Financial and Economic Issues

Benjamin Franklin once said, “By failing to prepare, you are preparing to fail.” Nothing could be more accurate for the development of a financial strategy as it relates to crisis management. A reliable, pre-developed financial plan is key to weathering any crisis. This chapter outlines the basic financial process that any organization should have in place so they can “weather the storm.” Although planning does not guarantee that the crisis will not be painful, it might ensure that the business remains viable throughout the situation.

DO NOT WAIT UNTIL A CRISIS TO PREPARE

The first admonition relating to a financial strategy is “Don’t wait.” Foresight is critical. A well-run business will look ahead at the potential issues on the horizon and plan accordingly; the potential for crises is one of them. If an organization waits until it is in a crisis, it will be in “reactive” mode versus being proactive. Reactivity will inevitably put more strain on an organization. First, it will require much more energy. During a crisis, the organization’s leaders need to be able to deal with the problem at hand. If a solid financial plan is already in place, the organization can focus on other vital matters rather than finance. Second, it will likely cost less, which means that in a reactive mood, one tends to “throw money” at problems to make them go away. Spending money without much forethought will likely result in the consumption of more economic resources in a time when money may be scarce. Because focus and financial resources will be in short supply amid a crisis, pre-planning will ensure that these valuable resources are well invested in dealing with the situation.

LIQUIDITY

Liquidity is crucial. As defined by Investopedia, “Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.” Stated another way, “Cash is king.” During a crisis, having liquid assets will provide significant financial security. Whether in cash or assets that can readily convert to cash, this liquidity will allow the organization to pay its financial obligations even if revenue begins to dry up.

Liquidity was a key consideration with many medical groups during the COVID-19 pandemic. As the economy quickly came to a halt, many medical groups were no longer able to generate revenue by seeing patients. Unfortunately, operational expenses are still incurred despite income drying up. This matter created much consternation for medical groups, resulting in one or all the following actions:

• Laying off/furloughing staff

• Borrowing money

• Capital calls from owners

• Not paying bills

• Bankruptcy

• Being forced to sell the entity to another organization

None of the above positions are desirable and can have a lasting (negative) impact on the organization. For example, borrowing money can create a financial hole that may take years to repay. The same is true for furloughs/layoffs. If those staff members have been long-time employees and function in “knowledge positions,” they may not be available for rehire when the organization reaches that point. The cost to recruit or re-train staff is real and can have a long-term impact on practice productivity.

So, liquidity is critical.

Organizations gauge their liquidity by several primary industry ratios. The two basics are the current ratio and the quick ratio. The equations for these two ratios are:

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = Cash + Short Term Investments + Accounts Receivable / Current Liabilities

The denominators of the two ratios are the same, but the numerator is different. The critical difference is in the definition. The Quick Ratio is looking at assets that can quickly convert to cash. The Current Ratio looks at assets that can reasonably convert to cash within a year. So, while both are important to ensure proper liquidity, the Current Ratio could be considered as a mid-term liquidity ratio for a business like a medical group. In contrast, the Quick Ratio could be an excellent indication of short-term liquidity.

Both are important and require monitoring. Having healthy ratios will indicate that liquid assets are available if a crisis were to strike. Unfortunately, the idea of maintaining strong liquidity ratios runs counter to many medical groups’ methods. Many medical groups keep limited cash on hand (the primary source of liquidity), paying out as much as possible and as frequently as possible to the owner physicians in the form of compensation. Tax implications could result from keeping much cash on hand, depending on the entity’s legal structure and other factors; balancing these competing dynamics is critical.

Another essential consideration for liquidity is understanding an organization’s fixed versus variable costs and the overall flexibility in its cost structure. If an organization’s revenue suddenly decreased, would much of its expense structure follow, or would the expense structure remain mostly unchanged? The former would infer a primarily variable cost structure, while the former would infer a predominantly fixed cost structure. A variable cost structure is most advantageous during a crisis in that it is easy to reduce expenses as revenue falls; however, outside of an emergency, the more an organization can leverage costs (meaning, drive higher revenue using the same cost structure), the more profitable it can become.

Moving to a completely variable cost structure does not make sense, as it infers only short-term thinking and/or assuming the worst-case scenario will inevitably occur. However, having a solid understanding of how an organization’s costs will change with revenue and working to find the right balance of fixed vs. variable costs for your organization will help to ensure liquidity in a crisis.

