In this fifth article, we will examine the key challenges to growth and how successful owner-managers overcome them.

For every 10 owner-managers I meet who talk about turnover targets, I encounter one who talks with the same passion about profit—and I get to meet a lot of owner-managers! Perhaps this should come as no great surprise. Turnover, after all, is the first line we see on the profit and loss margin. Business people define themselves, almost instinctively, by turnover: We have an intuitive sense of what it is to be a ??1-, ?10-, or ?100-million business.

If this is the only way you define the future stages of your business, alarm bells should be ringing. When Richard Salvage of Shield Medicare (Farnham, UK) attended Business Growth and Development (BGD) 2 years ago, turnover was growing, but profits were stuck at zero. One year later, profits were back to £1.5 million (?2,236,478). They have been rising ever since. The key to change was to refocus on the importance of delivering profit. This column will provide information about setting the right financial objectives.

Gross margin. Most businesses are only viable if gross margins are sufficiently high. Traditionally, manufacturing businesses were considered sustainable only if the gross margin was more than 40%, allowing for enough reinvestment in plant and equipment. The rise of the services sector made this rule of thumb harder to calculate, because it is more difficult to identify the direct cost of sales. Time, rather than raw materials, is the key input, and people's available and chargeable hours are the new machine efficiencies. Unless you try to establish a realistic gross margin, you run the risk of diminishing profitability as you fail to identify and recover your full costs.

Net margin. Too small of a bottom line will not support the business over the long term. Our experience is that, once a sustainable gross margin is established, a business will soon know if the benefits are dropping through to net profit. If not, ponder the overhead. Immediate questions are:
• Where is there unnecessary waste and duplication?
• What could be more effectively outsourced?
• What outsourced activities are better done in-house?

Expenses for a medical practice are typically fewer than 50%, but may increase to 70% if the practice includes a surgical facility. The extra costs for a surgical service (eg, disposables and staff) are considerable, and income/expense need close monitoring to avoid disaster. Surgical facilities frequently run into financial trouble, and blame is usually placed solely on inadequate business, however, high expenses may be equally to blame. Much can be done to contain high expenses. For example, accumulating surgical cases and performing them on 1 or 2 days per week greatly reduces use of expensive operating room staff. Instead of having staff on hand 5 days per week, accomplish surgical volume in 1 day; that translates to an 80% saving on theater staff.

You get what you measure. Measures assist in monitoring performance of a practice, and often much attention is paid to new business. If your sales force is compensated through sales, do not be surprised if you get a lot of business with little margin. Similarly, if they are rewarded largely for new business, do not complain that existing customers are neglected. Chasing new business is an expensive pursuit! As a general rule, it costs between three to five times as much to acquire a new customer than it does to retain the existing customer.

So, what does that mean for ophthalmic practices? Particularly in a refractive surgery practice, a lot of finance goes into marketing and designated for staff incentives to bring more patients through the door. But, if insufficient attention is paid to other aspects of the practice, existing patients may get neglected at the expense of new ones. Do not focus on getting new business; measure all sources of income, and do not forget to measure expenses and how it relates to income.

Set the right balance sheet objectives. In our last survey of small and medium enterprises, we found that a huge number of owner-managed British businesses are overly dependent on the bank overdraft. It is expensive and makes a business very vulnerable. Long-term financing requires long-term equity and debt. For working capital finance, there are many alternative financing mechanisms (eg, letters of credit, invoice discounting, and factoring). Karan Bilimoria, for instance, founded 17 funding methods to drive the growth of Cobra Beer (London).

In the next article, we will look at growing up as an organization as part of the recipe for successful growth.

For more information on BGD and Cranfield's other programs for owner-managers, visit www.som.cranfield.ac.uk/som/groups/enterprise/credo/index.asp.