Knowing how much it costs to run your care home is so important, but just how important? What difference does it make to the success of your care home?
Well, it can make far more difference than you might first think. In fact, it can make ALL the difference in the world.
Knowing your costs can be the difference between running a highly successful care home and one that struggles to get by and even stay afloat.
It can make a huge difference to how well you run your care home and how strong a leader you are.
Here are 5 key reasons why you must know your care home costs.
1. Set the Right Fees
This is the all-important number 1 reason for knowing your costs. If you don’t know your costs you cannot know if you are losing money on a particular resident and essentially subsidising some of the care they receive.
All businesses set prices that ensures they cover all costs. These prices could be based on volumes of products they forecast they will sell, like mobile phones or coffee, or it could be based on the service they deliver to however many customers.
Whatever the business models, the price will include a percentage of how much it costs to run their business. Your care home is no different.
The cost of running your care home needs to be divided across those who receive your service.
Once you have calculated that cost you have a minimum breakeven cost for all of your bed fees.
Average Hourly Cost
You deliver a service and therefore time is literally money.
Each of your residents need to receive a certain amount of care. Some of that care provision will be included in your running cost – basic care (see image).
But for nursing homes especially, residents will almost certainly require care beyond that ‘included’ provision – extra care.
It’s vital that you know how much daily basic care time each of your residents can receive and what that ‘care’ entails because any care delivered over that daily allowance needs to be added to your fee or you will be paying for it.
‘Basic care’ covers all the tasks that your care (and nurse) teams carry out, not just direct care delivery. For a residential home that might include some domestic duties and in all cases needs to include paperwork and other non-care tasks such as Coronavirus tests and checks and escorting visitors.
When you add this up you may well find that what you always considered basic care, such as help at mealtimes, should actually be classed as extra care and the cost of that task calculated.
To accurately calculate these costs of care you need to know the average hourly costs for your care and nurse teams.
Notice I say average hourly ‘cost’ instead of rate. An hourly rate could be the National Living Wage rate of £8.91, but the cost to the employer is more. On-cost in this sector is around 25% – 30%. 25% added onto £8.91 gives an hourly cost of £11.14.
Across your whole care team your average hourly rate could be £9 or more. 25% on-cost would bring that up to £11.25. This extra £2.25 every hour for every carer every day, week, month and year can add up to a massive amount of cost so please make sure you include it.
If you aren’t sure how to accurately calculate your average hourly rates then check out our free Average Hourly Rate Calculator.
Both running costs and average hourly costs are vital elements to setting the right fees and to ensuring that you are not paying for some of the care you are delivering. [Click to Tweet]
I detail how to accurately set and receive the right fees in my report, Will Your Care Home Survive This Crisis?
If you aren’t sure you are setting the right fees so you can deliver great care and return the vital profit your care home needs, then please download this report.
The title of the report is such because in it I first highlight how the sector is set up to make you fail and then move onto the key to running a successful care home in such a tough sector.
Fees and being financially viable is of course central to this and so how to calculate the right fees is a key part.
2. Manage Empty Beds
Knowing your costs means you can better manage those empty beds. When I say ‘manage’ I mean not panic and do a knee-jerk reaction to the empty bed and accept any fee offered.
An empty bed can actually be preferable to having an occupied bed for a low fee. But you can only know if this is the case when you know your costs.
When you know your costs you can work out how long your bed can stay empty for before before it becomes a financial loss for the remaining 12 months.
For example, in this image I show a 30-bed residential care home that has a running cost of £521.05 per resident. (Apologies for the .05 but I calculated a real running cost and this is how it came out weekly for each of the 30 beds.)I’ll ignore the things you can do to reduce the cost of an empty bed and stick to this cost when the bed is empty.
If the intention was to fill this bed for an ideal fee of £762.97 that returns a 30% profit margin of £241.92 (a healthy profit that should be aimed for) then the bed could remain empty for 16 weeks.
On week 17, it would fall into the red for the remaining 35 weeks of a 52-week period and produce and overall loss of £390.65.