ONGOING MONITORING

In discussing financial management and crises, the previous section outlines some key considerations relative to preparation and liquidity. An action that goes hand in hand with these concepts is based on the idea of having dependable ongoing monitoring of financial performance. It is not easy to have a financial plan and maintain reliable finances if you are not regularly monitoring what is going on financially inside your organization. Smaller organizations tend to have limited monthly financial reporting.

The following actions are beneficial to ensure the ongoing financial health of your organization will enable it to weather a financial crisis:

• Monthly financial reporting: Using your organization’s financial reporting tool (QuickBooks, for example), a balance sheet and income statement should be prepared each month. These reports should not just be put into a drawer but should be reviewed in detail.

• Variance analyses: Use the monthly financial reports to identify variances from month-to-month and year-to-year. If expenses are creeping up with no corollary change in revenue, implement a remediation plan.

• Ratio analyses: As outlined above, consider the various ratios, such as the Current Ratio and the Quick Ratio Also include Days in Accounts Receivable (AR), Profit before Provider Compensation as a percent of Professional Collections, comparisons to relevant industry data, and others.

• Bank statement reconciliations: Bank statements should be reviewed and reconciled regularly.

• Comparisons of the practice management system to the accounting system: Comparisons and reconciliation of these two systems’ data should occur regularly to ensure that they are trending alongside each other. Although timing differences may cause some variance, they should be limited.

Highlighted above are some of the actions that should occur regularly within an organization. There are likely others that are specific to organizations, but this sets the “minimum baseline.” Ensuring a solid and ongoing understanding of an organization’s finances will give it the ability to pivot quickly to respond to a crisis.

BE PREPARED TO MAKE THE TOUGH DECISIONS

Crises are problems, and survival is critical. To ensure that the organization can weather the storm financially, its leaders may have to make tough decisions.

Generally, the organization should be prepared to make these tough decisions, but the timing is critical. The organization should try to avoid “jumping the gun” and choosing a course of action too early; it may not be necessary. At the same time, if the organization waits too long, it may be too late; the organization may be too far gone for the tough decisions to have an impact on their financial viability.

Additionally, a plan to outline the tough decisions should occur well in advance of having to make them. For example, the organization should develop several different “playbooks” for distinct scenarios, depending on the severity of the crisis. That way, “game time” decisions are not being made on the spot. Only those that are well thought through in advance are being executed.

With respect to these decisions, financially, the organization should look to make cuts where there is an intersection between the maximum financial benefit to the organization and the least amount of impact for the organization to sustain its operations and generate revenue. Obviously, these are competing forces, but identifying where they intersect is vital. In many cases, the decisions will revolve around personnel cuts. The focus should be on those who are not “mission critical” to the organization. Given the organization’s relationships with many of these individuals, the tendency will be to see them all as mission critical. The goal will be to make certain loyalties are aligned — first to the viability of the organization and then to the people within the organization. A lack of clarity on this point could sink the organization.

While deciding upon which individuals are mission critical, it will also be necessary to define criteria. Meaning, will a salary reduction preclude a full furlough? Is a more permanent reduction in force needed? Options and the pros/cons should be weighed in the balance. For example, an overall salary reduction may equal permanently eliminating two staff members. Although there may not be a “right” or a “wrong” decision here, the implications could be lingering. For example, while an overall pay cuts may keep the staff gainfully employed and viewed as a shared sacrifice, it may be demoralizing to certain employees, especially if much of the weight of responding to the crisis is falling on their shoulders. So, it is vital to weigh decisions carefully. There is no right answer.

Another key consideration concerning making tough decisions is being willing to make sacrifices yourself. It may be energizing to an organization’s culture if the leadership makes the same or greater sacrifices than those asked of the other employees. This is a true sign of leadership — that the organization’s leaders will be “first in line” to take the hit out of deference to the organization and its employees. Sacrificing is not easy, as the leaders will feel much of the pain and will likely be working double-time to react/respond. If it were, everyone would be doing it!

REVENUE STABILITY

In the context of proactivity, organizations can take steps to ensure that their business model is almost crisis proof. One of these approaches is looking at revenue streams and identifying ways to create revenue stability. While there are several tactics to do this, three primary methods are outstanding.

First, make sure your revenue streams are tied to a commodity that will be needed regardless of a crisis. The more an organization can ensure that the services they sell will be in demand continuously, the less impact they will feel from a crisis. An example of this would be the difference between cosmetic plastic surgery services and primary care services. In a crisis situation, individuals will quickly forego cosmetic plastic surgery but will still demand primary care services.

