19 January 2015
Three key ways to measure the impact that aged care reform has had on your service
Six months on from the introduction of major reform across the aged care sector – providers are continuing to bed down new approaches.
But many are unsure about how to measure whether the new approaches are working, and what impacts the reforms are having on the bottom line for their services.
Do you have the tools to measure how your aged care service is being impacted by the reforms?
WHAT ARE THE KEY MEASURES?
Amongst a range of areas, the following financial ratios can provide you with a clear and reliable indication of how your service is being impacted by reforms:
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 latest Bentleys National Aged Care Survey showed that on average Net Profit Margin stands at 5.86 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. Improvements in Net Profit Margin are an indicator that changes are assisting with longer term sustainability.
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 latest Bentleys National Aged Care Survey was 3.50 per cent, indicating improvement across the industry is vital in order to boost investment.
If - like many across industry - your Return on Equity is lagging, you should explore the opportunities to improve your service in a way that attracts investment. For example, the removal of the demarcation between low and high care residents - and subsequent injection of revenue via accommodation charges - should be given greater focus.
Measure 3: Capital Structuring – Accommodation bonds as % of total financing:
Consumer capital funding – or Refundable Accommodation Deposits (RADs) – are an essential component of aged care provider capital structuring.
As a percentage of total capital financing, this funding source has grown from 16.8% in FY06 to 31.2% in FY 14.
Providers that record ongoing growth in this area are showing strong signs that they are being positively impacted by the reform initiatives. We predict that consumer capital will make up at least 50% of the capital funding of leading providers by 2020.