5 Financial Areas Every Care Home Owner Should Be Reviewing

Running a care home means balancing the delivery of high-quality care with the financial realities of operating a complex business.

Staffing costs, occupancy levels, rising overheads, investment in facilities and equipment, cash flow and long-term planning can all have a major impact on profitability.

For care home owners and managers, good financial management is therefore about much more than producing annual accounts and meeting filing deadlines. The most useful financial information is the information that helps you understand what is happening in the business now, identify potential issues early and make better decisions for the future.

Here are five areas care home owners should be reviewing regularly.

1. Keep a close eye on staffing costs

For most care homes, staffing is the largest single cost within the business.

That means even relatively small changes in wages, overtime, agency use or sickness cover can have a significant effect on profitability.

Rather than simply looking at the total payroll figure, it is useful to monitor staffing costs in relation to turnover and occupancy.

If staffing costs are increasing more quickly than income, that may indicate a need to review rotas, agency usage, recruitment or wider working practices.

That does not mean reducing staffing at the expense of care quality. The aim is to understand where costs are changing and why, so that informed decisions can be made.

Tracking staff-to-turnover ratios over time can also help owners spot trends that may not be obvious from annual accounts alone. 

2. Understand the relationship between occupancy and profitability

High occupancy is important, but occupancy on its own does not tell you whether a care home is performing well financially.

The key question is whether income generated from occupied beds is sufficient to cover the true cost of delivering care while still producing a sustainable margin.

That means looking at occupancy alongside fee levels, staffing costs and operating expenses.

A home may appear busy but still experience pressure on profitability if costs are rising faster than income.

Regular management information can help identify that earlier.

It can also help owners understand the financial impact of relatively small changes in occupancy or fee levels and assess where improvements would make the greatest difference.

3. Use management accounts to make decisions earlier

Annual accounts are essential, but they are historical.

By the time they are produced, many of the events reflected in them may have happened months earlier.

Regular management accounts give owners a much clearer picture of how the business is performing throughout the year.

They can show changes in:

• Occupancy
• Revenue
• Staffing costs
• Agency spend
• Overheads
• Gross margin
• Cash position
• Overall profitability

The real value comes from using that information to make decisions.

If margins are falling, staffing costs are rising or cash reserves are reducing, it is much better to understand the reason while there is still time to act.

Good financial reporting should therefore help answer not only "what happened?" but also "why did it happen?" and "what should we do next?"

4. Plan for investment and reinvestment

Care homes require continued investment.

Buildings need maintaining, rooms and communal areas need updating, equipment needs replacing and regulatory requirements can create additional expenditure.

Where possible, these costs should form part of a wider financial plan rather than being treated as unexpected expenses.

If you know that significant refurbishment, equipment purchases or other capital expenditure will be needed over the next 12 to 24 months, that can be incorporated into cash-flow forecasts and tax planning.

It also allows owners to consider whether the business is generating enough profit and cash to support the required level of reinvestment.

This is particularly important for care businesses where maintaining the quality of the environment is closely linked to occupancy, reputation and long-term value.

There may also be tax reliefs or allowances available on certain investments, so discussing significant expenditure before committing to it can be worthwhile.

5. Monitor cash flow, not just profit

A profitable care home can still experience cash-flow pressure.

Tax payments, VAT, insurance renewals, major repairs, equipment purchases and other large expenses can all create periods where cash becomes tighter than expected.

This is why cash-flow forecasting is so important.

A forward-looking cash-flow forecast can help owners understand what is likely to happen over the coming months and prepare for major payments before they arrive.

It can also help answer practical questions such as:

• Can the business comfortably afford a planned refurbishment?
• Is there enough cash available for a major equipment purchase?
• Are reserves sufficient if occupancy temporarily falls?
• Will upcoming tax liabilities create pressure?
• Is borrowing required, and if so, when?

Cash-flow planning gives owners more options because decisions can be made earlier rather than in response to an immediate problem. 

Better information leads to better decisions

The common theme across all five areas is having the right information at the right time.

Care home owners need to understand not only whether the business is profitable, but what is driving that profitability.

That means looking at occupancy, staffing costs, margins, cash flow and future investment together rather than in isolation.

The earlier changes are identified, the more opportunity there is to respond.

At Franks Accountants, we work with residential homes, nursing homes and specialist care providers, helping owners understand their financial performance and make better-informed business decisions.

Our approach is proactive. Rather than simply producing accounts at the end of the year, we work with care home owners to monitor performance, identify issues early, plan ahead and understand what their numbers are telling them.

As a Gold Partner of the Devon Care Homes Collaborative, we look forward to sharing further practical financial and business insights with members throughout the year.

To find out more about Franks Accountants' specialist support for care homes, visit:

https://www.franksaccountants.co.uk/services/care-home-accountant/

Adam Franks