FEATURE
Staying Afloat
Joe Bates, partner at accountancy firm, Clement Keys, warns minimum wage increase could be catastrophic for care homes. He offers advice on how to weather the storm.
The proposed increase to the minimum wage, which is set to reach £7.20 an hour from April 2016, could force care homes out of business and significantly reduce the care available for state-funded residents. In order to overcome this challenge, care home managers must drive cost efficiencies and identify additional revenue streams to supplement their income as a matter of urgency.
Wages are by far the largest expense incurred by care institutions, with staff pay accounting for up to 70% of turnover. In addition, a large percentage of employees, approximately 40%, are currently paid the minimum wage. In view of this, care homes are likely to see a significant increase in their wage bill at a time when budgets are already stretched, leaving them at risk of financial distress. Martin Green, the chief executive of Care England, recently estimated that local authorities currently commission care for the elderly at £71 a week below its actual cost.
A rise in the minimum wage, without any corresponding increase in government funding will further reduce the economic viability of providing care provisions to state- funded residents and minimise the social impact of not-for-profit organisations. Unlike some long- term public sector contracts, such as the running of prisons or janitorial services for hospitals, care home grants do not adjust for inflation, which means the full cost
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increase must be absorbed by the care operator. To stay afloat, care homes must take measures now to bolster the balance sheet and improve their cash position.
Care home managers should begin by exploring what other services their institution can provide in order to boost income. To make best use of available resources, there are two immediate options; day care and domiciliary care. Day care provision provides an ideal expansion opportunity, as the service appeals to a wider pool of potential customers and allows staff to utilise their current expertise. In addition, the cost of caring for each resident per hour is reduced as overnight care and private living space are not required. It also increases the variety of people using the home and stimulation for the residents.
Domiciliary care may also represent a possible avenue for expansion. Again, this provision utilises the existing skill sets of employees and training can easily be provided to new staff brought in to service additional demand. Care-at-home services are calculated on a case-by- case basis so are subject to change; it is thought that in this area local authorities will bear a significant proportion of the expense incurred by the increase to minimum wage. As a result, institutions may wish to rebalance their resources across both live-in and home-based care to reduce their financial burden.
Aside from increasing revenues, efficiencies must be made where possible to reduce an organisation’s cost base. Crucially, only non-essential services should be considered for decommissioning and any changes made must not affect care standards as a whole. Typically, it is likely that value- added amenities will be the first to fall in the name of cost-cutting, including holistic therapies, entertainment and group outings, which is a great shame as far as quality of care is concerned.
Supplier contracts should also be reviewed. Smaller institutions may wish to drive economies of scale by sourcing a number of different services or supplies from the same vendor, in order to secure a cost saving. Similarly, larger firms may find that putting large contracts to tender for numerous homes in a specific region or nationwide could prove more cost effective. The company accounts should be carefully examined to provide a breakdown of spending. Services that are currently outsourced, such as recruitment or cleaning, could potentially operate more efficiently in- house and drive further cost savings.
In the period leading to April 2016, it is vital that care home managers take measures to ready themselves for an increase to the minimum wage. As margins are further eroded by a burgeoning wage bill, firms must make a concerted effort to drive cost savings and explore other revenue streams in order to survive.
www.clementkeys.co.uk www.tomorrowscare.co.uk
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