Master the (right) numbers

Every truly successful CEO or MD we’ve ever worked with has mastery of their key numbers.  Of course, that involves understanding the basic building blocks of profit and loss, balance sheets and cash flow.  In addition, you need to identify the key performance indicators that link to your future plan.

One of those key performance indicators should usually be profit.  We still see many owner managers who are fixated on growing revenue when what really matters in increasing profit – after all, what’s the point in being a “busy fool” doing more and more work and making less and less profit?

When Cameron Tudor, joint director of West London Physiotherapy, joined the Better Business Programme earlier this year, he was using top line turnover to give him and business partner, Sarah Morton, a view of how the practice was performing.

This approach, he says, worked fine for the first four years of the practice’s life.  Expenses were predictable and cash flow healthy as the business grew steadily and organically.

“We didn’t have much debt and 80% of invoices were paid on the day so we had very few debtor days. We also employed a lot of contractors, so our fixed overheads didn’t vary too much. As the top line went up, we could easily tell that the practice was healthy,” says Cameron.

Cameron and Sarah knew that to take the practice to the next level, they needed to move beyond this basic business model and expand into related products and services.

“We have an excellent reputation for treating people who are injured – and we were missing an opportunity to help patients maintain their health post-treatment,” says Cameron. “At the point of discharge, a lot of patients would ask whether they should do yoga and pilates – and we would send them off somewhere else! We realised that we could provide those services.”

With the practice now selling physical products and offering services like massage and pilates, Cameron’s approach to financial management has had to change.

“When we were just offering treatment we knew for each £1 of turnover, gross profit was about 55%.  I could look at the top line and that would pretty much tell me the bottom line.  Now we’ve started to offer more products and services, we’ve got different profit margins so it’s not that simple anymore.”

Another aspect of its finances that the practice has outgrown is the way it was paying its two directors.

“As owner managers working in the business, we hadn’t really been paying ourselves accordingly – we would just take out cash in the form of dividends when there was cash there to take.  Actually, we were working as clinical physiotherapists and should have been paying ourselves for that work. Our profits were artificially high because we weren’t correctly accounting for our work in the business.”

By acknowledging their delivery role in the business, Cameron says he and Sarah have recognised the importance of working on the business, not in it.

“When you start looking at yourself as an employee, it makes you put on a more strategic hat because suddenly it isn’t very cost effective use of your time and you’d be better off taking on someone else,” says Cameron.

One of the business’ key performance indicators (KPIs) was also pointing towards taking on additional staff. The practice has always used KPIs, such as the number of new patients per month, to monitor its performance. As a result of participating in the Better Business Programme, Cameron added two new KPIs, one of which was room utilisation. This soon revealed that, for a third of the time, there were rooms standing empty, which could be used if the practice took on an additional physiotherapist.

Another realisation that came out of the programme was that if they wanted to grow the business, they needed to stop taking all the cash out and start using some of it to invest in future growth.

“We’re going to have to employ other people and increase the size of the premises, which may well involve taking on debt.  So, financially we need to focus on cash flow and gross and net profit,” says Cameron. “A year ago I probably would have found such ambitious expansion plans, and this different approach to numbers, quite daunting.  Participating in the programme has given me the confidence and clarity to see that this is the way we want to go.”

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