How to survive the recession
Cash is king whether it’s coming or going. You should explore all the ways to persevere and succeed during tough times, from negotiating with vendors and lenders to training and trusting your team.
We don’t claim to be economists and can’t begin to fully explain what causes a recession, but we’ve been impacted personally and professionally by a number of them and emerged reasonably unscathed each time. Historically, veterinary medicine has been recession-proof, one of the reasons it’s such an attractive space for investors. However, during the 2007-2009 Great Recession, many veterinary hospitals, especially higher-end general practices, emergency clinics and specialty practices, saw significant declines in revenue, caseload and profit. Veterinary medicine didn’t do as badly then as other kinds of businesses, but it certainly wasn’t recession-proof.
Now, here we are again. The National Bureau of Economic Research announced in early June that the U.S. economy peaked in February and that we are officially in a recession. We were long overdue for one given that recessions typically occur every 5½ years and the last one ended in 2009. No surprise that we’re in one now, but the big surprise is its cause and speed. Very few people predicted a pandemic of this magnitude and the economic upheaval it would cause.
We believe the recession will get worse before it gets better and that all practices need to be prepared, even those that have seen enormous growth over the past few months. If the recession is short-lived, great, but if not, prepared practices won’t be as hard hit.
The primary drivers of increased revenue at some veterinary clinics during the pandemic are:
- Clients working from home and noticing more pet issues.
- Clients having fewer places to spend their money — no mani-pedis, dinners out or movies. They choose to pay for veterinary care instead.
- Work-from-home clients sneaking over to the practice to get their pet seen.
- Paycheck Protection Program money keeping some employers afloat.
- Unemployment money keeping some pet owners solvent.
- Animal shelters emptying pre-shutdown, leading to a greater need for veterinary care.
- Some practices shutting down or reducing services, benefiting their competitors.
None of this will last forever, but practices still need to strategize how to survive and maybe even thrive during the recession. We’ll tell you how, but first, a couple of questions.
1. What Is a Recession?
The National Bureau of Economic Research defines a recession this way: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.”
2. How Does a Recession Affect Small Businesses?
Business owners might expect:
- Decreased consumer demand.
- Decreased cash flow.
- Inability to collect from customers.
- Inability to pay bills on time.
- Staff layoffs, furloughs, reduced hiring and less compensation.
- Cuts in other expenses.
- Lower profits and reduced business value.
- More trouble selling the business.
- Greater chance of bankruptcy.
Build a Safety Net
Now that the basics are out of the way, here’s how to protect your practice in the long and short terms.
- Establish a rainy day fund. If your practice has one, is it big enough? The proper amount depends on the expenses your fund might need to cover, the local economy and your risk tolerance. We recommend that a fund cover three to six months’ worth of expenses. Other factors to consider are how much you think revenue will decline, the expenses you could reasonably cut, and whether access to extra cash, such as a line of credit, is available.
- Tighten your spending immediately. Put the savings toward critical expenses or your emergency fund. (Read more about this below.)
- Keep the revenue coming in by focusing more than ever on giving clients what they want. (Again, read more below.)
- Whenever a recession looms, pay down debt and don’t take on new debt. This is standard advice. The current recession hit so fast, however, that many businesses weren’t in a position to prepare. If you have extra cash and the choice between paying down a loan or putting the money into an emergency fund, go with the second option until you are comfortable with the fund’s size. Once through the recession, you can take some of the money and pay off debt. Remember to keep the fund in a separate account so that you aren’t tempted to dip into it unnecessarily. Also, consider converting credit card or other debt into low-interest or no-interest loans.
- Obtain a line of credit. A practice typically does this before an economic downturn as lending usually tightens in bad times. If you can collateralize the line of credit using long-term assets that you won’t need to liquidate anytime soon, you might have a better shot with your bank.
- If you don’t have a budget, start one now. If you have one, review it and update it if needed. The budget should focus on cash flow, not net income or profitability. Make sure items not typically included in your profit-and-loss statements but that represent a use of cash are in your budget. For example, only the interest portion of loan payments would be included in the P&L, but your budget needs to account for the large amount of cash going out the door to cover the principal.
Watch cash outflow during times like this. Here are best practices.
- Negotiate a temporary rent reduction. Few landlords are forgiving rent, so be cognizant of when you will have to repay any back rent. Will your rent go up when it’s time to renew your lease?
- Review your mortgage and other loan obligations and then ask for payment deferrals or reductions. Some Small Business Administration loans come with six months of payments from the SBA instead of the borrower. Other lenders might only defer payments. Will your payments rise in six months, or will what you owe be tacked on to the end of the loan?
- Negotiate lower utility rates but beware of delayed billing as you don’t know when things will get better.
- Buy only what you need to have. Hold off on the nice-to-haves.
- Consider short-term equipment leases rather than outright purchases. Focus on the cash flow implications of each choice.
