Don’t rely on your bank account to tell you what financial shape your business is in – here’s what to measure instead.
As a care business owner, we’re guessing you didn’t set out to be an accountant or bookkeeper. But as you’ve probably discovered, that’s one of the many hats you’ll need to wear when you start a business.
Good financial management means knowing exactly what state your current finances are in, and how sustainable they’ll be in the future. To get a really accurate financial picture, you can’t rely on what’s in your bank account; you’ll need to know the key indicators to effectively measure how you’re doing.
We’ve listed the 8 financial KPIs that will help you discover exactly where your care business stands. You don’t have to be an accountant or bookkeeper to understand them, just as you don’t need to be a mechanic to drive a car. We recommend choosing 3-5 KPIs that work best for you. Before you start, though – a little housekeeping.
Firstly, think about what represents success to you, so you have your own KPIs to measure against. Is it getting more enquiries? Higher package values? Secondly, make sure you’re working with ‘clean financial data’. You’ve probably heard the phrase ‘put rubbish in, get rubbish out’. Whether it’s your care management system or your bookkeeping system, incorrect or mistake-ridden data will be of no use and could mean you’re making big business decisions based on inaccurate information.
Thirdly, make sure you’re recording and gathering that data effectively; use software to help you, whether it’s your own care management software or accounting systems like Xero and Quickbooks. Last but not least, have someone to hold you accountable. It’s one thing to measure KPIs, but you could be unlikely to reach them without having someone to keep your goals in check. Choose someone who’s independent to your business with a firm but fair approach.
Now the housekeeping’s out of the way, read on to choose the 3-5 KPIs that best suit your needs:
#1. TOTAL REVENUE
Total revenue means the total amount of money received by you for the care and support services provided. Tracking this indicator will help you see whether your business is still effective in generating sales, and understand its financial strength.
#2. GROSS PROFIT MARGIN PERCENTAGE
This measures how much revenue is left after deducting all the costs directly related to the services you’ve provided, such as carer or caregiver salaries. This percentage shows how much is left to cover your overhead costs.
#3. REVENUE PER EMPLOYEE
This determines the productivity and efficiency of employees working in the business. It’s important to measure this, because for most care businesses, your team costs (wages, salaries, benefits etc) are your largest cost.
#4. BREAK-EVEN MARGIN OF SAFETY
Every business has a break-even point; it’s the amount of revenue needed to cover costs. Your margin of safety shows you the gap between your revenue and your break-even point. Measuring this margin shows you how much revenue you could afford to lose before you start to incur losses.
#5. OPERATING EXPENSE CASH BUFFER
So many businesses operate with no cash reserve, meaning there’s no buffer if things go wrong or you’re faced with unexpected circumstances – like a pandemic. Build up a cash buffer of at least 3 months’ worth of operating expenses – on top of the money you put aside for taxes due. This will give you breathing space to make considered, rather than rash, decisions.
#6. EMPLOYEE TURNOVER RATE
In a sector that faces high employee turnover and recruitment challenges, monitoring staff turnover in your care business is essential. If it starts to creep up, it could suggest issues within the team or with recruiting the right people.
If it starts to drop, you’re doing something right – so capture what’s working well and make sure it continues. Keep staff motivated and provide progression to ensure you retain your loyal workforce. On the other hand, if you’re losing staff, you may need to look at your business culture from top to bottom. High staff turnover is costly for your business and makes it difficult to provide quality, consistent care to your customers.
#7. AVERAGE PACKAGE VALUE
Understanding the average value of your care packages and monitoring how this figure fluctuates will help you see the type of package that’s most popular.
Margins on your lower level packages may be tight and if you have lots of these packages, it could stunt your business growth. Lower value packages also mean you need a higher volume of customers to generate enough profit.
#8. CUSTOMER RELIANCE RATIO
How reliant are you on one customer? You might have lots of clients but if they’re all with one local authority, it puts you at greater risk. It only takes one change to their payment structure or a new system that doesn’t go to plan, and you face not getting paid for a month or more – putting your business in instant danger.
If you’re heavily reliant on one customer, monitor what’s happening. If you hear they’re reviewing their brokerage system or hourly rates, you need to assess the risk to your business and manage this.
For more financial tips, advice and inspiration for care business owners, view our other insights here. Alternatively, book a call with one of our team to find out how we could help you improve your business finances and feel more confident about the future.