The four key finance metrics every care agency needs to know

Running a financially viable care business involves a unique set of challenges that ‘come with the territory’: small margins, high costs and high volatility. 

In a rapidly-changing environment, it's critical to understand what finance metrics can serve as important warning signs and red flags, and which ones are just noise. This article - drawn from Birdie's new eBook on 'How to grow your homecare business with the power of data' - sets out to answer that question.

Below, we'll explore the top four finance metrics that your business should be monitoring, measuring and optimising for every day.

1. Revenue 

What is it? 

The total amount of income generated by your business in a given period 

How does it help? 

This metric should always be growing: however, it shouldn’t be looked at in isolation (see the next section). 

Once you’ve got the total number, you should then break it down into how much you get from different sources - for example, public contracts versus private clients. To have a stable and profitable business, you should be aiming to diversify your sources of revenue: this is a critical consideration that many care businesses learn the hard way. 

For example, by balancing out public contracts (lower margins, but easier to get started with) with private contracts (higher margins, but harder to compete for), and even adding in other service provision such as cleaning services, you can better stabilise your revenue should one source experience fluctuations. 

As your business grows, you should start to break down this metric by different areas of your business (either geographically or by service line) in order to understand where you’re getting the most business, and where your biggest areas of opportunity are. 

Where you can find it 

Your accounting software and finance team.

2. Profit 

What is it? 

There are two different ways to look at profit margin: 

Gross profit is your revenue, minus the cost of care delivery (carer salaries, travel time and expenses). 

Net profit is your revenue, minus the cost of delivery and the rest of the costs of your business (including things like marketing, insurance and rent). 

How does it help? 

These two different calculations work in different ways:

Net profit is your critical metric; it should be growing in the same way that your revenue is growing (and it should be growing even if your revenue is static).

Gross profit is important because care worker costs make up the lion’s share of the cost of running a care business. This means that changing those costs even slightly - for example, in implementing pay rises (or on the inverse, reducing travel or waiting time) - can have a huge impact on profit. Monitoring this closely can help you with making quick decisions, but only if you already have a good handle on what your net profit looks like. 

Ultimately, profit is a litmus test for whether you’re applying the right resources and time to the right sources of revenue. If your profit margins are weak, your next step is to look at your operational efficiency (conveniently covered in the next chapter…).

Where you can find it 

Gross profit should be relatively simple to calculate based on what you know of your revenue and care worker expenditure. 

Net profit is slightly more challenging, as many of these costs (for example, insurance) are billed at wider intervals or might change across the year (for example, utilities). It’s important to put the effort into estimating them with as much accuracy as possible so you have as clear a picture as you can. 

For both of these margins, you should look to express them as a ‘per hour of care’ number. If you’re a Birdie user, you can also see a profit and loss report in your Birdie Analytics dashboard. 

Helpful benchmarks 

The Homecare Association now considers 5% to be a minimum rate of net profit for a financially sustainable care business. Use Birdie’s benchmarking tool to understand how your margin compares to other agencies.

To compare margins with other agencies in your area, it’s also helpful to check homecare.co.uk’s listings of agencies for sale, where turnover and EBITDA are listed under most profiles.

3. Quick cash ratio 

What is it? 

The money that your business has that’s ready for use (i.e. not tied up in investments and can be liquidated in less than 90 days). 

How does it help? 

They say that ‘revenue is vanity, profit is sanity, and cash is king’ - and in care, that’s more true than ever.

While the volatility of revenue in the care sector makes this important at all times, it’s even more so if you’re looking to invest in growth. Too little liquidity can put your whole business at risk if your plans take an unexpected turn and leave you unable to pay salaries. 

This is why we recommend looking at a ‘quick cash ratio’ rather than a ‘current cash ratio’ - the latter is a longer-term view. In care, a few months of slow or no revenue can mean the end of a business, so err on the side of caution. 

Where you can find it 

To calculate your quick ratio, add up your cash (including receivables and cash equivalents) and divide them by your current liabilities. 

Helpful benchmarks

A quick ratio above one is considered good - anything less and you may struggle to meet your liabilities if you were to experience a drop in revenue. 

4. Collections Effectiveness Index 

What is it? 

This is a slightly more complex calculation that shows how effectively you’re collecting payments. 

How does it help? 

Your collections and payments schedules are a big factor in how much quick cash you have: if you pay out before you get money in, you might find yourself frequently in a vulnerable position. 

Getting a good CEI means that you need to ensure that your invoices are accurate and out in time, but also that you keep a handle on your payment terms and collections policy.

Where you can find it

To calculate this, you’ll need to gather a number of metrics and put them through a calculation. We recommend using an online calculator such as the one here.

Helpful benchmarks

The closer your CEI percentage is to 100%, the better. If your CEI is less than 80%, treat this as your cue to review how you’re collecting payment. 

Ready to learn more? 

If you're keen to not just put your homecare business on a firm financial footing but to see it grow, then it's time to start taking data seriously. To get started on your journey to becoming a data-driven team (and reaping the rewards in revenue), download Birdie's new free eBook here.