There are several reasons a company may downsize: Recession: Poor economic conditions may spur a business to downsize to stay afloat or maintain profitability. Industry decline: If a business's specific industry is facing a crisis due to technological or other difficulties, reducing costs may be a necessity.

For what reasons do companies downsize?

One the primary reasons for employee downsizing is to reduce costs. Employee payroll counts as a liability on the company balance sheet and, therefore, reduces the owners' equity. The retained earnings of a company are affected by the amount it pays out in payroll, and removing this obligation is one way to cut costs.

When should you downsize your business?

A company doesn't have to be at risk of failing to downsize. If a company is seeing reduced profits, either because of fewer customers or because of increased overhead, it may not be as successful as it once was. This is a perfectly legitimate reason to downsize.