Case Study – Aspire Care
(Names and places have been altered to protect client confidentiality)
Residential care home turning over £2.3m / year
Aspire is an established provider of specialist residential care to young people at risk of offending in the community. Located in Trafford, South Manchester, they operate 4 sites, each catering for 3 young people, giving a total provision at capacity of 12.
The residential care sector for young people is notorious from a business perspective for periods of ‘feast and famine’. Since opening up the sector to private investors in the early 1980s, the government has continued to oversee and regulate the industry. It remains highly regulated and accounts must be strong to satisfy inspectors. Although the homes are independent, government policy has a considerable influence over local authority decisions to put a child into care and, where care is required, over what type of provision is deemed suitable. This creates a high risk environment for private investors since government policy can change suddenly in response to high profile cases of abuse or neglect, effectively cutting off a revenue stream overnight or, conversely, shutting down competitors. For a business like Aspire, turning over £2.3m annually with only 12 potential revenue streams, this can create serious financial risk.
Robustness is a key feature of financial planning in this sector. Homes must be able to operate at a loss for a considerable period of time, and also have the flexibility to grow when times are good. This is difficult in an environment where staffing costs represent upwards of 50% of total revenue, and are relatively invariable: Trained staff familiar with the home environment must be on hand immediately if a placement is requested, and the high cost of agency staff means that overstaffing is often seen as the only solution.
The Story So Far
We joined the company 2 years ago. At this time the directors were handling the accounts themselves, an activity which proved very inefficient for them, tying up time that they would otherwise have spent developing and implementing a strategy for growth. They were turning a reasonable profit and paying themselves a decent salary each month, attracting a large number of referrals because of their unique approach and the high quality of the care they provided. As far as the business was concerned, however, they were living on the edge, invoicing monthly in advance in order to have enough money in the bank to pay their staff, and the bills at the end of the month. They lacked a coherent approach to projection and, despite high demand for their product, were scared to grow because of a lack of confidence in their financial control. By their own admission they were struggling to find a way to ride out the volatility of the sector and achieve a position of balance and stability.
One of the first things that we did for them was take over the bookkeeping and accounts. This dramatically increased the time the directors had available to get to grips with the business as a whole, and to develop strategy. Then, in the first year we oversaw the transition to an invoice period of 4 weekly in arrears. Since staffing costs and bills are paid, for the most part, monthly, this results in the creation of 13 incoming periods against only 12 outgoing periods. Paying costs upfront and collecting revenue in arrears quickly shifted the business away from a ‘hand-to-mouth’ existence and established a ‘bonus period’ with income but no outgoings, very useful for building capital and/or repairing deficits accumulated during the rest of the year.
Other issues for the company in the early period of our involvement were weak measures for staff costing, purchase ordering and petty cash. The directors knew roughly what their wage bill amounted to each month, and were able to cover it, but there were frequent absences, sickness, periods of overstaffing and confusion over rota-swaps that were not properly recorded. Purchase ordering for items like food for the young people, activities and transport was done by hand, filed and reviewed at the end of the month by the directors, and there were frequent episodes of missing receipts, overbuying and theft.
The Position Today
One of our major projects in the first year was the implementation of a system that keeps adequate track of staffing efficiencies and costs, handles purchase ordering and petty cash. In an industry where the professionalism of staff is paramount, it was important to strike a balance between giving responsibility and freedom to the staff, but also implementing double checks and reducing the incidence of losses.
We designed and implemented intranet-based software that handles the rota, electronically records absences and provides a facility for staff to initiate shift swaps which are then automatically updated, limiting confusion. As part of the implementation process we used existing data to produce bespoke reports that highlighted staffing inefficiencies; comparing total hours required, hours paid and hours actually worked. We then worked alongside the directors, using this data to streamline the rota and reduce costs. The reporting system is ongoing, continues to help with the optimisation of staffing ratios and limits the need to employ agency staff. We now handle all payroll and HR functions offsite, as well as providing ongoing IT infrastructure and support with our partners, Froya IT services.
Next, we overhauled the purchase ordering and petty cash systems. Senior staff are now required to complete statements, file receipts in a secure box and, importantly, hand over to each other at the shift change, such that they take shared responsibility for the veracity of their statements. This increase in responsibility for senior staff has dramatically reduced losses and helped to create a culture of greater professionalism. All data is now checked weekly by our bookkeepers to ensure that any mistakes are traceable.
Another key role for us has been the implementation of robust systems of projection and planning. In the care sector, “what if” projection is key to surviving the fluctuations of the market that result from political involvement. We have designed comprehensive financial models that allow the directors to get the answers to important questions like “How many months can Home 1 continue to operate with a loss of x amount per month?” Or “What level of capital do we need to add another home and achieve stability for a period of 6 months? What is the minimum level of occupancy acceptable for this?” Projections like these have allowed the directors to get back a sense of control over their finances, which has in turn brought them the confidence they need to grow further in a stable fashion, and to ride out volatility. In addition to these bespoke projections and reports, we also produce monthly management accounts, budgets and forecasts, and monitor the company’s performance in real time using an alert monitoring system that measures KPI indices. Because of this new flow of information, and changes to staffing efficiency, invoicing periods and a reduction of unauthorised losses, each home now operates with a minimum of £50,000 cash surplus, the directors are well informed and the company is well positioned for growth.
The future’s bright for Aspire Care Homes. They have the insight and the control they need to give them confidence to grow, despite, and even because of, the volatility of their sector. Key to their performance in the next 18 months will be the provision of non-financial information about the political and local authority environments, since these are the biggest determinants of projected revenue.
Using our experience in the sector, and our extensive list of contacts, we will provide this information and advise about optimum periods for growth. The current plan for the company is to grow organically over the coming year or more, adding one or two more homes of a similar size, operating under similar conditions. Once this growth is consolidated, they plan to diversify, offering specialist education services for the young people in their care, and other members of the community (these are currently commissioned from NT&AS, and local providers).
In the 3-5 year timeframe, the plan will be to change the business model, achieving growth through acquisition. As the company increases in size they will retain our services as a financial director, bringing most of their accountancy, HR and payroll provision back in-house. In this position we will continue to offer strategic advice, monthly reports and information, consult where necessary, manage and recruit the accountancy team and review the books at the end of each period. Our position as an organisation with a large, highly skilled workforce will mean that they receive the benefit of our collective experience for a fraction of the cost of employing someone full time in the FD role.
Apr 25, 2015