Even within a specialty such as primary care, another way to ensure revenue stability is to consider the services tied to the pricing model. Examples of this are concierge services and capitation arrangements. With both concierge services and capitation, less of a primary care physician’s revenue is tied to fee for service than to subscription-based, and it is received regardless of whether services are delivered. This arrangement provides much more insulation than a fee-for-service model. In a fee-for-service model, if patients’ ability to access care is turned off in an FFS model, the revenue spigot is turned off; however, the spigot keeps running in these alternative payment models, creating much more stability.

The final revenue stability factor we will consider is the method of delivering the services. The recent COVID-19 pandemic highlighted the phenomenon of telemedicine. Historically, the reliance on telemedicine has been very low, with most patients preferring in-person visits. Once the ability to schedule in-person visits ceased, the ability to generate revenue diminished as well. Those organizations that were equipped to deliver care via telemedicine modalities still had the ability to generate revenue, allowing for a more stable revenue base.

In summary, consideration of the type of services, the type of revenue streams tied to those services, and the method of delivering those services can impact revenue stability. In turn, revenue stability can create a more solid financial platform that will allow an organization to weather a crisis.

INSURANCE IS IMPORTANT

Insurance becomes essential amid crises and can help to protect against the financial implications of the situation. There are many different types of insurance. These can include, but are not limited to, the following:

• General Liability

• Auto

• Health

• Life

• Disability

• Worker’s Compensation

• Key Man (Life)

• Professional Liability

• Errors and Omissions

• Cyber

• Earthquake

• Flood

• Kidnap and Ransom

• Reputational Risk

• Umbrella

Insurance hedges risk. You pay a small sum of money on an ongoing basis to protect against the unlikely event that a crisis will occur requiring a much larger financial outlay. By concept, the more likely an emergency is to occur, the more costly the insurance will be. Thus, organizations must make solid financial decisions about what types of insurance make sense for that organization. The basis of decisions can depend on 1) the cost of the insurance and 2) the likelihood of an event occurring that that type of insurance covers. For example, using a rather extreme example, kidnap and ransom insurance is likely not needed for most medical groups in the United States, but could very well be a necessity in other parts of the world. Similarly, it may be worth considering key man insurance, but depending on the age and health of the “key man,” it may not make financial sense to take out a key-man policy.

Organizations should work closely with their insurance brokers to assess their respective organization and associated risks to make sure that they are adequately covered in the unlikely event of a crisis. A review of insurance coverage should occur at least annually. Further, the organization should understand for what they are and are not covered and use the insurance when the need arises. It does not make sense to pay for insurance but not use it when the policy would otherwise be activated.

TAP INTO RESOURCES

Depending on the type of crisis in play, there may be other sources of financial relief, especially with events like hurricanes and floods where specific governmental relief programs are available. Relief is also obtainable for infrequent occurrences, such as the COVID-19 pandemic. As a result of the significant financial strain on businesses, the government enacted various forms of relief that organizations can access. Consultation with an organization’s accounting and legal representatives is vital in determining the risk/reward of tapping into these resources. (See Chapter 11, Legal and Regulatory Hurdles.) As an example, the Paycheck Protection Program came with a few “strings” attached and legal complexities that require some level of expertise to navigate. While the program may be very beneficial to an organization, it is critical to understand all aspects of the program before participating.

BE AN OPPORTUNIST

As a final financial word of this chapter, organizations that do well to execute on the above can take advantage of unique opportunities amid a crisis. If other organizations are suffering financially and your organization is healthy, that creates opportunities. These can include but are not necessarily limited to:

Acquire other businesses at a discount

Offer employment to top talent that their current employer has let go

Purchase property at a discount

Negotiate favorable contracts

Create more goodwill with current employees by offering strong incentives during a crisis

Having a solid financial plan does not only allow an organization to survive during a crisis, but it can enable the organization to thrive. This is the position an organization wants to be in!

SUMMARY

Solid financial planning is key to weathering a crisis. The steps outlined in this chapter are not to infer that an organization will be crisis-proof, financially, but they should help ensure that an organization can make it through a crisis. The objective is to thrive vs. merely survive.

Excerpted from Effective Crisis Leadership in Healthcare: Lessons Learned from a Pandemic (American Association for Physician Leadership, 2021).