21 October 2013
What are the secrets to success for aged care services?
We define viability as the ability to survive. For operators of aged care businesses, that ability to survive is ultimately linked to financial performance and position.
Major funding reforms and an aging population have placed mounting pressure on providers in today’s market and balancing long term financial viability with rising expectations around client care and quality facilities is challenging.
The Government – both past and present – has introduced reforms to address these challenges, but the longevity and future growth of the sector doesn’t rely solely on government reform. Critical to success are “financially healthy” and resilient providers who can adapt to the new landscape and thrive in the long term.
But how do you know if your service is financially fit? Data from the 2012 Bentleys National Aged Care Survey revealed that many in the industry are struggling to achieve or sustain a position of profitability.
There are some key financial metrics that can help you to assess your service, and provide you with a yardstick for identifying areas for improvement.
HOW DOES YOUR SERVICE MEASURE UP?
Measure 1: Net Profit Margin:
Your Net Profit Margin is your average profitability (after structuring, investment and financing decisions) generated on each $1 of revenue.
To nurture future growth and long term industry sustainability – aged care providers should be aiming for a Net Profit Margin above 10 per cent. The 2012 Bentleys National Aged Care Survey showed that on average, Net Profit stands at 7.8 per cent for Australian providers.
Any number of factors can affect the profitability of a service including building configuration, location, staffing mix, resident mix, service offerings, use of accommodation bonds and the underlying condition of building stock. Understanding the impacts that each variable has on the bottom line performance of your service is critical.
Measure 2: Return on Equity:
Return on equity is the net income that is returned as a percentage of shareholder’s equity. It provides investors with a gauge of the viability and profitability of a service, and can be a powerful incentive to encourage equity capital injections into the sector.
Ideally, Return on Equity should be around 10-12 per cent. The average Return on Equity in the 2012 Bentleys National Aged Care Survey was 6.57 per cent, indicating that there is an urgent priority to improve performance across the industry in order to boost investment.
Measure 3: Capital Structuring – Accommodation bonds as % of total financing:
Consumer capital funding – currently known as accommodation bonds, but in the future to be known as Refundable Accommodation Deposits (RADs) – are an essential component of aged care provider capital structuring. We refer to this funding as Funds Under Management (FUM).
Our analysis for the Commonwealth Government identified that bonds as a percentage of total capital financing was 16.8% in FY06. This grew to 31.1% in FY12. Our long term forecasts indicate this funding source will make up at least 50% of the capital funding of leading providers by 2020.
Measure 4: Efficiency dividends:
A key element to measuring and improving the financial performance for your service is understanding the true cost of care and identifying how efficiencies can be achieved.
Efficiencies can be measured and managed in all aspects of aged care operations - from constraining budgets, re-allocating staff hours and using new technologies to save time and resources - to cutting down on administration costs.
Once delivered, efficiency dividends can make an enormous difference to your business’s performance. For example, the top 25% of residential aged care providers spent $1.95 less in administration costs per resident per day in the 2012 Bentleys National Aged Care Survey. For an 80-bed facility, that amounted to an extra $56,940 over a year.
Identifying opportunities for efficiency gains is more straightforward when activity based costing approaches are used to allocate overheads. By separating the discrete costs of care versus the costs of accommodation or services, you can gain a better understanding of your liquidity ratios such as current assets to current liabilities. The true relevance of classifying bond liabilities as current is also much clearer in the context of RADs and DAPs. The activity based costing approach also assists with the development of rolling three way forecasts – which are essential for the strategic planning of your business.
NOT SURE WHERE TO START?
Participation in the Bentleys National Aged Care Survey provides you with a methodology to calculate the measures and numbers for your service. In addition to the benchmarking benefits, the survey will also help you to develop your activity based costing analysis and inform your accommodation pricing strategies.
Since 1994, the Bentleys National Aged Care Survey has benchmarked the financial dynamics of the Australian aged care sector. This survey works with hundreds of providers across Australia to collect and collate financial and operational data and produce a comprehensive benchmarking tool. The Survey informs all industry stakeholders, from private and not-for-profit providers to financial institutions and government, about the key national issues and opportunities facing the sector.