If filled on week 18 for the ideal fee then on the 37th week of occupation the bed will once more return a profit.
If, however the care home was willing to accept the average fee that residential homes were paid in England last year of £596, then, as this next table shows, the bed could only stay empty for 6 weeks to remain profitable.
On week 7 the bed would fall into the red and wouldn’t make a profit for the remaining 45 weeks of the 52-week period.
If filled on week 7 on this low average fee, the bed wouldn’t return to profit for 49 weeks.
If you don’t receive the bed fee you need an empty bed will become loss-making far quicker and stay loss-making far longer than if you filled it for the right fee. [
And that’s for a single bed. When you know your costs you can also work out your worst-case scenario of how many empty beds you can handle before you just about break even.
In these examples, on the ideal fee of £762.97 for each resident, the care home would start making an overall loss if it had 10 empty beds. But on a fee of only £596, it would start making an overall loss with 4 empty beds.
You see how powerful knowing this is. How you can make informed decisions rather than knee-jerk reactions if you know your costs.
For more on this including how to work this out check out my post on managing empty beds.
3. Track Overspend
Any business needs to keep a handle on how much they spend. This is arguably even more important in the care sector which isn’t known for its high profit margins.
Every penny of your fee counts. If you record your spend in enough detail and regularly enough then you can see trends of spend and spot spikes. You can then question the reason for the increased trend or spike.
For example, if your kitchen spend is gradually increasing over a number of months (like in this image) you need to see that so you can question it.
Is your chef making decisions that is costing you more money? Or has a supplier increased their prices and you should be arranging to negotiate a new contract or look for a different supplier?
Staff is a big cost and you need to see and control this cost especially when it comes to agency staff which can increase dramatically.
If you don’t see these increased cost trends then you can’t act on them and you won’t know that the spend in an area of your business is getting out of hand.
When you record your spend on a monthly basis you can build an overall average spend and set monthly budgets so you can better see how well or not people are staying within agreed budgets. In this image you see the straight-line budgets and the actual monthly spend in comparison.
These charts are examples taken from a tool that we use to track our care home costs, called the Running Cost Calculator.
4. Be the Leader Your Care Home Needs
Recording and knowing your costs gives you the knowledge you need to be a better leader.
Knowing your costs means you will be able to make better decisions because you won’t be hoping for example that the bed fee you have agreed to is enough – you will know. [
Knowing how much it costs you to deliver care means you can negotiate for the right fee from a more confident and powerful position because you can argue what the impact on the client would be if you accepted a lower fee. I talk about how to negotiate from a stronger position in the report, Will Your Care Home Survive This Crisis?
As you have seen, knowing your costs also means you will manage empty beds better and have more control over your spend.
Knowing your costs means you are in more control because you are eliminating guesswork and instead making decisions based on hard facts.
Knowing your costs means you can keep your care home on course to be one that can succeed instead of one that struggles and fails like so many others do.
5. Have a Financially Strong, Successful Care Home.
The industry is set up to make you fail. If you have any doubt about that then please do read my report, Will Your Care Home Survive This Crisis?
Your customers – LAs and CCGs – don’t know how much care costs but neither do too many care providers and they succumb to the pressure commissioners put on them and eventually run out of money and close.
Your customers don’t know your business and they shouldn’t have a say as to how much they are willing to pay for your services. It’s your care home business and as such you need to be the one in control and set the prices you need to deliver a great service and make enough profit to keep going.
They think making 10% profit margin or less is perfectly acceptable. And that was before the pandemic which has cost care homes on average 10% of their revenue.
And this week’s announcement by the government regarding funding the NHS and social care by increasing NI, is woefully inadequate.
Do not rely on the government to help you run the care home you want to run. Take control of your care home and its destiny like any private business should. [Click to Tweet]
That control starts with knowing your costs.
I hope you see just how important it is that you accurately know your costs. You should aim to have all of your costs recorded so you can see on a monthly basis just how much your care home is costing to run.
If you don’t have a tool for recording your costs then do check out the Running Cost Calculator.