The Anatomy of a Recession

I was having a conversation recently with an acquaintance about the likely effects of the current recession on the dental profession as a whole.  That lead on to a discussion as to which practice we considered might be more at risk in the current climate and then what actions could be taken by all of us to ensure that we minimise the downside in an extremely difficult year, possibly the worst the world economies have know since the 1930’s.

Many are comparing the current crisis with that of 1929

“May you live in interesting times” is now generally accepted as being a Chinese curse, whereas for years we thought it was a pleasant proverb and it is fair to say that times don’t get much more “interesting” than they are right now.  It might be worth considering how we got here in the first place, it may well influence the way we think about economic cycles and let’s hope above all that future governments learn from these important lessons.  George Santayana (1863-1952) although often misquoted actually said “those who cannot remember the past are condemned to repeat it”, that simple phrase uttered so long ago has been proven so true in our day.  Many are comparing the current crisis with that of 1929 and I have to say that I personally feel that the fallout from the credit crunch as it has become known in some ways could be every bit as bad as the aftermath of 1929. 

 So are there any parallels between then and now?

 Some say fear and greed drove the situation then and you have to say both emotions are present today.  I personally believe the greatest and most obvious parallel is the unrestricted and irresponsible use of credit.  We have all heard of the roaring 20’s and in the latter part the boom really gained pace.  Company stock values began to increase rapidly and the Dow Jones index fuelled by ever increasing share prices seemed to be going forever upwards.  In fact, it peaked on September 3rd 1929 at 381.17 points, it hit a low of 44 points in 1934, that represents a staggering loss of 88.5% of its value and it didn’t recover its pre-crash value for two decades.

 So why such a massive bubble?

 During the 1920’s the man in the street in America really began to believe in the American Dream and the concept of money making money was truly embraced and for those that didn’t have money they simply borrowed it.  For those who borrowed $15,000 to buy say General Motors stocks could easily double their money in a matter of weeks, so borrowing on the margins as it became know became all too easy.  When the crash came it was catastrophic for the personal wealth of a large proportion of the population.  I think and hope that the fundamentals are quite different now which should mean that the fallout is not nearly so great in personal terms, however, there is no room for complacency and it is a sobering thought to realise that if history completely repeats itself the FTSE could bottom out at 733 points. 

When the crash came it was catastrophic for the personal wealth of a large proportion of the population

So we have seen how credit was misused to create a share bubble and whilst recently we have had hedge funds which engaged in highly specialist investment strategies, measuring their performance on absolute rather that relative target levels of return.  In simplistic terms through gearing they are investing more than the capital value of the fund.  There is a saying “Gear today gone tomorrow” and as the fear factor kicks in and investors demand their money back hedge funds are forced into a fire sale situation selling assets below market value, dumping stock into an already falling market, which of course, accentuates the problem.

 As bad as that is, however, it is not the core problem with western economies which lies in property values.  Alan Greenspan, former head of the Federal Reserve in the US, was warning for some years that property prices in the US and UK were unsustainable and that he believed that the recession in the US would not bottom out until property prices stabilised. 

 We have had quite sharp property falls in the past so why did property prices get so high in the UK?

 First and foremost, I think we actually bought the line from Gordon Brown that there would be no more boom and bust.  Also, those with a vested interest i.e. building societies and estate agents were peddling the nonsensical notion that because of a shortage of property in the UK and an influx of immigrants the property prices couldn’t fall, add to that the insidious effect of companies like inside track promising everybody they could be property millionaires in five minutes flat and you have a perfect recipe for disaster.  The credit flowed endlessly for bigger and better properties; buy to lets, you name it and the bank would lend you money to buy it.  With ever increasing amounts of equity in UK properties we then went on to spray UK equity all over the world in very diverse places from the US across Europe and into Eastern Block countries.  The Spanish property market is testament to the fallout from our love affair with property.  The sad thing is Gordon Brown and his government were warned several times in recent years by none other than the Royal Institute of Chartered Surveyors that properties were desperately overvalued.  It could have taken measures to dampen the situation down; instead they cynically rode the wave knowing that once it hit the beach UK spending would be over for a long time.  Presumably, they were hoping that the wave would run past the next general election.

