Lay Off or Invest

Neeraj is also an invitational speaker, Mentor and an Angel Investor who is always eager to boost the ecosystem through his experience.

At a time of an adversity as we are facing now, many corporate managers seem to prefer laying off employees as a part of cost reduction. As a result, they lose the trained talent and even worse, offer them to competition. For a short-term gain, a long-term damage is inadvertently overlooked. Interestingly, the same companies start recruiting soon thereafter as the business must carry on. The investment in hiring, training and inducting newcomers can be high and a drain on precious resources. Moreover, there is a large social cost of such lay-offs, directly impacting families.

Are there better alternatives to tide over such situations? Here are a few that can be considered and exhausted before people actions are taken.

Increase liquidity: This is the time to convert assets which are not directly in use for running the business into cash. For instance, disposal of real estate and idle plant and equipment as well as deferring non critical capex investments will enhance liquidity. Drawing credit lines from banks, opting for channel financing and negotiating longer credit with cash rich suppliers will further ease the position. Another way to boost cash is to opt for bank guarantees instead of paying cash deposits as this is an option available in most tenders.

Zero base all expenses: Instead of touching people who are engaged in building a business, all other expenses should first be questioned. Deferring fresh investments in new projects or moving some of the advertising budgets from conventional to social media and rationalizing promotional activities can save cost. Giving up an office space, an extra warehouse, non-customer facing travel and meetings, entertainment budgets, celebrations and renegotiating contracted expenses should definitely be on the list. Outsourcing activities can add to the bottom line. A zero-based budgeting of expenses can be a powerful tool to redefine the need for every expense on the P&L.

Convert employee bonus and incentives into stocks: This would be the right time to incentivize employees for a stock option with a quicker vesting instead of cash bonus. The savings directly add to the cash while the employee does not lose out. It is surprising that many owner managed companies still resist giving such stock options to employees even when the dilution is minimal, actually a small fraction. This is a powerful tool and should not be missed out.

Reduce dividend: Is it right to lay off people to generate profit and maintain full dividend rate for the shareholders? Recognizing employees as equal stakeholders in a business will force us to think otherwise. While some people do depend upon the dividends for their retirement, even they would appreciate receiving less dividend if it is resulting in saving jobs. Interim and final dividend should be merged. This will not only help generate interest on conserved cash during the year, it will also cut down the transactional cost. Closely held companies can even look at skipping dividend for a year,provided its shareholders can afford.

Long term arrangements: Entering into long term sale/purchase agreements for a steady business can result in a win-win situation. It provides security, liquidity and a sense of business continuation for everyone. Instead of dropping price, adding more services and enhancing value at the same price can be an attractive proposition maintaining profitability as well as cash.

Renegotiate loan repayments: At a time when the banks are looking for business, a renegotiation with banks for deferring loan repayments can be a potential opportunity for a company looking for liquidity.

Defer part of the salary:As a last resort, a deferral of salary can be considered by a corporate. It would still be better than laying off or a plain salary cut. And, if a salary cut is indeed required, it should start at the top and restricted to that layer alone.

Even if some of the above can be implemented and realized, the employer will not need to resort to a lay-off. Employees are precious resources and once well trained, they become invaluable. Laying them off in a depressed market condition or a recession is an easy way out, but may not be the right one. No business can grow without the strength of its employees and losing that strength cannot help
any company in running its business.

The investment in hiring, training and inducting newcomers can be high and a drain on precious resources

Communication is key in such difficult times. The decisions taken should be communicated and the rationale well explained to all stakeholders. Investment in people and their growth and managing the company by addressing all other means to manage cost and cash can be a powerful factor in employee retention and business growth.

Even when a position is no longer required, it is preferable to retrain that person for a new role than laying off. The existing employees understand the company, its culture and the business. Letting them go can be detrimental to everyone’s interest and should be the last resort after exhausting all options. Investing in people and backing them in difficult times can be a business advantage that others would envy in the long run.