Why Cutting Employees Should Not Automatically Be the First Turnaround Move

When a business starts losing money, payroll is one of the first expenses an owner notices. It is large, recurring, and easy to quantify. If the company needs to reduce expenses quickly, cutting employees can look like the most direct way to stop the bleeding.

Sometimes it is necessary. A business that has permanently lost revenue, closed a division, eliminated a product line, or simply has more employees than its realistic future operations can support may have no responsible alternative.But layoffs should be the result of a turnaround analysis, not the substitute for one.Research on corporate turnarounds has repeatedly found that the appropriate response depends on why the company is declining in the first place.

A study published in Business Research Quarterly specifically cautioned companies to identify the causes of decline before resorting to layoffs, finding that workforce reductions are not equally effective across different types of business crises. A later study of bankrupt companies likewise found that aggressive layoffs could actually reduce the likelihood of successful survival and turnaround. The question, then, should not be, “How many people can we cut?” It should be, “What is actually causing this company to fail?”

A Turnaround Where Employees Were Not the Problem

We encountered exactly that distinction while working with an orthopedic-shoe company experiencing a serious operational and financial crisis.

The company had moved manufacturing from China to the Dominican Republic in an effort to reduce production costs. Instead, the new manufacturing operation produced defective inventory that could not be sold. The former production operation had already been shut down, leaving the company with unusable product, disrupted operations, pressure on cash flow, and a business model that was no longer working as planned.

Reducing payroll could have lowered expenses temporarily. It would not have made the inventory sellable. It would not have restored the manufacturing operation. It would not have improved the company’s relationship with its lender or changed the way the company reached customers.

Instead, the turnaround attacked several different problems at once. Financial reporting was improved so management could see what was actually happening inside the business. Communication with the bank became a priority because the company depended on its line of credit. Investors needed clearer information. Operations were restructured. Most significantly, the sales strategy began moving away from dependence on doctors and other intermediaries and toward direct-to-consumer sales.

The company was eventually able to improve sales and profitability without eliminating jobs.That does not prove layoffs are never appropriate. It demonstrates why they should not be automatic. The employees were not the underlying cause of the crisis.

Start With Better Financial Information

Before a business owner makes an irreversible workforce decision, the financial information should be good enough to show where the problem actually exists.A monthly income statement showing that the company lost money is not enough. Management may need profitability by product or service, gross margin by customer, inventory aging, accounts-receivable collections, cash requirements, debt payments, labor utilization, sales-channel performance, and short-term cash-flow forecasting.

That distinction matters because a company that appears to have a labor-cost problem may actually have a pricing problem, an inventory problem, a customer concentration problem, or a working-capital problem.Payroll is certainly significant. According to the U.S. Bureau of Labor Statistics, private-industry employers spent an average of $46.60 per employee hour on compensation in March 2026. Wages and salaries accounted for $32.60, or 69.9%, while benefits added another $14.01, or 30.1%. That makes labor an understandable place to look for savings. But being a large expense does not automatically make it an excessive expense.

A company needs to determine whether those employees are producing, selling, servicing customers, collecting receivables, maintaining relationships, or performing other functions the surviving business will continue to need.

Have the Financing Conversation Early

A struggling company can also mistake a liquidity problem for an operating problem.

The Federal Reserve’s 2026 Report on Employer Firms found that 60% of small employer firms had applied for financing during the preceding 12 months. Among those businesses, 56% said they were seeking financing to meet operating expenses. Only 42% received the full amount they requested, while 36% received some or most and 22% received nothing. That does not mean a company should borrow its way out of losses. Debt cannot rescue a fundamentally unprofitable business indefinitely.

But when the underlying business is viable and the problem is timing, inventory, receivables, temporary disruption, or another identifiable working-capital issue, financing may be one component of the solution.The same Federal Reserve survey found that applicants seeking financing through small banks were fully approved 57% of the time, a higher rate than applicants using other lender categories. It also found that 60% of businesses borrowing from online lenders said their actual borrowing costs were higher than expected. Those numbers make early lender communication important. Waiting until cash is nearly exhausted generally gives the company fewer choices.

