How much has the rise in the national living wage cost you? How much will it cost you for the rest of the year?
At the start of April the national living wage (NLW) increased by 6.5% to £8.20 for 21-24 year olds and by 6.2% to £8.72 for those 25 and over.
How much will your monthly staff bill increase by – £7000, £8000, more? A 50-bed nursing home’s staff bill could easily increase by £10,000 a month or more.
How will this year’s increase affect your care home and have you got it covered?
You know by now how much extra April’s staff bill has been and I would estimate that the overall monthly increase is at least the fee for one of your clients.
This isn’t quite a finger-in-the-air statement.
Let’s say your overall staff wages has increased by 6.2% – the NLW increase for 25s and over. I’ve assumed you’ll have some younger people at 6.5% and others who are on higher levels for whom you had increased to maintain the gap between pay grades.
So, your overall increase may not be 6.2% but it won’t be far off. (The overall increase for our nursing homes this month was around 6.5%.)
A 30-bed residential care home could have a monthly staff bill of say, £55,000, in which case an overall increase of 6.2% to £58,410 is an increase of £3,410 a month or £796 a week. (Based on a 30-day month.)
A 50-bed residential care home could have a monthly staff bill of £84,000 and a 6.2% increase would equate to an extra £5,208 a month or £1,215 a week. For some residential care homes this could be the equivalent of two clients.
Here is a table showing these numbers and also for equivalent sized nursing homes.
The increase this month and for the rest of the year could easily work out to be the equivalent of caring for at least one resident for free.
The next table below shows an example of staff cost rises from now to 2024 – based on the government’s current targets – for a care home that had an average monthly staff cost of £60,000 prior to this April’s NLW increase (2019-20).
This table shows that this care home’s staff cost has increased by £3,720 a month or £868 a week and by £45,260 a year.
At the end of the day, you know your own increase in staff costs and so can do the maths. If you’d like to use this table, to add your own monthly cost and see your potential increases through to 2024, then you can get a copy here.
Make sure you include your employer ‘on-costs’ as this makes a big difference (25% to 30%) to your overall staff costs. If the above example of £868 a week didn’t include on-cost, then (at 30%) the weekly staff cost increase would be £1,128.40 a week (an extra £260.40) or £4836 a month (and extra £1116).
Your staff costs have pretty much increased overnight but of course you can’t simply do the same with your fees to compensate.
So, for a while you will have to absorb this extra monthly cost and essentially subsidise some of the care your residents receive. (And you know that any annual uplift from your local authorities won’t cover this increase.)
How long can you comfortably pay this extra monthly amount for?
Your ability to absorb this extra cost is of course dependent on how financially strong and resilient your care home is – how profitable it is.
If you are making around 30% plus profit, then your care home should be resilient enough to manage this increase in your costs giving you time to address this loss without any significant impact to your care home’s financial health.
If you are making around 20% profit, then the financial impact on your care home is of course going to be greater and you will need to address this quicker to keep the financial impact to a minimum.
To be honest, 20% profit margin isn’t enough to sustain a healthy business and so, you should also plan how you are going to increase your profit margin to at least 30%. Now would be a good time to start.
If you are only making around 10% profit margin, then your care home is unlikely to be financially resilient enough to survive these kinds of cost rises.
Are your profit levels at around 10%?
If you do accept the kinds of low fees that your local authorities are happy to pay, then you are probably working on 10% or less profit margin.
I say this because this is the kind of profit level your local authorities expect you to work at.
Check out this post about signing up to new contracts. In it I show a screenshot survey from a local council. You’ll see they expect most care providers to tick a profit margin that is at 10% or below.
On top of these financial pressures you are also trying to survive the COVID-19 pandemic and you may well have more empty beds than usual.
Your costs have increased significantly overnight and you may have more empty beds than usual. What will happen if you ignore this? You will struggle and will eventually have to close your care home. All your residents will have to be found new homes and your staff will have to find new jobs.
How do I know? Because we have a decade of yearly record care home insolvencies that prove this to be the case.
You need to step back and decide now that you are going to put the wellbeing of your care home business first.
This is about your mindset. I talk more about your leadership mindset in this post.
I say, “you need to put the wellbeing of your care home first” because if care providers historically did, then the sector would not have lost record numbers of care homes to insolvency in the last decade.
Your customers – your local authorities and CCGs – have been able to pay you what they want to pay you and not pay you what you need.
This is a truly bizarre situation – where customers dictate the price for your service – which is so low that care providers have to make up the difference in the cost, when they deliver the care a resident needs.
And because this situation has gone unchallenged for far too long, regardless of year-on-year record insolvencies, it leads me to the conclusion that the wellbeing of the client overrides the wellbeing of the care home.
This order of priorities is, in my opinion, back to front.
Why the welfare of your care home should be your highest priority.
I won’t go into this here as I outline this argument – the devastating impact, of the customer dictating prices over the years, has had on the care sector – in my report The Secret to a Successful Care Home Business.
To fully understand why I say this and say the financial strength of your care home should be your top priority – even over the quality of the care your residents receive – then do read this report.
Addressing the financial strength of your care home business must now be your top priority before it’s too late.
Do this and you’ll see, in my report, that the outcome will be the best of care delivery for your residents.
Having hopefully, made the decision that you are going to address the financial stability of your care home, what next? Well, assuming that you won’t do this by reducing the quality of the service you offer, the only way you can do this is to increase your revenue so you do return a health profit.
You need to resolve that you will no longer succumb to the pressure, from your local authorities and other referrers, to accept the low fee levels they want to pay because this is the road to insolvency.
