have to close their account. It is better to downsize in a deliberate and organised way than to allow the market to decide for you what shape and size your business must be in order to survive. You may feel that doing so advertises a weakness that your competitors will exploit and will cause you embarrassment. But I suggest that you should undertake the exercise openly and honestly and explain to customers and suppliers exactly why you are downsizing. That you are taking this opportunity to focus your business on its strengths so that you can support your profitable customers and be positioned strongly to move forward when the recession ends.Anthony Holmes is an international corporate turnaround specialist and transitional leadership expert. He has led the revival of seven companies over 15 years, and his 30-year international business career spans strategic consultancy, investment banking and senior corporate management in a diverse range of industries. Holmes is also penning two business books: Managing Through Turbulent Times (publication: 30 March 2009 by Harriman House) and A Time to Lead, A Time to Manage.Related articlesWe’re in a recession: what do I do?How do I keep my bank facilities?How do I lay off staff  



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