Budgets, love them or hate them, they are an essential part of operating a successful business.

This week on the Care Directions podcast Carrie talks with Carole Stone from Enmark Accountants about budgets for aged care services, why they are important, common terminology (and what it means), what the budget should include and how to monitor.

So who is Enmark?

Enmark is a firm of Chartered Accountants established in 2003. Enmark specialises in providing financial, advisory and assurance services in regional and remote Australia to individuals, business, not for profits (NFP) and local councils as well as Government departments and agencies. Carole is one of Enmark’s senior consultants. Carole originally hails from Canada but has made Australia her home for the past 20+ years. Recently Carole has been busy assisting remote aged care services with financial management, including service pricing to support the development of individual client budgets.

Here are Carole’s responses to the following questions.

Why should an aged care service have a budget separate to the organisational budget?

An organisation needs to know whether its aged care service is going to generate income, cost the organisation or have a nil impact on the organisations’ position.

An estimate of revenue for the year, together with an estimate of expenses for the year, allows the aged care manager to determine the net impact the aged care service is likely to have on the organisation’s resources. If a budget it not created, the organisation will not know if the Aged Care Service is profitable or sustainable.

Why does it matter if the Aged Care Service is profitable if the organisation as a whole is profitable? 

There is no point in being in the business of delivering aged care if it is costing the organisation money, even if the organisation is a not for profit. In fact, an organisation needs to generate a profit from the delivery of its aged services in order to fund future capital expenses associated with the aged care service. These future capital expenses should also be budgeted for.

Once you know what the expenses are, what then?

Once all costs of delivering aged care are known, the estimated income from providing those services can be determined, this will allow the organisation to know if a profit is likely to be made. If a profit is unlikely to be made, the organisation will need to look at whether it can increase the prices charged for aged care services and/or reduce variable expenses such as wages.

So the reason to have an aged care budget is to see if the service is profitable?

The main reasons to budget is to allow for effective planning and identify problems.

For example, if you reviewed the monthly aged care budget reports and noted that expenses exceeded revenue by a significant amount, you need a way to see where the problem lies? With an expected or budgeted amount for each revenue and expense item, it is easier to determine where the problem is likely to be and develop an appropriate response so that the service can be returned to profitability.

The previous podcast in this series looked at Strategic Planning. A budget should reflect the actions outlined in the Strategic Plan, taking into account staffing structures and service offered etc. The budget for an aged care service is in effect the financial component of the strategic plan. Preparing a well-considered budget can highlight areas that need to be addressed which will then allow the strategic goals to be met. The budgeting process also helps to identify potential issues and allows the business to make changes to address these before valuable resources are spent.

What should a budget include?

A service budget should be prepared for each month for a 12-month period and will include revenue, expenses and taxes.

Ideally the aged care budget should mirror the accounts in your organisation’s accounting system. Many standard accounting packages allow budgets to be prepared which then allow for easy year-to-date comparison.

So how are expenses budgeted for?

Budgeting for expenses is usually easier than projecting revenues.

Budgets should be based on the actual cost of providing an activity, but it is common to use the prior year’s expenses recorded in the accounting system as a basis for projecting current year expenses. Many organisations start with their current payroll structure, projecting salaries and on costs through the year, and split other known, or anticipated, expenses evenly over the 12-month period. If you are a start-up business, with no previous costs to refer to, the process of budgeting expenses can be more difficult and you need to look carefully and realistically at your anticipated costs.

It is important to ensure that all relevant expenses are picked up in the budgeting process. This includes overhead allocations as well as depreciation expenses on the assets of the Aged Care Service.

Payroll is an important area to consider carefully. One item we often see neglected is on-costs. These may include long service leave, holiday pay loading, payroll tax, workers compensation insurance and superannuation guarantee. The full cost of an employee is not just what you pay them each month. It also includes costs that accrue each pay day.

Some organisations underestimate or forget to include the additional administration or accounting cost associated with implementing the new reforms such as CDC reporting. The costs associated with repairs and maintenance, replacements and upgrades should also be included.

What about projected revenues?

Projecting revenues can be much more difficult, particularly in this changing aged care environment where Home Care Packages are portable. If an organisation delivers home care packages only, income items may include Medicare Subsidies as well as client contributions for meals and services.  If services are delivered to a Home Care Package recipient on behalf of another Provider, there may also be Brokerage fee income to consider.

To estimate subsidy revenue, a starting point would be to calculate the daily subsidy due from Medicare times the number of packages you are managing. This would allow the organisation to determine the estimated monthly subsidy income. There is the risk though that some consumers will take their package elsewhere during the year thereby reducing future subsidies in relation to those consumers. Alternatively you may gain additional clients and therefore package funds. Although these HCP funds are to be used for each individual client who will have their own budget, you still need to see the big picture when looking at income.

Projecting client contributions may be a simple as multiplying the client contribution for meals for example by the estimated number of meals for each month, adjusting again for days where the client may not be available. Projected brokerage fees can be based on your pricing schedule, multiplied by the estimated number of services you would expect to deliver during the year.

Where you might find cost efficiencies when developing a budget

When budgeting for the costs of aged care service delivery, consideration should be given to areas where there may be cost savings. The delivery of aged care services involve two types of costs.

  • Overhead costs which are often fixed and constant for the year and
  • Direct costs which often vary depending on the number of clients or services provided.

