An Economic Framework to Make Effective Decisions

By now it should obvious to every practice owner that your response to the COVID-19 pandemic represents a special test of leadership. There is a lot of rapidly changing information to absorb and filter, a lot of sources to consult, a lot of mandates from governing bodies to evaluate and implement, and a lot of people depending on you to provide answers and guidance. If there ever was a time for applying wisdom and discipline to our decisions, it is now.

I should note at the time of this writing, the banks are accepting loan applications and there is understandably a lot of urgency about figuring out how to take advantage of the stimulus provisions. I’m going to assume you are consulting with your advisors on how best to do that. This article is going to focus more on what else you can do, right now, to guide your thinking and to create an economic strategy for these times.

Naturally, there is one issue at the top of everyone's mind at a time of a health crisis like this, and that is safety — the safety of your patients, the safety of your team, as well as your own health and safety.

The health and safety of your business

But this is also a time to be thinking carefully about the health and safety of your business as a business because your practice needs to stay on solid footing for you to be able to perform the leadership role you need to take.

As I outlined in a previous article, there are two principles I believe are important to follow during a challenging time like this — to take the long view, and to focus on what you can control.

In this case, taking the long view means recognizing our return to normal is going to happen in stages, and by preparing for what we can control as we advance through three zones:

• The red zone is where the number of infections is still rising toward a peak. This is, of course, the zone where we are dealing with drastic, highly disruptive measures, with most practices being ordered to close or to operate with severe restrictions.
• Eventually, though, these measures will have an impact. At that point, the curve will need to flatten for us to enter the yellow zone. More testing will be available, and results will come faster. Our health care infrastructure will hopefully be able to expand its capacity and eventually start to see a decline in the level of demand. There could be an effective antiviral agent in use, even if there is not yet a vaccine, and the warmer summer weather could also help slow the spread of the virus. When that happens, some restrictions will be lifted. It may very well come about in a staggered way, state by state, but this yellow zone is when we start returning to work.
• Finally, we will reach the green zone, when a vaccine is developed and becomes widely available, and the virus arc flattens out even more and a new normal will emerge.

Of course, we don’t know what that new normal will look like or how long it will take to arrive, and there are going to be a lot of uncertainties along the way.

In the red zone, we will see record unemployment rates, but it’s a different kind of unemployment rate we are looking at than what we are used to because few people are actually looking for work — they’re waiting for their jobs to come back.

In the yellow zone, some formerly full-time workers will go back to work part-time, on a job-sharing plan. Even when we reach the green zone and the immediate health crisis has passed, we don’t know how long it will take to reach the employment levels we saw before the pandemic. We could be dealing with the implications of this crisis for a long time.

But amid all this uncertainty, there is one thing we in the dental community can be certain about — dental care is an essential service that there will always be demand for, because dental conditions don’t heal themselves; without treatment they can only become worse. And of course, there will always be a need for hygiene care.

In the yellow zone, there will be people who need to get out and pick up where they left off with appointments. How much they do so will depend on their mindset, on how you have communicated with them to invite them back and make them feel safe, and how urgent their need is. That’s why it’s important to make care calls to these patients right now, to remind and reassure them.

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In some cases, the urgency a patient feels is the urgency to just get back on track with life, which over time will include dental visits and hygiene care (even if they reduce those hygiene visits to once a year). There will be some who are just as eager to see their hygienist as they are to see their hairstylist again (even if they end up reducing the number of those hair appointments, too).

And when we are fully in the green zone, you could be ramping up quite quickly, as the pent-up demand for services becomes apparent.

Knowing we can expect to go through these zones, the best thing you can do as a leader is to get clarity for your economic situation. I’ve always said in tough economic times, you shouldn’t be taking your lead based on what is happening in the national economy. Your focus should be on your practice economy, which is the only economy you can control.

Run the worst-case scenario

With that in mind, consider the economic forecast for a sample practice, as outlined in Table 1A.

Table 1A shows a practice that last year had revenue of $1.2 million. Scanning down the column for 2019, they had an overhead ratio of 80%, meaning their expenses, including lab fees, salaries, and the doctor’s compensation, came to $960,000, leaving it with a net of $240,000.