Now, I’m not talking about artificially increasing your fees without justification. I don’t advocate any finger in the air guessing.
What I am saying is, do the maths. Calculate the fees you need to deliver your services well and to return a healthy profit margin of 30% or more.
How are you going get all of your residents on the right fees?
1. If you have been setting fees your LAs are willing pay, then I suspect you haven’t been calculating accurately what the fee should be so this needs to be your first action – figure out how to set the right fees.
2. Set the right fees for all new clients and don’t succumb to pressure anymore.
3. Review all of your residents and assess if the fees you receive meet their care needs.
Low fees versus empty beds
By the way, I understand the concern with ending up with empty beds, if you don’t accept their fees, and I talk about this in the report too.
You can only change the fees of your current clients if their care needs have changed enough to warrant it. (Your LAs won’t increase fees just because your running costs have gone up. Unless you have an “Evergreen” client of course.)
So, make it a priority to review the care you deliver, and should deliver if you could afford to, to each of your residents. If their care needs have increased, and you have evidence to prove that, then arrange a (remote) review meeting with their referrer as soon as possible.
Meanwhile, calculate the fee you really need for that client versus the fee that you are actually receiving.
What fee do you really need that would give you 30% profit?
Setting the right fee needs to be an accurately costed exercise that covers:
- Your fixed costs (loans, fuel, food, utilities, training, etc).
- Your staff costs, which is by far your largest cost and from this month just increased further, and
- The true cost of delivering all of the care that this client needs.
Once you have your costs accurately calculated you will have the actual breakeven point for that client. A penny below this breakeven point and you are losing money.
Next you need to add a contingency factor.
If your clients’ needs don’t change in the next, say, 2 years what’s going to happen to the cost of caring for him or her and hence your profit?
You know your costs will increase and hence your profits reduce. So, we usually add around 2.5 to 3% ‘Impact Analysis’ percentage to cushion us against these future cost rises.
Then you add your required profit margin.
How to calculate your profit correctly
When I say add 30% profit margin, it’s not as straightforward as simply adding 30% to your cost figure. That would give you around 23% profit.
Check this post to see how to calculate your profit correctly.
It is vital that you calculate the right fee and not just guess and hope that your figures are correct.
Now, if you have never calculated your fees to the point of knowing that all your running costs are covered and that the cost of the care required is accurately calculated, then it can be a daunting exercise.
But it doesn’t need to be.
If you have any doubts that you can accurately calculate the right fees, then this tool, the Quality Care Calculator will help you get this right.
Please don’t put this off because, if you have been accepting the fees your LAs have pressured you into paying, I can pretty much guarantee that you are subsidising the care you deliver and hence making a loss.
And from this month onwards that loss will increase.
At their low fees your care home cannot be financially resilient, and this increase in the national living wage can only cause you even more financial harm.
Add to that the extra costs you’ve incurred because of COVID-19 and possibly the awful situation of losing clients to the virus – your care home’s financial viability could now be a matter of urgency.
When you calculate your fees accurately, you take back control from your referrers. You can negotiate confidently from a position of strength.
Imagine, discussing the fee you need, knowing that this is a genuine, carefully calculated fee with all guesswork eliminated.
How much more confident will you feel when you present it?
Knowing that you are presenting the right fee, for the wellbeing of both your client and your care home, will give you the certainty and confidence you need to negotiate the fee you really need.
If you decide that you have any leeway to reduce your fee slightly – because the financial benefit of reducing your profit somewhat, to fill one of the three empty beds you have, for example, outweighs the profit reduction – then at least you can make that decision knowing its impact.
The certainty and control shifts to you and away from your referrer.
But what if, in a client review, your local authority refuses to increase your fee to anywhere near what you need?
Well, you’ve calculated the fee you really need and you now know how much of this person’s care you’ve been paying for. You know the financial burden this person has been – possibly for years – and could be for years to come.
And now, if the maths just doesn’t work, you can confidently make the decision to serve notice on your referrer, so they have to find the person another care home.
I know this sounds harsh but what’s worse, doing that or accepting low fees and ending up insolvent (like record numbers of care homes do each year) and all of your residents being uprooted and placed elsewhere and all of your staff losing their jobs?
A fee that results in you caring for a person at a financial loss, is worse than an empty bed. Income is irrelevant if there is no profit.
Show, accurately calculated numbers because they don’t lie, and it’ll be so much harder for your referrer to argue against them and for you to agree to something that will financially harm you.
Don’t forget, the Care Act says an authority cannot knowingly hold back funding that will result in a person not receiving the care they need.
If you have simply been accepting the fees LAs insist they will pay (or if you have to bid online and have been reducing your fee to win a client) then you must stop. You are killing your business.
Because of the NLW rise, you have a large, step function, increase in your costs and you’ll get another next year and the year after that if the Government follow through with their plans to increase the NLW by 5% until they hit £10.50 an hour by 2024. (That’s £13.65 with on-cost included.)
You need to address this today
So, review and calculate the real fee you should be receiving for each of your clients and, if their needs have changed then have a review meeting.
For new clients, make sure you set the right fee from the start and don’t back-down when your LA objects to paying it.
Please act now and increase your fees to cover the care your clients’ need and to cover the increasing cost of running your care home.
The survival of your care home depends on this – please don’t put it off.
If you are not receiving the fees you need or if you don’t know how to accurately calculate this fee, then do check out the Quality Care Calculator. It really can help you.
If you are not convinced by anything I’ve said here about what your top priority should be, then please do read my report, The Secret to Running a Successful Care Home.