Managing finance to run a viable Care Home

When Care Home Managers look at finance we need to consider 4 items: budget, income, expenditure and profitability. In this article, Liam explains how to understand these to run a viable Care Home.

Care Home Managers need to know how to balance the budgets for a viable and profitable Care Home. Liam explains the fundamentals

Topics covered in this article

Fundamentals

Often the key numbers come from a detailed budget document prepared by accountants.

It may be well thought through with input from those managing the service (realistic / achievable) or it may be a more simple affair where the owner / director simply states what they want to achieve in terms of occupancy (e.g. 100% occupancy all the time).

The problem with an unachievable budget is that it is ignored and doesn’t motivate managers to give their best.

When we look at managing finance for a care home, the simplest way of looking at this is to consider 4 items – the budget (the plan) for the year, money in (income), and money out (expenditure).

How these work together leads to the profit / loss (income - expenditure).

With a financial year starting in April 2019, the figures at the end of June 2019 will be April + May + June.

If the home makes less than budget at the end of the financial year – it means they’ve “missed budget”, if they make more, they’ve “achieved budget with a surplus”.

During the year, if the home is not achieving budget, it is described as “not on budget.”

Budget

The budget is a summary of the predicted money coming in (income) versus the money going out (expenditure).

It is calculated for each calendar month with a tally for the end of the financial year.

The difference between the 2 is the predicted profit (if income exceeds expenditure) or predicted loss (if expenditure exceeds income).

Income

Income is based on a prediction of average room occupancy over the month and the price expected to be paid for those rooms.

For example if a care home has 10 beds and fees are £2k per month. If the home expects occupancy of 9 people per month (average of 90% occupancy), the predicted income will be 9 people x £2k per month = £18k total income each month.

If the occupancy is predicted to be consistently 9 all year, it means the predicted income will be £18k x 12 months = £360k of income.

If historically there is lower occupancy in Dec / Jan, the budget should reflect this.

For physically vulnerable residents in poor health, a harsh winter can be especially difficult and in some cases will impact occupancy.

Private versus local authority / local authority plus “top-up”

When a budget is built, the average price may be based on a combination of local authority funded residents, some with a private top up and some funded privately.

To understand what that looks like, firstly different rooms may have different prices (with a premium for ground floor, larger size, ensuite etc.).

This needs to be factored into the budget. Secondly, next if there are 10 rooms, the budget could be;

4 residents funded by the local authority at £500 per week

1 at £650 per week – local authority funded plus family “top up” of £150 per week

5 fully privately funded at £1000 per week.

This makes a total weekly income of £2k+£650+£5000 = £7,650 per week

Expenditure

A detailed budget will predict costs across different areas of the home.

The main budget lines to be aware of are staffing hours – care, management, admin, activities, kitchen, laundry, agency etc.

There will be budgeted hours per department per week.

Also maintenance costs, catering costs (provisions), agency costs. Staffing costs are usually 45 – 65% of total expenditure.

Of course there are many other costs e.g. electric, gas but these are not costs that can be managed a great deal, whereas managing staff hours against occupancy is something every home manager MUST do to stay financially viable.

The reason this is so crucial is that a budget will be set for a certain number of residents.

So the budget will say I will give you £5 per day per resident.

With 20 residents, budget is £100 per day. If you have 10 residents, you need to spend £50 not £100.

Basically the rest of the home needs to adjust accordingly.

If there are ½ the residents, there is less laundry, less housekeeping, less care.

So there needs to be less spent in those areas also when the occupancy (reflected by income) changes.

This is the essence of managing a care home budget. The skill is in “how” to do this.

How to flex your staffing costs against occupancy

Staffing needs to be a balance of contracted hours and bank hours so that you can flex staff hours when you need to.

A rule of thumb is to have around 70% of the staff hours on care contracted and 30% picked up as extra shifts or bank shifts.

That way if occupancy reduces, costs can reduce.

If contracted hours (people with contracts working regular hours) are 100% of the staffing budget, it means if you have 10 residents in a 20 bed home, you will still have to pay staff as If you have 20.

The cumulative overspend will ruin the profit and loss of a home and can cause an owner of a care home to run out of cash, which would in turn lead to an emergency closure.

What to do if you’re behind budget

If you’re behind budget, you need to increase the amount of money you make or slow down your costs.

The options are spend less, earn more or both.

Spend less – this is about coming in less than budget on your highest spending budget lines – maintenance, catering costs, staffing hours, agency costs. It is easy to spend less but the trick is to cut costs WHILST retaining a safe and well managed home. You can’t cut costs which may create risk for residents, e.g. deliberately understaffing which could lead to unsafe care.

Earn more – this may sound obvious here but this is about earning more than is expected in the budget. So if you have a occupancy budget for 18 / 20 beds and you had a month of 16, the next month you need 19 / 20 to catch up. The first and most important thing is to know how much you are short by and make a plan to catch up – e.g. in response to 1 privately funding leaving, you could look for 1 replacement or 2 new local authority funded residents to make up the shortfall.

Both – trying to tightly manage costs whilst trying to raise income is hard but it will speed up getting out of the red(behind budget) into the black, (being on track with the budget).

Managing staff hours / vacancies / use of agency and the budget

The key point here is that any critical staff vacancies – nurses, carers, seniors etc lay the home open to the use of temporary labour - agency staff.

There are several issues with this regarding budget:

Firstly, the labour cost will cost 1/3 to double the cost if you paid for the shift on your payroll. It may include travel costs too.

Secondly, regular use can weaken the team, encourage greater dependence, weaken the team spirit to dig deep and cover outstanding shifts from within.

Thirdly, over time, care quality may be impacted as more and more staff work at the service who do not KNOW the residents. This is not a question about the quality of agency staff – it is variable, the key thing is that the staff don’t know the residents and this multiples risk over time.

Fourthly, an unexpected consequence of habitual agency staff usage is that existing staff may get burnout, as they carry more and more of the shift. Ironically, this can lead to more staff attrition leading to greater agency usage. Don’t say I didn’t warn you!

Key take away

Key thing to remember is that the minute someone resigns (imminent gap in rota / possible agency usage) or whilst you have any critical posts not recruited for, today is the day to push those roles, advertise, call those candidates, follow through, get suitable interviews booked! You need to protect the home from agency, you need to protect your profit and loss statement, you need to deliver your budget. Habitual high agency usage (unless it’s in the budget) will block you achieving budget and once you get too far behind, it is very hard to draw back!

The difference between profit (private provider) vs surplus for a 3rd sector Care Home

Some of the key differences in cost structure between charities versus private providers are that charities don’t pay corporation tax, in some cases they have boards of directors who are unpaid.

This means their costs may be lower versus a private company so potentially, it may be better value for money than a private operator.

Charities also have a limit to what cash they keep, so if they make more than expected, it needs to be reinvested in the enterprise.

This means that they are social enterprises in being designed for sustainability as opposed to profit.

As a Care Home Manager, if you work in the 3rd sector (charity), you will be expected to achieve your surplus (instead of profit in a private company).

3rd sector companies have needs to cover costs, salaries, building costs just the same as a private company. Check out care home manager experience here.

Third sector operators expect managers to achieve budget / their surplus.

Just because it is called a “charity”, doesn’t mean a lack of focus or care about money! Every care service needs to be adequately financed.

A key part of that is staying viable through effective financial management... The Home Manager is key!

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