There are two very difficult things to deal with as a manger. The first is hiring the right people. The second is firing someone. And as this piece on MSNBC.com so wisely suggests, the rule to live by is to "hire slowly and fire quickly"
What that means in practice is that it's important to put in the initial effort to train someone and give them time to thrive in their new role. But as soon as it becomes clear that the employee isn't working, cut them out quickly instead of putting up with them.
Obviously this is often easier said than done. In a small company where so many people work practically on top of each other, it can be particularly difficult. It can also be tough for a manager who will potentially understand intimately how the laying off could affect the employee's life.
The key is to focus on the needs of business rather than the personal problems of employees. Of course, this can be exceedingly difficult. At the same time, there are lots of qualified people in the job market at the moment, so losing an employee need not be detrimental to your business.