22 July 2014
Top Tips for managing the impacts of reform: Profitability Analysis
For aged care providers in Australia, understanding and managing the impacts of aged care reforms is vital to ensure that your service's financial viability is protected and strengthened.
Analysing profitability and managing the profit drivers for your service is a more straightforward process when your income and related expenses are aligned to the key business streams of accommodation, care and services. This also allows you to establish activity based costing models that will support the strategic management of your service.
The following tips provide you with key guidelines for adopting activity based costing models in your service.
Break your expenses down into the streams to identify what drives the profit and loss of your aged care service.
Like many aged care providers – staffing is likely to be the most significant expense for your service. Employee expenses consumed an average 65.61% of total expenses for Bentleys National Aged Care Survey participants in 2013.
By breaking your staffing costs down into the categories of accommodation (cleaning and maintenance staff), care (nursing and care staff) and services (activity staff, bus drivers, etc), you can better align your staffing costs to their relevant stream – and begin the process of profitability analysis.
Align income categories to the relevant streams.
Government subsidies received for residents should be separated from accommodation payments. Subsidies should cover the costs of providing care to residents (i.e. care staff employment costs and medical supplies). If these subsidies don’t match your care costs, your service needs to be able to identify how they will build profitability in one of the other streams to compensate for any shortfall.
DID YOU KNOW...
Bentleys has developed a Standard Chart of Accounts template for Aged Care to standardise reporting methodology and facilitate financial analysis across your three main business streams - Care, Accommodation and Services.
This Chart of Accounts aligns directly with the Bentleys National Aged Care Survey. This means that participation in the Survey requires minimal additional effort, and provides you with access to reports, benchmarks and financial diagnostic tools that will enhance your financial reporting.
Forecast for the future.
Using an activity based costing approach will help you to proactively map out how your business will grow.
Read more here.
Build variables into your forecasting model.
Test a range of scenarios to identify what the outcomes might be for your business under its best, base and worst operating, funding and growth conditions. While the future can’t be predicted, improvements can be made now to prepare for what it may bring.
Monitor your performance to manage the impacts of reform.
Regularly review and measure your expenses via an activity based costing framework to help you to quickly and accurately identify which streams within your service are performing most efficiently, and which require review.