For qualifying small businesses, the SBA 7(a) program can also support working capital and refinancing of existing business debt. Its Working Capital Pilot provides monitored lines of credit of up to $5 million for qualifying businesses, including companies borrowing against receivables or inventory. Again, financing is not automatically the answer. The point is that it deserves analysis before management assumes employees are the only available source of cash savings.

Look at How the Company Reaches Customers

Turnaround work also requires examining the revenue side of the income statement.This is particularly important because sales problems remain a major concern for small businesses. In the Federal Reserve’s 2026 survey, reaching customers and growing sales was the most commonly reported operational challenge, ranking ahead of hiring or retaining qualified employees. That was an important issue in our orthopedic-shoe turnaround. Changing the sales strategy allowed the company to reconsider how it reached the end customer instead of simply shrinking the organization supporting an ineffective model.

The broader retail environment makes that kind of analysis increasingly important. According to the latest U.S. Census Bureau Quarterly Retail E-Commerce Report available as of August 16, 2026, U.S. e-commerce sales reached $326.7 billion during the first quarter of 2026, up 9.8% from the first quarter of 2025. E-commerce represented 16.9% of all U.S. retail sales during the quarter. A business does not necessarily need to become an e-commerce company. But a turnaround should ask whether its existing distribution model still makes sense. There may be opportunities in direct sales, new customer segments, revised pricing, digital acquisition, different distributors, new geographic markets, or more profitable products.

Cutting people while leaving an unsuccessful sales model untouched can simply produce a smaller company with the same problem.

Restructure Operations Before Assuming Headcount Is the Only Lever

There are also ways to reduce operating costs without immediately eliminating positions.Management can examine vendor contracts, purchasing, overtime, management layers, outside consultants, unused subscriptions, facilities, inventory levels, discretionary spending, workflow duplication, scheduling, temporary hiring freezes, cross-training, and whether employees can be reassigned from declining activities to more valuable ones.

There are even formal workforce alternatives available in some circumstances. The U.S. Department of Labor identifies Short-Time Compensation programs as an alternative to layoffs in participating states. Under these programs, employers can temporarily reduce hours across a group of employees while affected workers receive partial unemployment benefits for the hours they lose. That will not work for every company or every crisis. Neither will vendor negotiations, financing, channel changes, or operational restructuring.

That is precisely the point. There is no universal first move because there is no universal reason businesses get into trouble.

When Cutting Employees Really Is Necessary

A responsible turnaround analysis may still end with layoffs.If demand has permanently disappeared, a location is closing, a department is no longer needed, automation has fundamentally changed the work, or projected revenue simply cannot support the existing payroll, delaying the decision can make the financial situation worse. In June 2026 alone, U.S. employers reported approximately 1.8 million layoffs and discharges, according to the Bureau of Labor Statistics. Workforce reductions remain a normal, if difficult, part of business restructuring. But there is an important difference between determining that the future business requires fewer employees and cutting employees simply because payroll is the fastest expense to remove.

A turnaround should first establish what went wrong, what the viable version of the business looks like, what cash it requires, how it will reach customers, what financing is realistically available, and what operational structure supports that plan.Only then can management determine how many people that business actually needs.

Our orthopedic-shoe case is useful precisely because the turnaround did not begin with an assumption that labor was the problem. Better reporting exposed what was happening. Financing conversations protected access to capital. Operational changes addressed internal problems. A different sales strategy addressed revenue.

The objective of a turnaround is not simply to make the company cheaper to operate. It is to make the company work again.

We’ve seen it already.

Need help making the numbers make sense for your business? The Veltre Group works with business owners who want more than basic bookkeeping, but do not necessarily need a full in-house finance team. From keeping your books organized to helping you understand what the numbers are telling you, we provide client accounting and advisory support designed to help you make clearer, more confident decisions.

If you are growing, cleaning things up, planning for the future, or simply tired of feeling like you are guessing your way through the financial side of the business, we can help. Book a 30-minute call with The Veltre Group to talk through where you are, what you need, and whether ongoing accounting and advisory support makes sense for your business.