How to drive profit levels whilst managing increasing costs

Profit is the positive financial gain your business makes after you’ve paid all your expenses. For the survival of your business, it’s crucial you are able to generate a profit. It is more than just about making money – it’s also about the ability to use surplus funds to invest in and grow your business in the future.

As a business owner, it is crucial that you have a profit goal, so you can determine the  amount of profit you need to meet your commitments for now and the future. It will also help you direct your actions and strategies to reach your target.

In order to achieve your profit goal, you need to calculate your minimum sales requirement. That is, you need to work out the amount of turnover that will produce enough profit to cover your operating costs, plus your personal financial commitments.

Profit drivers

Profit drivers are factors that have a significant impact on your bottom line. Trading accounts and profit and loss statements usually contain information on profit drivers for a business, and can be extracted very easily. By identifying the profit drivers in your business and focusing on them, you can achieve the best growth results.

Financial profit drivers

Financial profit drivers are directly associated with financial figures and are usually considered in relation to profit. Examples include:

• Price
• Fixed costs
• Variable costs
• Sales volume

Non-financial profit drivers

Non-financial profit drivers also impact your bottom line, even though they’re not expressed in financial terms. Your CQC rating, for example, may impact the number of beds you can fill, which will increase or decrease your profit.

Non-financial profit drivers include:

• Staff productivity
• Client satisfaction
• CQC rating
• Training of employees
• Employee satisfaction (morale)
• Business culture and values

Ranking your profit drivers

If you haven’t already done so, think about your own business and the relative importance of its profit drivers. Once you have determined your profit drivers, work out why they’re important to the success of your business. This will help you rank your profit drivers from most important to least important in terms of their direct impact on your business goals.

The top profit drivers common to most businesses include:

• Increasing sales (turnover)
• Reducing cost of sales
• Reducing overhead expenses.

Strategies to improve profit

Once you have identified and measured your key profit drivers, you should develop strategies to grow them, without unnecessarily increasing costs. Making your business more profitable involves looking at ways to increase sales revenue, as well as decreasing your costs and benchmarking your business to see where you can save money.

Many businesspeople are preoccupied with getting more revenue, often from new customers. However, they often pay little regard to the customers they already have, and usually adopt the view that price is something over which they have very little control because of competitive pressure, they also believe that reducing costs is the most effective way to building a profitable business.

This is absolutely the wrong way to run a business. Even though it makes intuitive sense that cutting costs leads to improved profitability, there is a big qualifier to this. If a cost is necessary for you to do business (for example, staff costs), then reducing it may reduce your capacity to do business. Furthermore, the costs that can be reduced most easily are usually those of a “discretionary” nature, and these tend to be the ones geared toward building the future of your business (marketing, staff training etc.).

As far as pricing is concerned, you may think: “That sounds good in theory but if I increase my prices, how much business would I lose?” The question you should actually be asking, is: “How many customers could I lose and still make the same amount of profit?” The answer might surprise you.

For example, it is entirely possible that a company could raise its prices by 10%, lose 25% of its customers, and actually make more profit. In other words, the company could lose a quarter of its customers and still be better off. Furthermore, if that were to happen, which customers do you think the company might lose? We suspect that it might be those customers who are most price-sensitive and cause the greatest amount of stress for you your team.

You should also prioritise the strategies you’ve chosen to improve your profit so you can focus on the most important ones.

Strategies to increase sales revenue

Find new customers

• Generate and convert more enquiries – look at ways to increase the number of enquiries you generate, and subsequently convert into customers – empty beds don’t generate revenue!

Increase your number of beds

• Could you get more bedrooms (sales units) out of the space you have, without increasing fixed costs (e.g. admin staff salaries, utilities or rent)?

Find new markets

• Use market research to determine if you could expand your business into new areas. For example, Private pay customers are typically more profitable than local authority funded

Improve your CQC rating

• Research shows there is a clear correlation between high care standards and strong financial performance. Care homes with healthy profit margins upwards of 30% tend to have the best standards of care with 80-90% of these homes rated as ‘Good’ or ‘Outstanding’.  

Increase your prices

• Upgrade your facilities to meet your target fee level e.g. Add en-suites to your bedrooms

Use effective marketing strategies

• Engage with your local community and share positive stories on social media to generate PR. If people see positive coverage about your care home, this will generate enquiries.
• Use cost effective advertising tactics to make sure you are being found in places where people are looking for you. For example, targeted Facebook ads or a local billboard on a busy road.

Strategies to decrease costs

Decrease inventory

• Ensure your staff are using the correct products and following the best procedures to maximise the effectiveness and efficiency of the products you buy.
• Look at ways to reduce the number of products you purchase. For example, you could move paper-based tasks to a digital alternative. Another common issue in care homes is staff like to cover up a problem rather than deal with the root cause, for example urine odours can be masked with a de-odouriser but an enzyme-based solution will remove the bad bacteria that is causing the malodour.

Decrease direct costs

• Efficient processes could reduce the number of staff you need, without reducing quality. Choose suppliers that can help you be more efficient and reduce your workload, for example consolidated invoices can reduce the amount of time your payables team spends processing invoices.
• Or consider using robots to reduce loneliness rather than employ more staff!

Decrease indirect costs

• Try to minimise waste and errors in your business by training staff, or reduce marketing costs by using low-cost marketing techniques.

Decrease overheads

• Save energy wherever possible, or try find a cheaper energy supply company

Benchmark key financials

• Benchmarking your business helps you compare your costs (like rent and utilities etc) to similar businesses in your industry to see if you are paying too much.

Prioritise your strategies

Once you have chosen strategies to make your care home more profitable, you should prioritise them in order of importance. It’s a good idea to write down your goals and the corresponding strategies to achieve them, and how you plan to implement your strategies.

Focus on your more profitable services

Your services with the highest gross profit margin are the most important to your business, as they generate more money. Once you have identified your most profitable items, you should concentrate on achieving higher sales targets for them. This may require you to rethink aspects of your business or to devise strategies for improvement.

If you’d like advice on how your care home can increase its profits, or to find out more about our Global Connect software, then get in touch with us today. Alternatively, for the latest news in the care sector, head on over to our blog.

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