The care home sector currently faces a number of issues which will result in both winners and losers. Greg Palfrey, an advisory and restructuring specialist at Smith & Williamson, the accountancy and investment management group, explores the behaviours which he sees in successful operators.
As with the UK health care industry generally, care home provision is experiencing significant difficulties. Growing regulatory requirements, rising payroll costs, public funding restrictions, expectation of improved physical facilities and increasing establishment costs are all causing a gloomy view of the care home arena.
However, for care home providers it is not all bad news!
With the UK population aged over 65 set to increase by 15% over the next 7 years1 the already significant demand for care homes will continue to grow. There has been, and continues to be, consolidation within the sector and there is an improving appetite from funders, such as banks and equity houses, for the right business model. Although many operators and investors only want to acquire modern, purpose built homes there is still a future for the more traditional, smaller, care homes.
The key question many providers face is how to deliver a profitable business model that can satisfy the demand, balancing affordable fee levels with appropriate cost control.
How to succeed
Many successful operators share the following common attributes:
Consistently achieve good or outstanding Care Quality Commission (CQC) reports
This is achieved by implementing and regularly reviewing operational controls for personal care, medicines, hygiene etc. It may be beneficial to seek the opinion of a specialist regulatory adviser to not only keep you apprised of changing regulations but also to act as a devil’s advocate.
As a minimum, non-compliance with regulations will result in additional staff time/resource being required to instigate corrective action. Further, as CQC reports are public, adverse reports may cause families to look elsewhere when placing relatives or local authorities to cease placing new residents with the business. Continued failure to address concerns raised by CQC may result in an embargo being placed on the business taking new residents or ultimately, an order for the closure of the care home.
Develop and retain staff
Wage costs can often constitute circa 50% to 60% of care home revenue. Rising payroll costs have had a significant impact in recent years with increases in the national minimum wage, pension auto-enrolment, additional staff training and increasing use of agency staff having caused a dramatic rise in overall expenditure. High staff turnover is not only expensive, due to related agency and training costs, but also disruptive and therefore, detrimental to the operation of the business. A practical and targeted staff development programme may cost more in the short-term (both financially and in terms of time) but will deliver substantial long term financial benefits coupled with an increasingly motivated, efficient and technically astute workforce.
Retaining a balanced client mix
A key issue for all operators is understanding the optimum mix of self-funded versus local authority funded residents. A nationwide care home business needs to consider what services to provide as well as the geographical location of their operations as local authority weekly fees vary considerably across the country.
A successful care home operator will assess and continually monitor the volume of potential residents able to fully self-fund. The higher volume of wealthier individuals able to self-fund in the South East means that many leading operators are beginning to only invest there. Given the constraints on the level of local authority fees, care homes routinely need to be cross-subsidised by charging self-funders more.
A living and relevant business plan
Successful operators have a clear business plan both for the short term (often 12 months) and longer term (three to five years). This will be a formalised plan which is regularly reviewed (by owners and management), questioned and amended in the context of changing market conditions and trends. There should be no “sacred cows” but rigorous questioning of the business model as to whether it is still relevant, with changes being made based upon a realistic and objective strengths, weaknesses, opportunities and threats (SWOT) analysis.
Key questions which care operators might consider include;
• What are my unique selling points (USPs)?
• Who are my key competitors?
• What does the care sector look like now and how is it likely to change?
• Is my management and staffing structure appropriate to my current and future needs?
• Should my operation be solely elderly care or specific to physical disability or dementia services?
• What services can my business provide from its existing property?
• Based on my existing care home operation would it be feasible to develop a domiciliary care operation?
• Does the business need to make property changes or invest in new equipment?
• Should I be considering an acquisition, merger or sale?
• What funding options are available?
Strong financial control
Financial key performance indicators (KPIs) should be monitored on a regular basis to enable timely action to be taken to identify and rectify problems or to maximise returns where improved results are highlighted.
KPIs will often include occupancy rates, fee rates, debt ageing and collection, income and costs compared with revenue and cost forecasts as well as margins by separate business streams.
Good business practice would include preparing and monitoring:
• A rolling 12 week cash flow forecast.
• An annual forecast consisting of monthly linked profit and loss account, cash flow and balance sheet forecasts, together with a written summary of the key assumptions upon which they are based.
• Monthly management accounts comparing actual monthly and cumulative results with the forecast, explaining material variances.
• Action plans to address material adverse variances or to maximise the benefits that can be achieved from, say, positive sales or margin variances. Names and timescales should be allocated to each action and monitored to ensure achievement.
Review purchasing strategies
Purchasing strategies for material costs, such as energy, food and transport should be regularly and vigorously reviewed to ensure cost efficiency. For example, when examining energy costs the review should include not only looking at the use of purchasing groups and longer term supply agreements, but also energy saving measures such as insulation, and any available grants. Similarly, a review of food costs might encompass looking at the quality/prices from a range of suppliers together with seeking to reduce waste.
Actively manage the relationship with your funder
The provision of reliable financial and management information will give any current or potential funder confidence. Your forecasting system should enable you to predict funding shortfalls in advance and approach your funder not only with the problem but also your suggested solution. Similarly, well thought out, forward-planned capital expenditure and payback analyses are more likely to receive full consideration from funders.
Funders do not like surprises. Early identification of issues will provide both the business and the funders with greater options and is likely to result in a better solution for all concerned.
Whilst care businesses increasingly appear within our financial warning criteria, there is still a very successful care sector. Success in the care sector can typically be achieved by implementing the strategies and disciplines as summarised above.
There is a multitude of issues with which care home operators must deal on a daily basis. This often makes it difficult for them to take the necessary time out to review their business model afresh and implement appropriate changes. In these circumstances, we frequently work with operators to facilitate this process, bringing a fresh pair of eyes to bear.
In the words commonly attributed to Charles Darwin:
“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”