If your occupancy is lower than average and you have more empty beds than usual here is what you should AND shouldn’t do.
First, what you SHOULD do is not panic.
What you SHOULDN’T do is try to fill an empty bed for whatever bed fee you can get.
Of course, you want to fill empty beds – an empty bed doesn’t generate any revenue. But if the revenue doesn’t even cover your costs then that loss will harm your business and harm it every week, every month, and every year that this person is with you.
Resist the pressure to fill a bed for a low-fee client and you keep the door open to the possibility of filling it for the right fee. You could fill the bed the next day or the next week for the fee you need. And as you’ll see, even if you don’t fill it for a few weeks, you will financially recover on the right fee far quicker and better than if you accept a low fee.
Before I continue, if you feel pressure to fill an empty bed to meet a bank covenant occupancy clause please don’t.
I spoke with a regional director for a high street bank, who’s portfolio of customers is pretty much all care providers, about this dilemma. Should a care provider take a client at a loss just to meet the stipulated occupancy level?
He said no. They would rather you spoke with them as, “we would much prefer they received the fees they need so they are able to meet their financial obligations even if that means having a lower occupancy than the covenant requires. It’s a conversation we would want to have, and we would be flexible.”
So please do contact them if that is a concern.
If you’ve read my stuff before, you’ll know that I’m all about the numbers. To manage empty beds and not stress needlessly there is one number in particular that you need to know.
You need to know your minimum breakeven point for each resident.
This is the minimum cost for resident that is essentially your total weekly running cost divided by your number of beds or normal occupancy level.
This is also the minimum cost of any bed fee before any extra care costs and profit is added. So it’s a vitally important number to know.
To find out more about why knowing your breakeven point is so important read What is your Minimum Breakeven Point?
Ideally, you record all your fixed and staff costs on a monthly basis. Together they make up your monthly running cost and over time you will be able to establish and average monthly running cost.
Divide into weeks and by your normal occupancy level and you have your minimum breakeven cost per resident or client (for home care).
If you don’t currently record your costs on a monthly basis, I highly recommend that you start now.
Split your costs by departments, suppliers or types of spend and set monthly budgets so you can track and investigate overspend.
Controlling your costs is always important for a business but with the costs of living being so high and not coming down anytime soon, it has never been more important. So please record your costs and track your spend.
This may sound like a lot of effort but recording spend on a weekly basis is a relatively easy admin exercise that should only take a few hours depending on the size of your care home or home care operation.
The control and clarity you gain from being able to better manage your extremely high costs, see where savings can be made and set more accurate, justifiable bed fees, is well worth this relatively small effort
I created an Excel-based tool that recorded costs for our sister company’s nursing homes. In the past it has highlighted areas of large overspend that has then been investigated and brought back in line. It can reveal massive overspend that may not be otherwise spotted until you get your annual report from your accountant.
I recently launched an online version of this tool called The Care Running Cost Calculator. If you don’t currently have a way of recording your costs then click this link to check it out.
Ok, let’s get back to the empty beds
Here are two important ways to look at the financial impact of empty beds.
- 1. How long can a care home keep a bed empty before it will make an overall annual loss on that individual bed?
- 2. How many empty beds would it take to wipe out the care home’s entire profit for the year?
1. The Financial Impact of a Single Empty Bed
What is the financial impact of a single empty bed?
I’m going to use an example 50-bed nursing home to show how to calculate the impact of empty beds. Of course, your numbers will be different.
This 50-bed nursing home has a minimum breakeven point per resident of £900. (This is actually quite conservative.)
An empty bed or room won’t cost as much as an occupied one because it doesn’t need heating, lighting or cleaning and there isn’t anyone occupying the room who needs feeding and providing care for.
Your fixed costs per resident could be half what they normally are and your staff costs reduced because you may be able to reduce the need for agency or for staff to pick up extra shifts.
But for the sake of simplicity and doing the numbers here, we will assume that the cost of an empty room is still the minimum breakeven cost of £900.
Now let’s look at the financial impact if the care provider accepts an average fee versus the impact if the provider holds out for the fee he or she really needs.
According to the UK Care Guide, bed fees for nursing homes range from £35,000 to £55,000 a year. That equates to from £673.08 to £1,057.69 a week.
According to LaingBuisson, the average nursing fee for adult social care is £1,078. This is based on the average state-funded fee of £1,031 and average self-funded fee of £1,385.
Let’s go with the higher, LaingBuisson average fee of £1,078.
As you see, based on that fee and the home’s breakeven cost, the provider is making a 17% profit of £178 per resident. (Rounded up to the nearest percentage point.)
For the sake of simplicity, we’ll assume that all residents need the same level of care and cost £900 a week.
In reality you would need to take all your fees and work out the average fee and hence the fee you’re most likely to be asked to accept for a new client.
