A significant decline in overall economic activity that lasts more than a few months and is visible in industrial production, employment, real income and wholesale-retail trade…”

That, according to the National Bureau of Economic Research in Cambridge, Mass., is the telltale sign of a recession.

And that is exactly what we're experiencing.

The Sept. 11 terrorist attacks only made economic matters worse, pulling the gross domestic product down by as much as 3 percent, some experts say. What's more, while think tanks like the Washington-based National Association for Business Economics say this recession is a mild one, many predict it will get worse before it gets better.

Why focus on all this gloom and doom? Because, as a business owner or manager, you can't afford not to. And when you know economic troubles lie ahead, you are more likely to do what it takes to keep your business profitable.

To follow are some basic components of your business operation — from personnel to products and processes — that may need reevaluation.

Streamline Your Workforce

Addressing staffing concerns is tough in any type of economy, but it is critical to the health of your company when times get tight, says Mike Mallaro, chief financial officer for The VGM Group, Waterloo, Iowa. Making sure you have the appropriate number of employees for the amount of business you have is what matters. “If your business is not supporting the number of people you have,” he says, “then you need to make a change, even if they are all good performers.”

Just as important as your total number of employees is the way in which employees work, adds Michael Barish, president of Ancor Consulting, Coral Springs, Fla. Not only are many HME providers inappropriately staffed, they are often overstaffed because their operations are inefficient. “Some companies take poor orders initially, for example, so they must have additional people on collections to help work the denials,” he explains.

The fewer the number of people handling one item, the more efficient the process will be. “This is not to say one person should be handling every patient from beginning to end,” Barish adds. “You just want to handle patients in an effective manner so that you are not creating additional positions just to keep people busy.”

It's a matter of honing your processes, agrees Wallace Weeks, president of Melbourne, Fla.-based The Weeks Group.

“One reason companies waste labor costs is because they have processes that require more labor than is necessary,” he says. “If [companies] would redesign their processes, they would be able to do things more effectively and thereby reduce the labor costs. The real opportunity for reduced cost in this industry lies in having better processes, both within a company and between one company and another, like between the referral source and the intake department.”

Invest in Your Employees

Once you isolate areas of operational weakness, you can begin to make improvements. Just remember, while some improvements will require employee participation, all will require employee support.

Your employees are the heartbeat of your business and often are your only connection to customers, referral sources and payers, says Miriam Lieber, president of Lieber Consulting, Sherman Oaks, Calif. “Employees in an HME organization make or break the business,” she emphasizes. “Properly hiring and training your staff will make the difference between a successful company and a struggling one.”

Because it is so costly — both in cost of training and lost productivity — to continually hire people, you need to make a concerted effort to keep your employees motivated and successful, says Richard Davis, vice president of Paragon Ventures, Charleston, S.C. You can accomplish this by establishing realistic expectations for all employees through simple goal setting and periodic performance reviews.

“When this is done,” he says, “everyone is on the same page as it relates to expected performance.”

Manage Your Inventory

Before you can attempt to reduce your inventory costs, Weeks says, you must be sure you're counting the right things. “Inventory should include all and only those items that you have purchased for resale,” he says. “Rental equipment is a fixed asset that should be thought of as capital expenditures, not inventory.”

Once you have a handle on your total inventory, Weeks says, you can begin to streamline it by putting detailed inventory-control procedures in place for employees to follow. You should invest in a management information system that allows for efficient purchasing plans. Only when you can track “inventory days on hand” can you see how close to zero you can push that number. The current industry average, he notes, is 43 days.

By evaluating your inventory by product class, you also can determine if each item is generating enough profit to cover the cost of showroom floor space and your employees' time. But even if a product line is profitable, he warns, you should not tie up your available cash by overstocking.

To determine where you should focus your limited resources, Mallaro suggests analyzing your profits by product lines, referral sources and customer types. You also can examine profitability by performing bench-marking studies. “It is a good idea to look back and see how you are doing versus how you used to do and how you are doing versus the competition,” he says.

“HME providers may know what their overall business does but they may not be as focused on exactly where the profits are coming from,” Mallaro says. “It is incredibly important to understand that if things get a little tight.”

Control Accounts Receivable

Inefficiencies in your accounts receivable department also can hinder company profitability, especially if your business volume is growing, Lieber says. “The key in managing your money is tracking A/R by segregating old from new,” she says. “Management reports can tell you where your real problems lie, and isolating big dollars first will give you your starting position.”

Perhaps the simplest measure of your success is your days sales outstanding. And follow-up is crucial to reducing that number. “Just because a claim is resubmitted doesn't guarantee payment,” Lieber says. “You should check the status of your claims consistently and constantly.”

Creating an internal quality assurance process can be helpful. Without one, providers in effect “deny” their own claims before the claims are ever sent to the payer. “Because of costs, you don't want to do this permanently,” Weeks says. “But it can bring an awareness to employees regarding proper claims submissions.”

