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Increasing profit margins and improving balance sheets are great things for a company to post in their quarterly earnings reports. But let me ask this- what was the cause of these improvements? Cost-cutting or revenue generation? Revenue generation is ideal, and sometimes cost-cutting is healthy.

I'm all for companies cutting costs, but the cost-cutting measure that I'm really leading to the most is layoffs. Layoffs of any magnitude helps businesses' bottom lines by not only reducing base salaries, but also fringe benefits- which may account for a few percent above base salary up to a "golden parachute". In analyzing the fundamentals of a company, we evaluate the financial sustainability, the competitive advantages, and the quality of the management, among other things. All of this is done in an effort to determine if the company is viable and will provide a return on our investment.

When I see stories about layoffs from a business, I begin to question a few decisions on the part of the management and the business. Before I continue, I want to say that I do not envy the position that any member of management of any company is in because they have an extraordinarily tough position which requires a lot of potentially unfavorable decision-making requirements. That being said, the instigating question I ask is if the business over-hired or attempted to expand too quickly. My perspective- and I know not everyone shares this perspective- is that if a business hires someone, they were hired because the overall workload was still too much that it warranted another position being created to divide up the workload among all employees to being fair. Therefore, I see layoffs as either to plan for an even workload distribution or that the company is financially mismanaged otherwise.

Recent Layoffs

While I'm sure others come to mind that I may have missed, here are some recent ones that I remember reading about.

  • In 2012, Hewlett-Packard (NYSE:HPQ) laid off 29,000 employees.

  • In August of this year, Cisco (NASDAQ:CSCO) announced plans to lay off 4,000 in addition to the 8,000 already let go in the last two years.

  • This year, United Technologies (NYSE:UTX) announced 3,000 layoffs.

  • This year, American Express (NYSE:AXP) cut 5,400 jobs.

  • BlackBerry Limited (NASDAQ:BBRY) will have cut 7,000 jobs in the last two years after the current round of 4,500 cuts have been made currently.

Business Operations Suffer...And For What?

Cutting positions is never fun. While the work of some positions may be phased out due to technological advances, some cuts will mean that business departments will need to do more with less.

I will venture to guess that the majority of operational costs is personnel-related. I imagine that by undergoing mass layoffs, a lot of operational or current expenses will be cut, which through the domino effect, help save the businesses' bottom line.

Let me point the light on a different angle by looking at productivity. Assuming layoffs were not a result of any technology advancement and that the business just needed to save money, productivity will suffer. If you look at a retailer such as Best Buy (NYSE:BBY), Target (NYSE:TGT), or Wal-Mart (NYSE:WMT), if you cut positions in the retail side of operations, you're putting less sales associates on the sales floor with the same amount of customers. If customers can't get the individualized help that they were getting before the layoffs, they'll go to another store, causing another retailer to get the customer's money. Domino effect says if this becomes a widespread issue, then where one retailer won't make the financial sacrifice to keep positions, someone else will be able to afford to and profit at the original retailer's expense.

Wall Street's estimates usually dictate if a company needs to save cash and sometimes even how the company will do it. While at the end of the day some of these companies will beat Wall Street's estimates after a mass layoff or restructuring, this comes down to a personnel decision. And any layoff decision ultimately comes from upstairs. Most investors won't care anyway because the company posted a profit, beat expectations, and share prices may have gone up a bit. While layoffs can happen for reasons other than trying to save money- depending on the company- the common reason is to save money.

Conclusion

Businesses exist to make money and in the process they create jobs and help to keep the economy going. I feel that when a company makes a choice to create positions and hire people, they do so because they need to keep the workload manageable and need a minimum required amount of personnel to accomplish the workload.

When I see a company layoff employees in an attempt to save cash, it isn't a company I would want to invest in because I see that as a sign of a failure to plan for the organization's staffing levels and financial levels. Although the business may post profits in earnings season, I feel that it wasn't done naturally and therefore shows room for other organizational problems.

Source: Why I Don't Invest In Companies That Layoff Employees