If the bed is empty for 4 weeks you see the cost when empty for 4 weeks and the profit when occupied for the remaining 48 weeks and hence the overall profit this provider makes over 52 weeks.
How long does the bed need to be empty, before the provider won’t make any profit in that 12-month period?
As the next table shows, if the bed is empty for 9 weeks and the provider then accepts a fee of £1,078, they won’t make a profit in the remaining 43 weeks of the 12-month period.
That’s just 9 weeks – just over two months – being empty for the bed to make no profit across the 12 months.
They would finally turn a profit after 46 weeks.
See how you can make better and more informed decisions when you know your numbers?
What if the provider held out for the bed fee they ideally need? If their breakeven point per resident is £900 and they want to make a healthy 30% profit margin, then the fee they need is £1,285.71.
By the way, if you don’t agree with my profit calculation then please read this post to check you are calculating profit the right way.
Read more: Calculate Your Profit the Wrong Way and You Could Lose Many Thousands of Pounds a Year
As you see from this table, after 9 weeks of being empty, the provider would still make a profit of £8,485.53 if the bed is filled on the 10th week for the target fee of £1,285.71.
How many weeks will the bed need to be empty in order for the provider to make a loss over the 12-month period?
The bed would need to be empty for 16 weeks before the provider would make a 12-month loss on it. That’s nearly twice as long.
And, because the profit is higher, the bed would switch back into making a profit just over a week later.
In a nutshell It can stay empty for longer and return the bed to profit quicker.
This highlights a very important point…
The more financially healthy your care home is, the more resilient it is to handle, and recover from, issues like empty beds.
2. How Many Empty Beds Would Completely Wipe Out Your Profit?
If you spread the cost of empty beds across your remaining number of residents you will be able to work out how many empty beds it would take for your care home to be in the red.
Say the 50-bed nursing home is down one bed. Spread that cost across the remaining 49 residents and you have an extra £18.37 cost added to the minimum breakeven point for each resident.
Two empty beds would cost £1800 divided across 48 residents which is £37.50 per resident and so on.
So how many empty beds can this provider tolerate before it is making a loss overall?
On the average fee of £1,078, this nursing home would make a profit of £178 a week. So, we need to work out how many empty beds would result in a cost increase per resident greater than £178.
As you see from the image 9 empty beds would result in an overall loss of profit for this nursing home.
That’s 18% empty or an occupancy level of 82% would put this nursing home in the red.
But what if the nursing home was receiving the target fee for each resident? How many empty beds would result in an overall loss of profit?
As you can see it would make an overall loss with 16 empty beds.
That’s 32% empty or an occupancy level of 68% to move into the red.
On 9 empty beds (which pushed the home into the red on the average referrer fee) if the home was receiving its target fees, 9 empty beds would still give it an overall profit of 15%.
Which in the current climate is better than a lot of care providers are making.
Again, see how much more resilient a care home is if it receives the fees it needs and how a provider need not panic but can instead hold out for the right fee.
As well as highlighting how much more resilient a financially healthy care home is when it comes to managing empty beds, it also highlights a useful finger-in-the-air check of your financial resilience.
If your care home is financially healthy then you should still be able to cover your running costs with 25% – 30% of your beds empty.
You see how working out the numbers gives you the clarity and power to make informed decisions?
I know it’s pretty obvious that the higher the fees the more a care home can cope with its empty beds, but please just take a minute to see what a difference this illustrates and how much more financially resilient it makes the care home.
Note especially how long it takes a bed on the average fee to return to profit compared to one that is filled at the right fee. But then how much quicker profit will build on the right fee.
You can panic and think that a bed is not covering your £900 weekly running cost, or you can know your numbers and, in this case, know you can soak up losing 1% off your profit for each empty bed.
On the right fees your care home can handle more empty beds for longer and more quickly recover once beds are filled.
If having empty beds has traditionally stressed you and if you have accepted low fees in order to fill them then I hope I have persuaded you to think twice, to not panic and to do your numbers so you can make the right decisions.
I also hope that I have demonstrated just how financially vulnerable care homes are if they accept the kinds of fees that councils want to pay.
If your care home accepts these kinds of fees then, more than ever it is vital that you review whether your residents are on the right fees and make your care home financially resilient enough to handle empty beds and other financial strains more strategically.
You must know your costs and your minimum breakeven cost per resident.
If you want to know how to accurately work out your minimum breakeven point per resident so you can review your current fees based on your current costs, download this report, 5 Steps to Make Your Care Business Financially Secure.
As well as showing you these steps you will see the Care Running Cost Calculator in more detail and I’ll introduce you to the Care Fee Calculator which is the only tool designed for the care sector that will help you calculate accurate fees.
This post was update from 8th October 2020.