In the next column, 2020 is forecasted based on a model where the revenues are cut in half. It’s very unlikely you would lose a full six months of revenue, but let’s make this a worst-case scenario. And for now, we’ll keep the expenses at $960,000. (Naturally, that won’t be the case when production is cut in half. But I’ll address that in a moment. Again, we are talking about the worst-case right now.)

That puts this practice $360,000 in the red in terms of net earnings. When you add in the lost profit of $240,000, that comes out to a total loss of $600,000 for the year.

But of course, the practice was producing at full capacity for the first two and a half months of Quarter 1, which averages to about $250,000 in revenue already earned. That brings us down to $350,000. That is the amount in a contingency fund the practice would need to get through the year before other considerations.

Now, let’s look at those other considerations and factor in some realities in our favor. For one thing, there is going to be considerable flexibility in those expense numbers. Once you account for reduced lab and supply costs, the lighter payroll after team members are furloughed, deferred loan payments, and renegotiated or consolidated loans, it’s reasonable to say you could take as much as $100,000 off that contingency number.

Then there is the help the practice will get from the government in the form of stimulus package payouts or other relief measures. For a business, the size of this sample practice, it is a modest projection to say that could take another $50,000 off of the contingency amount, leaving a shortfall of $200,000 for the year.

How big a concern this number is to you will of course depend on your current economic situation but, as we are about to see, there is still a lot you can do to bring that number down. In any event, maybe you end up working an extra year than you planned before retirement. Or maybe you add extra days to your schedule between the time you go back to full practice until the end of 2021. I’ll have more to say about how to accelerate that ramping-up stage in a future article.

And remember this is using a scenario where 2020 revenues are at 50%, which we all hope will not be the case. If you run those numbers again, with a revenue expectation of 70% and, when we account for reduced expenses, a flexibility amount of $50,000, along with a stimulus payout of $50,000, you come out with a shortfall of only $10,000!

The message here is that even though these are undoubtedly challenging times, your economic outlook is probably not as bleak as you might imagine. Prepare for the worst and drive for the best.

Shoot for 70% of last year’s revenue but create a contingency fund that will cover you for a loss of 50% (or even 40% if you want to be safer). The worst that can happen is you don’t need to use all the funds, and you can pay it back to yourself later. Think of your practice as a new start-up and focus on driving results to give you some urgently needed cash flow.

Revenue fixes everything

Which brings me to the bigger takeaway from doing this exercise — revenue fixes everything. Do what you need to do defensively. Consult with your financial advisors and ensure you are taking full advantage of the government stimulus initiatives. Take advantage of any mortgage relief available to you. Take advantage of the currently low-interest rates to consolidate debt.

Those are givens. Where your real leadership skills come into play will be in how you work toward maximizing your revenue now, and how you position yourself to hit the ground running when you scale back up. Revenue fixes everything.

Part of that preparation will also involve taking advantage of this downtime to develop your competencies in a way that will help you through the red and yellow zones, as well as set you up for continuing lasting growth in the green zone.

You can start by watching the webinars Spear has released, and are continuing to develop, on topics of immediate concern during the crisis. Spear has always had a large and continually growing inventory of online courses available on-demand to clinicians and their teams. To that, we have added new material that deals specifically with issues of urgent interest during these times. On our site, you’ll find web pages with links to this special new content — one page for specialists, and one for restorative doctors.

If you’re already a Spear member, you know about the other resources available to you in the form of online courses, and person-to-person individualized support through programs such as Spear Practice Solutions, our Masters Program for specialists, and our study clubs.

If you aren’t already a member, I invite you to come aboard. Now is a smart time to be connecting with a range of clinical and practice experts, as well as with colleagues who share your commitment to excellence, especially in this time of crisis.

My final advice is this — stay healthy. And by that, I don’t just mean taking precautions to keep yourself safe from the virus. I mean keep yourself physically, mentally, and emotionally healthy, because you are going to need to be on top of your game to be an effective leader.

Read a lot, learn a lot. Take walks when you can. Exercise at home. Enjoy the extra time with your close loved ones. You will need to do these things to keep up your inner strength and ensure you have a healthy body and a healthy mindset to take on the challenges that lie ahead.

Imtiaz Manji is co-founder and chairman of Spear Education.