The practice of benchmarking key performance indicators (KPIs) is not new, yet it is an under-utilised management tool in the aged care sector.
Benchmarking provides management and the board or owners of private aged care facilities essential information comparing their organisation’s performance to others in the industry. Research has shown that facilities whose performance measures rank in the top quartile of their industry are much more profitable than those that rank in the bottom quartile.
While a lot of aged care facilities do not consider profit as their first priority, there are good reasons to benchmark financial KPIs to remain an effective and sustainable facility in the long run. A good facility manages the fine balance between achieving good financial results, maintaining their facilities in state of the art condition and providing excellent care to residents. Benchmarking against those who have achieved this fine balance can help to determine areas of improvement.
This year we gathered data during our audits of for-profit and not-for-profit Aged Care clients and presented it to their respective boards or owners, so that they could see how their Aged Care facility compares to others. Regardless of the size of the facility, meaningful comparisons can be made and valuable information can be shared with the boards or owners on what they are doing well and what can be improved.
What does this year’s benchmarking data tell us?
Employee cost per bed license
Employee cost per bed licence increased for most facilities by around 3% with the average being somewhat skewed by one facility that had a large decrease in this ratio. This was due to a large increase in the number of beds that the facility holds the licenses for.
The employee cost per bed license varied quite a large amount from the lowest ($45,000) to the highest ($96,000). Generally, the larger facilities can achieve economies of scale and keep the employee costs at a lower average amount than the smaller facilities. Other factors effecting this benchmark included large amounts of allowances and sub-optimal staffing mixes.
EBIT and EBITDA
EBIT (Earnings Before Interest and Tax) and EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) saw an average of 4% and 8% respectively for 2016 with facilities varying from -2% to 17% for EBITDA.
The left graph represents EBIT and the right EBITDA.
Facilities with a high EBITDA (16%-17%) included both larger and smaller facilities proving that the number of residents and staff are not the only factors in determining the bottom line. These facilities were typically more financially focussed, in that they are either a for-profit facility or they are amongst the more business minded not-for-profits.
Working Capital Ratio
The Working Capital Ratio for a facility is worked out by comparing their current assets and current liabilities. Normally a commercial organisation strives to obtain a working capital ratio of at least 1, meaning that they can pay all of their current liabilities out with their current assets. The 2016 average for the facilities was 0.39 with a range of 0.08 up to 0.74. Interestingly, none of the facilities were above 1 for this ratio in either 2015 or 2016.
A number of factors would have contributed to this including (i) facilities disclosing accommodation bond liabilities as current liabilities even though all of these amounts will not be repaid in the next 12 months, (ii) undergoing significant capital upgrades of the existing resident facilities, and (iii) using existing cash to invest in property and shares which are both classified as non-current assets.
Total Revenue per Bed License
As an average across all facilities, total revenue per bed license, increased nearly 6%. The range for this financial indicator was quite broad with the lowest amount being $77,000 and the highest being $167,000. The facilities with larger revenue per bed license tended to have a number of sources of income including interest, investments and other sources. This is a very important indicator and quite often correlates positively with the EBIT and EBITDA of the facilities. Those facilities with higher revenue per bed license tended to be more profit focussed and have had recent ACFI (Aged Care Funding Instrument) funding reviews.
The above graphs were just a small selection of those presented to our aged care facilities this year.
If you run an aged care facility or are involved in its finances, are you currently looking at your facility’s financial KPIs and comparing it to the industry benchmarks? Are you aware of what other Aged Care facilities are doing to improve their financial results?
If you would like to know how your facility compares or discuss areas of your facility’s business, please don’t hesitate to contact Accru. Accru Melbourne specialises in this sector.