 So can world leaders fix it?

I think it is time to do financial cold turkey

 With mind boggling sums of money being pumped into financial institutions, with Mandelson poised to bail out sections of the UK motor industry and overarching all this Barack Obama promising to rebuild America, somehow surely the money must start flowing again, or will it? 

 I was recently in a room full of financial advisers, I estimate around 100 and the speaker decided on a straw poll and asked the whole room to raise their hands if they thought it was possible to kick start an economy and whether or not Gordon Brown’s current financial measures would work.  Suffice to say; only 3 people raised their hands and I wasn’t one of the three.  I fear that as long as we feel the problem can be fixed with money we won’t take the necessary steps to repair the damage.  I think it is time to do financial cold turkey and get on with our lives and focus on our individual businesses and situations.  For the wider economy, 2009 will be truly an annus horribilis; we will almost certainly hit 3 million unemployed.

 So where does all this doom and gloom leave the dental profession? (And this is where the tone lightens somewhat.)

 I believe for most people dentistry is an essential purchase.  In the general practice a significant number of patients are paying under £200 a year and therefore saving that amount to end up with toothache is not an option.  There is plenty of evidence to show that in a recession individuals will spend more money on themselves and where patients are buying high value treatments there are plenty of options for them to either spread the payment or take out low cost finance.  The total spend on UK dentistry as a whole continues to rise exponentially and when we review our existing client base there are plenty of practices that are very busy and acquiring new patients at the rate of 40-60 per month.  I also believe last year there was a great deal of fruitless discussion as to whether we were or were not going to have a recession, now it is patently obvious that we are going to have one, people are just getting on with their lives and buying what they need or want.  Having said all that, the days of putting up a sign “dental practice” and knowing that sufficient people will walk through the door are over.  Every practice should have a marketing strategy and budget; new patients in your area are likely to check to see if you have a website.  Websites should be fit for purpose and projecting the correct images. Throwing a mountain of cash at some flashy web designer is not necessary and we do have some good contacts who understand the dental profession and provide what you need at a reasonable cost.

Key Performance Indicators are vital

 Key Performance Indicators are vital, find out how many new patient enquiries you receive at the practice each month before you spend a fortune on marketing.  If you are not adequately converting enquiries into new patients you need to look at how these enquiries are being handled.  Consider having the telephone answered between 1-2pm and the surgery door open if at all possible.  Carry out a detailed analysis of and benchmark your accounts, make sure you know the actual fee income for each chair side hour worked.  Ensure you are getting adequate remuneration for check ups.  Your advice is just as valuable as the work you carry out for patients.  Make sure there is enough time during check ups to talk to your patients and ask them if there is anything else they would like to have done; in my view 10 minute check ups make the practice busy, hurried places where patients don’t have enough time to discuss their needs with you.  Make sure your patients know what you can do for them, the phrase “Oh, I didn’t know you could do that” is heard in many, many practices.  Most important of all always have a plan, write down how much income you need each year, create and maintain adequate practice and personal budgets, create enough financial breathing space to be able to put away money required for tax on a monthly basis.  Make sure your retirement is well planned and paid for by the patients, always be aware that unless you are very close to retirement your greatest asset is your yet to be earned income.  If you have an extended illness or accident, make sure that you can adequately support your family and the practice.

 Every practitioner should have the time to focus on their dentistry whilst maintaining a good work life balance.  Surround yourself with good quality dental specific advisers, this will free up time to deal with the more important things like completing treatment plans and working out your business strategy or taking time off with the family.

 We at Dental Financial Associates are fee based, independent financial planners and business advisers to the dental profession.  We offer every prospective client a free no obligation meeting to discuss their potential needs.  We work exclusively with the dental profession.  We feel it is vital for clients to feel relaxed and unhurried when making decisions about their financial planning.  Always remember, if you are not making money and having fun, stop doing it.  That doesn’t mean stop doing dentistry, but it may mean changing the way you are doing it.  Make sure your practice is a fun place to be, both for your patients and your staff.

 Remember, Dentist’s never plan to fail but they often fail to plan.

 Dentistry is going through a very exciting phase, there has never been a better time to be a dentist.  Let’s opt out of the recession and get on with the job.