Based on our recent analysis, increasing numbers of care homes are showing signs of financial stress. In fact, 16% now appear to be at risk of failure, which is a substantial increase from the 12% of companies we identified as being financially stressed last year. That’s equivalent to almost one in six care homes.
Those working in the sector will not be surprised at the key causes. Care home operators are facing a double challenge: rising staff costs, but stagnant or even falling local authority funding.
Staff costs themselves are being pushed up by a combination of factors, starting with the increase to the National Living Wage (NLW) in April 2017, which rose to £7.50 an hour. As well as pushing up wages at the lower end of the pay scale, the NLW increase triggered pay rises for more experienced staff in order to keep the pay grade differential. Another driver of rising pay is the high level of demand for people to work in the care sector. The UK’s ageing population is fuelling demand for care, whereas attracting people to work in the sector can be difficult. When demand outstrips supply, wages have to rise.
According to NatWest’s Care Home Benchmarking report, staff costs at care homes have already reached an estimated all-time high of 55% of turnover due to the increased reliance on agency workers. Unfortunately, pay-related pressures are only likely to increase. The NLW is scheduled to increase to £9 an hour by 2020, while uncertainty over the future of EU personnel, who play a vital role in the UK care sector, is only fuelling concern over future staff shortages.
Meanwhile, local councils have been forced to cut their social care funding in order to balance their own books. As indicated by the Association of Directors of Adult Social Services, local authorities in England plan to make £824m of savings in their social care budgets in 2017/18.
From my experience working with troubled companies in the care sector, those most likely to get into difficulty are those most dependent on local authority contracts. Operators that have focused on the private end of the market – offering higher quality services and environments and charging an appropriate premium – have more financial wriggle room.
This doesn’t mean that all operators in the lower priced, local authority-driven segment are doomed to fail. However, they do need to keep a tight focus on the basics of good business, starting with cash control. Too many owners focus on occupancy rates and payroll – but overlook cash. Managing cash flows and planning for expected future expenses (such as replacing essential equipment to maintain care standards) is a vital starting point.
Making sure your organisation has the infrastructure it needs is also essential. For example, managing one or two homes successfully is easier than managing five or six. I’ve seen situations where problems in just one home can prove so distracting that other, previously good homes begin to struggle – operationally and financially. This is a problem, not least because one of the surest ways to get into financial difficulty is to receive a poor rating from the Care Quality Commission (CQC). However, inspections should not be feared – engaging properly with the CQC is to be encouraged as a way to identify potential issues before they develop into serious problems that could threaten the future viability of a care home.
Taking corrective action early is always the best option and Moore Stephens can provide you, and your care home with as little or as much support as needed. For more information, please contact me: lee.causer@moorestephens.com or 020 7334 9191.