- Ask vendors for longer payment terms, extended current terms and lower interest rates.
- Focus on your inventory. Only purchase things that leave your shelves quickly. Look into an online pharmacy for the sale of expensive items. Be careful with volume purchases by asking yourself, “Is the discount worth it?”
- Look at staffing levels and payroll. If you have to lay off individuals, try to involve the team in the discussion. Perhaps someone would like an unpaid leave. Or is everyone willing to cut their work hours or forgo raises to preserve all the jobs? If you employ a bad apple, start with that person. (Make sure you documented the poor work and discussed the issues with the person.)
- If you are the practice owner, can you cut your salary and pay yourself for the production you deliver as a veterinarian? Hold off on the return-on-investment check and instead put the money toward the practice.
- Delay large remodeling projects.
- Review the hours your practice is open. Will fewer hours help with payroll and not affect client access? On the other hand, will extending hours generate additional revenue and make your hospital more desirable to clients?
- Look at your efficiencies. What can you do smarter, better and cheaper?
Cash inflow is as important as cash outflow. We recommend:
- Take care of your best clients. You can’t overcommunicate with your A-list pet owners.
- Do everything you can to be paid at the time services are provided. Look into third-party financing. The rates you sacrifice with third-party options might be offset by having cash in hand.
- Crack down on missed charges and random discounts. If you are going to add or keep a discount program, make sure it brings in more revenue, clients and profit than not having one.
- Ask yourself, “What can I do that my competitors aren’t?”
- Review the response to your marketing efforts. Do what delivers the best return on investment.
- Look for opportunities with synergistic businesses such as pet stores and shelters.
Our final message is don’t just focus on what got you to today. Think about where you need to be tomorrow. In a recession, competition becomes cutthroat because money is tight. And since veterinary care is not a budgeted line item for most pet owners, you have to compete with other discretionary spending arenas as well as other clinics. It becomes a dog-eat-dog world, so you have to do what you can to gain market share at the expense of others.
Be aggressive. Be imaginative. Be resourceful.
Dr. Peter Weinstein owns PAW Consulting and is executive director of the Southern California Veterinary Medical Association. He serves as chair of the American Veterinary Medical Association’s Veterinary Economics Strategy Committee. Dr. Karen E. Felsted is the founder of PantheraT Veterinary Management Consulting. She spent three years as CEO of the National Commission on Veterinary Economic Issues.
FINISH ON TOP
You, a resourceful leader, can keep dark clouds from settling over your practice. Like in the TV show “Survivor,” you need to outwit, outlast and outplay the competition. You don’t want to be voted off the island. Here are 12 keys to winning during a recession.
- Mind your mind: One long-lasting impact of a recession is emotional. A study published in Clinical Psychological Science found that people who suffered a job, housing or financial hardship during the Great Recession were more likely to show signs of depression, anxiety and drug use years afterward. Those without a safety net are particularly impacted.
- Keep a tight inventory: Don’t run out of the need-to-haves but at the same time don’t carry the nice-to-haves. Return what is not turning.
- Emphasize cash flow: Review your income statements and balance sheets routinely. Have your accountant create a cash-flow statement.
- Cut spending: Think about putting off remodel projects, capital expenditures and eating out for lunch.
- Reach out and touch someone: Market to your best clients, pacify disgruntled clients and win back lost clients. Use all available tools, including the telephone, to let people know how much you care.
- Don’t accept promises: You’re not a bank, so have a transparent payment policy for clients. Make sure your staff understands the policy and why it’s important. Being tough with clients at check-out is not pleasant but is important for ensuring good cash flow.
- Keep your friends close and your banker closer: Ask lenders about ways to lower interest rates and extend loan terms. Consolidate high-interest loans.
- Think smaller: Are you paying rent for underutilized space? Could you sublet to a groomer or pet trainer? Can a planned build-out or expansion be smaller?
- Staff appropriately: Make sure your best people-skill people are in service positions. Clients don’t like to wait, so don’t be understaffed. Lose some of the formality and focus on a friendly, welcoming attitude at all levels of the practice.
- Take time to train: Slow times can be spent training your employees in client service skills and streamlining extraneous processes and systems. Train to a level of trust so that you can delegate and allow others to contribute to the practice’s success.
- Market more: Social media marketing can have low upfront costs. While other practices tighten their marketing budgets to zero, you can spend a little to get a lot. Don’t be gimmicky. Instead, focus on value and your practice’s benefits and advantages, such as convenient hours and drop-off services. With social media posts, focus on education and problem-solving. Upbeat posts can help during trying times.
- Be a leader: Schedule a team meeting at which you transparently discuss any issues threatening the practice. Let your employees help with problem-solving. Seek their input on how to trim payroll without trimming people. Meet regularly, be positive and build people up. Make your team feel important.