Your breakeven point is the foundation upon which the financial stability and hence sustainability of your care business rests.
The breakeven point in business refers to the level of sales or revenue at which total costs and total revenue are equal. At this point, a company is neither making a profit nor incurring a loss.
Understanding the breakeven point is important for several reasons:
- Profitability Analysis: By knowing your breakeven point, you can assess your profitability for the clients you have and the varying levels of care they need. This analysis helps in setting realistic fees, revenue and profit targets. It ultimately shows the financial sustainability of your care business.
- Decision Making: The breakeven point is a valuable tool for decision-making processes. It helps you to decide whether the fee a commissioner wants to pay is too low and to better manage empty beds. At a higher level it helps you evaluate the financial viability of expansion plans, investments in equipment, and other business decisions.
- Financial Planning: The breakeven point provides businesses with a reference point for financial planning. It helps in setting revenue goals, in setting spend budgets for the different areas of your business, and in determining the level of revenue required to achieve desired profit levels. By understanding the breakeven point, you can create more accurate and effective financial forecasts and budgets.
- Risk Assessment: The breakeven point helps identify the level of risk associated with a business decision. If the breakeven point is relatively high and bed fee below that level, the business will start incurring losses, which is a huge problem in the industry. This information enables businesses identify potential risks and take appropriate measures to mitigate them.
Your breakeven point is the point at which the income you are making from your bed fees is covering the cost of running your care home or home care service. A penny below is a loss and a penny above is a profit. This is why it is so important to get right.
Your overall breakeven point and hence profitability of your care business is dependent on two other breakeven points – a minimum breakeven point per client and an individual breakeven point per client.
An overall breakeven point that is essentially the cost of running your care business.
Spread your overall business costs equally amongst the number of clients you care for and you have a minimum breakeven point per client.
For example, if your total weekly cost (staff and fixed costs) is £50,000 and you have 50 clients then your minimum breakeven point is £1000 per client.
This is the minimum that each of your clients cost you.
Within that cost there will be a certain amount of care (and nursing for nursing homes) that each resident can receive each day. For care it may be around 4 hours and around an hour for nursing. (You need to calculate an accurate average hourly rate (with On-cost and Cover cost) in order to figure out how much care each person can receive each day as part of your care and nurse staff costs.)
For a purely residential home, this care allocation of around 4 hours of care may well be enough. If you run a nursing home then these 4 hours of care will cover some standard tasks but an hour for nursing certainly won’t be anywhere near enough.
If a person needs more care than this daily allowance then your breakeven point will increase to an individual breakeven point per client. An obvious example if those needing 1-to-1 care.
Knowing the minimum and individual breakeven points for each resident or client is crucial to ensure you are not paying for the any of the care you are delivering.
From accurately calculated individual breakeven points you can add your profit and set accurate fees.
These are essential steps to setting the right fees and having the numbers you need to defend and justify those fees when a commissioner challenges you and wants to impose their own fee level.
There are in fact 5 key steps to setting AND receiving the fee you need to ensure financially stability. I’ve set them out in my latest report, 5 Steps to Make Your Care Business Financially Secure in 2023 and Beyond.
In the report, I outline how to accurately calculate your minimum and individual breakeven points.
I detail how to best record and establish an average monthly fixed cost.
Staff costs are more complicated and I show how it should be based on your ideal staffing levels, in case you are low of staff right now, and accurately calculated average hourly rates for your different departments and hours worked plus salaried staff of course.
The steps for calculating your care (and nurse) staff costs will ensure you can accurately calculate how much ‘standard’ care each resident or client can receive each day and how much extra care provision costs so that you set accurate individual breakeven points.
I also show you how to calculate On-cost and Cover costs. This can easily add £3 or more to an hourly rate, so please don’t ignore these extra employer costs.
I also show how to calculate the correct fee that returns your target profit margin. Most people get this wrong. If you want to make a 30% profit and simply add 30% to your cost then you’re doing it wrong and your profit will be more like 23%.
I finally show how you can use the numbers you have established to confidently justify your fee and to know the financial impact should you accept a lower fee. This also applies to reviewing your current clients.
Download 5 Steps to Make Your Care Business Financially Secure in 2023 and Beyond.
About your current clients… if you haven’t reviewed your fees in the last 6 months then please do so with some urgency. Your costs have risen too much over that time for you not to and you may well be making a loss on some clients.
I hope you see how setting an accurate breakeven point for each of your clients is so important. It is the foundation that a fee, and ultimately your care business, is built on and is therefore crucial to get right.
Download the 5 Steps to Make Your Care Business Financially Secure in 2023 and Beyond and see how to set accurate individual breakeven points and from that set accurate, fully justifiable fees.
