Earlier this year in our blog, we took a look at the top KPIs home healthcare agencies should be monitoring on a regular basis to help ensure a healthy business. Today, we want to take a closer look at one of those indicators – profit margin – and delve a little deeper to illustrate just how critical an understanding of this factor is to your home care business.
As part of our series on key performance indicators (KPIs), we have come across this great tool for more day-to-day operations. If you are an agency owner who finds that you do a lot of negotiations with prospective customers, or you are staying competitive by keeping your margins tight, then read on: we have some great insights for you as well.
Know Your Profit Margins When Negotiating with Clients
As a home care agency owner, you probably find yourself doing a lot of negotiations with prospective new clients. You may find yourself negotiating just about everything – from cost per hour and episode to the cost of a flat fee for a week or month. Negotiations can happen around pretty much any topic.
And just when you think you have won a new client’s business because you have offered them a great deal and equitable discount, they want to know how much of a savings that actually will be for them this week and over time. Now you are back to the calculator. When that happens, you may feel like you are fumbling for the information. You might feel a little out of control and your words don’t come easily because it is a bit stressful.
When a client asks questions about discounted rates, or specifically how much you are discounting per hour, they are really trying to make sense of everything in the manner that works for them. Having these numbers at the ready can take the stress out of it for you and put you in a more powerful position.
A word about your competitors: You can count on a good portion of the home care sector not being very organized in this area of their business. Most likely your competitors are not prepared to answer these questions in a professional manner. It may seem to their prospects that they are fumbling around trying to figure out the answers to this barrage of questions. Having these numbers at your fingertips puts you in the driver’s seat and potentially puts your competitors in the rearview mirror.
Calculating Profit Margin
What you need to know before starting negotiations with any client is the acceptable margin for your business. That means you need to know your operating costs and revenue numbers. Once you have determined those, you can use this spreadsheet we’ve created to help you with any future negotiations that may arise.
One caveat here is that we recommend that you use this only in specific cases. Don’t be nickel and dimed on every case. Stick to your posted prices for most situations and then provide great care. With great care, your satisfied customers will become “word of mouth” advertising gold for you.
There was a time when you might have expected 50 percent profit margins in the private pay home care market, but today with overtime and increased competition, a 30 to 40 percent margin is what some of our customers say is fairly typical for the industry.
Gather Important Numbers
To get started calculating the profit margin for your agency’s business, you will need to know the following. Note that you can calculate the profit margin without some of these elements, but it will not be as accurate.
- Acceptable Margin
- Current Rate/Hour (Revenue)
- Operating Costs
- Current Caregiver Rate
- All benefits that you pay out over and above caregiver wages
- Federal Unemployment Taxes
- Social Security
- Your State Unemployment Rate
- Worker’s Compensation (W/C) – premium and annual payroll
- Overhead to Manage Caregiver
- Other Overhead
- Additional Travel Expenses Allowance (if applicable)
- Overtime Pay (if applicable)
- Total Client Hours (for spreading out the cost of Overtime pay, if applicable)
Once you’ve gathered all of this information, plug in the numbers and really get a handle on them. Then the next time you are negotiating with a client, you will be prepared to have a great conversation – one that is about the great care you provide and not a lengthy and confusing discussion about fees.
Using this spreadsheet to calculate profit margin can also help you to decide if a specific client case actually works financially for your agency. In some cases, after running the numbers you may find that you will lose money on this case if you accept it. It can be heartbreaking, but ultimately it will enable you to have a strong, growing agency.
Need More Information about Calculating Profit Margins?
If you are a Rosemark System user and would like more information about calculating profit margin for your business and how to utilize the spreadsheet we’ve referenced in this post, please contact a Customer Care Manager and we’ll be happy to help.
Special thanks to long-time Shoshana Technologies customer and Rosemark user, Paul Gach of Visiting Angels, Charlotte, North Carolina for providing the original spreadsheet that he uses on a regular basis to grow his business.
Join the Discussion
What do you think? Have you spent a lot of time analyzing the profit margins for your business? Are you interested in reassessing the KPIs for your home healthcare agency? What other factors do you focus on when it comes to evaluating your business performance? Leave us a comment below.