Even when times aren't tight, Weeks says, you should always work toward lowering your DSO. “An account receivable is really your cash sitting in a payer's account.”

Many HME companies have billing software, Davis adds, but most do not track their accounts receivable. As a result, DSOs are higher than should be. “The most valuable HME companies,” he says, “are those who spend as much time, effort and money collecting on what they bill as they spend on sending out the bills in the first place.”

Davis also suggests hiring a certified public accounting firm to provide monthly financial compilations, or getting a financial software package that can print out monthly financial statements and balance sheets. An annual review provided by a CPA firm also is a good idea, he says.

Find Good Business Partners

To “ride out any tough times,” Mallaro says, “you want to hoard cash and look for any sources of additional capital that might be available.” So in addition to reducing inventory and DSO, he advises HME providers minimize the working capital they need to run their businesses by asking for extensive dating terms from vendors.

Lieber also recommends researching a variety of vendors and methods of distribution, such as direct buying versus using distributors or buying groups. “Small HME providers — especially when they are young — may find it less risky to use a distributor who offers next-day delivery, payment terms and co-op marketing programs,” she says. “Mid-size companies tend to affiliate with a buying group or a limited number of vendors or manufacturers to attract more handsome discounts.”

Even when you find a preferred purchasing method, Lieber warns not to get too comfortable. Rather, you should reevaluate your needs quarterly. “Ask if the vendor still is offering the best deal, or determine if internal growth has changed your purchasing needs,” she says.

Weeks also advises companies to look at vendor fulfillment time. “The vendors who can give us the better fulfillment times also help us keep down the number of items we need to keep on a shelf,” he says.

This often leads to consolidating vendors. “Sometimes it makes really good sense to consolidate your vendors,” Weeks says. “You might be able to get better fulfillment times; you might be able to get lower pricing. You also create stronger relationships that help you through those funny little problems that pop up every week.”

Staying Focused

Finally, before you make a move on any of these fronts, you should have a realistic mission statement and make sure that any changes fit that particular mission statement, Davis says.

“Many independent HME business owners want to be all things to all people,” he says. “The perception is that the only way to be competitive is to provide all the products and services that referral sources want.”

A better method, he says, is determining the products and services that are necessary, as opposed to those that would be “nice” to have.

“Providing low-margin products and services that do not create substantive value or added benefits should be evaluated closely,” Davis concludes. “The bottom line is to continually evaluate what the company is offering to customers to ensure those offerings add value and also are necessary to the company's overall profitability.”

The Don't Do List

In an unsure economic climate, there are also some things you should not do. These include:

• Making across-the-board cuts. Instead, be specific in salary cuts, layoffs and program cuts.

• Making “nickel-and-dime” decisions. Instead, be sure to look at the big picture and focus on areas that will make a strong impact on your bottom line.

• Cutting marketing programs. Instead, cut only those programs that are not effective and replace them with new and innovative ways to target your customers.
  — D.H.M.

Working in a Discretionary-Income Economy

Certain segments of the industry are likely to see measurable declines in profitability, says Wallace Weeks, president of the Melbourne, Fla.-based The Weeks Group. “The segments of home care that rely heavily on cash sales, such as mobility, accessibility, transportation and retail, will be most impacted,” he predicts.

Smart marketing can make a difference, however, even in unsure economic times. “Many providers do not recognize that if there is a recession, it means that we just have to work a little bit harder to get the message out to the people that we are here to serve them and can provide them with what they need,” says Shelly Prial, director of government relations for the Homecare Providers Co-op, Melbourne, Fla., and Waterloo, Iowa-based The VGM Group.

Providers should create marketing plans to promote product lines that are typically cash-sale items, such as scooters, lift chairs and bath safety items. When executed properly, for example, educational seminars for referral sources and open houses or free screening days for customers can increase business.

But the focus of the home medical equipment business — providing products and services to those in medical need — will help shield much of the industry from economic downturns.

“The HME industry is not affected by a slowing economy like regular retail businesses that rely on the consumer,” says Richard Davis, vice president of Paragon Ventures, Charleston, S.C. “The fact is the HME industry serves a segment of the population that will always exist — people with health care needs.”

Current demographics also are on HME providers' side, says Mike Mallaro, chief financial officer for VGM. “Whether the economy is booming or not, the need is still there,” Mallaro says. “People are still getting older and need this equipment.”

That need has grown considerably during the past few decades and continues to increase at an exploding rate. According to Miriam Lieber, president of Lieber Consulting in Sherman Oaks, Calif., the market for home health care has risen from $2.4 billion in 1980 to greater than $30 billion today.

Most attribute this growth to the remarkable increase in the number of older Americans. Consider these statistics from the American Association of Retired Persons:

• In the United States, 34.5 million people — or 12 percent of the population — are age 65 and older. By 2030, that number will be 70 million.

• Almost three-fourths of people age 80 and older report at least one disability. What's more, the percentage of people age 80 and older who have trouble with activities of daily living is double that of the 65- to 80-year-old population.
  — D.H.M.