Survival Kit for Tough Economic Times

“So wild things happen in the markets. And the markets have not gotten more rational over the years. They’ve become more followed. But when people panic, when fear takes over, or when greed takes over, people react just as irrationally as they have in the past.”

–Warren Buffet, April 14, 2008¹

Tough times are here and in the face of rising gas prices, the U.S. housing crisis, the American healthcare crisis and the declining value of the U.S. dollar, even the most optimistic among us would say that it’s going to take some effort to face the economic downturn over the next several years. As healthcare business owners, it’s hard not to feel the fear taking over. But there are some clear strategies which can help owners face the bleak days ahead, maintain optimism, and survive the economic recession.

These strategies include: traditional cost-cutting measures, which reduce excess and slim down operations; maintaining solid leadership through focused planning and communication; and counterintuitive spending which paradoxically invests back in the business. Success is not guaranteed, but the potential for success is maximized through methodical planning.

Traditional Cost Cutting

When things are as tough as they are nowadays, owners often become “slashers” — cutting spending in just about every area and penny pinching their way through the downturn. Random slashing, however, should be cautioned because it could lead to a paper-thin workforce with limited resources, organizational “depression” that lends itself to a culture of fear and irrationality, and loss of the company’s strategic focus as a necessary stabilizing force. It’s helpful, therefore, to more clearly define cost and examine ways of converting fixed to variable cost or eliminate areas of excess.

Costs are usually viewed in terms of “fixed” or “variable” costs. Fixed costs are expenses that cannot be changed easily, for example a lease or mortgage payment, property tax, equipment leases or interest expense on loans. Variable costs may include the cost of labor, supplies or other overhead that changes per unit change in the volume.² Fixed cost generally cannot be reduced in the immediate term, but can potentially be reduced over the long-term.

Converting fixed cost to variable cost can be an advantageous cost-cutting measure.³ For example, a lease payment is usually paid over a five- or 10-year term, but if your lease term is almost up you could renegotiate or consider more cost-effective options. Consider also downsizing or sub-leasing the space to other providers or adding additional services to reduce a high mortgage.

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