Overhead costs include things such as head office electricity, rent, phone, accounting and information technology support. For a remote service operating under a local Government structure, these expenses are often common to all divisions of the organisation and as a result are often allocated across the organisation on a relatively arbitrary basis, generally they cannot be avoided.

Other costs however are under the control of Aged Care management. These may be staff wages or purchases of equipment and products in relation to patient care such as continence pads.

Understandably, wages comprise a large portion of the costs of delivering aged care. If the staffing and scheduling mix is inappropriate, the service can lose money quickly. One key area to save wage costs is to ensure that you employ the right staff. You want to avoid having overqualified, and relatively expensive staff performing duties that could be performed by a “cheaper” staff member. Additionally, ensuring that your processes are efficient can reduce costs. For example, it may be efficient for staff to pick up laundry at the same time that they are delivering meals and home care to the client, provided you can do this in a safe manner.

Cost savings can also be made in the area of products purchases.  For example if you need to buy continence pads for clients these should be purchased in bulk where possible to reduce the cost per unit. Services should always shop around for the best prices for everything and it is best practice to try to get at least three quotes, especially where you are purchasing large items or large amounts of a particular item on a regular basis.

Sharing resources of the organisation can also help to reduce costs. For example, in the Northern Territory, the government funds a program called the School Nutrition Program. By sharing the kitchen facilities used for this program to prepare meals for package clients costs can be reduced, or the vehicles owned by a Council for example could be used for the service when needed allowing only a portion of the vehicle costs to be borne by the aged care service.

How to stay within budget – Monitoring income and expenditure

Having a budgeting and accounting system in place is of no use to the organisation if those results are not reviewed and monitored. It is crucial for management to understand whether their aged care delivery is profitable and to know quickly if things are not going to plan. The process of reviewing actual results against budget on a monthly basis is a key component of sound financial management.

Given that many Providers have only recently implemented service pricing, there may be some uncertainty as to whether the actual costs incurred to deliver aged care will exceed the revenue earned, particularly if the Provider was not rigorous in its costing and pricing processes. If prices charged are not exceeding expenses, management needs to know as soon as possible so that corrective action can be taken. Such corrective action may entail modifying the pricing structure, conducting a detailed review of costs per service, reviewing the accounts for accuracy or cutting costs. In a multi-location service, such as a regional Council, you may find that wages as a percentage of income is much higher in one location than in another or perhaps the cost of food is significantly higher from one particular supplier. Conducting a regular review and analysis helps to identify issues before they become big problems and identifies areas that require further investigation.

An example of how not monitoring the aged care budget was seen recently by Enmark who were called in to act as a Financial Controller of a Local Gov’t Council in a remote setting. Enmark was placed in the role because the Council was in serious financial trouble. After analysis, it became clear that the Aged Care division of the Council was a major source of the problem. It was losing a considerable amount of money each month. Investigation by Enmark revealed that the cashflow problem was due to a failure to lodge Medicare claims in a timely basis, client contributions were down and staffing levels and service provided to clients was higher than income allowed. If regular, detailed reviews of Council operations had been conducted, the Council would not have been in the dire position that it was.

Budget v actual what does this mean?

Comparing budget to actual results is a key management tool to keep the business on track. Each month, a comparison of actual revenue (income) and expenses to budgeted revenues and expenses is conducted.

For example, budgeted aged care revenue should be compared to actual revenue received. Any shortfalls identified can then be investigated and may be due to not lodging a Medicare claim in time, invoices not being raised for brokered services or a grant not coming in, this can then quickly be followed up, hopefully before cashflow suffers. Actual spend on expenses such as wages verses the budgeted wages for the month may identify overspends and a need to review staffing levels and scheduling.

This sounds like a detailed process. Who usually performs this budget to actual analysis?

Ideally an organisation will have a management accountant whose role is to analyse the monthly budget to actual results, identify issues, recommend corrective action, review cashflow adequacy and adjust the budget for new information.

The management accountant communicates with Aged Care Management and staff to obtain further information about the results and should prepare a monthly management report summarising and explaining the results.

Where organisations do not have the skills of a management accountant at their disposal they should consider engaging external support as this is a vital role that can help to keep the business on track.

How can an aged care service improve its results? 

  1. Maximise your revenues and cashflow Claiming for everything possible – are you ensuring you are sending out invoices on time or claiming correctly. This is a big one for some organisations as they don’t claim in a timely manner. Also with the change to HCP’s if they are providing brokered services they will need to invoice in a timely manner.
  2. Don’t deliver services that are not funded . Stay within scope, don’t doing more than you are funded for or can afford to supply. Another big one for some organisations with coordinators who want to be all things for their clients. They end up blowing their budgets. We always emphasise that if you don’t have it on scope then go looking for other ways of funding it or seek more funding.
  3. Review your pricing each year. The prices set for the services delivered should exceed the cost of delivering that service including Administration, Case Management and direct service provision. In addition to covering the full cost of service provision, prices should incorporate an amount for profit, capital purchases and contingencies. Services need to know and understand the full cost of delivering services by analyzing actual costs. The full cost of Case Management and time spent on reporting is often underestimated costing and pricing aged care services. Management must ensure that the prices charged exceed costs in order to ensure the service is viable and is able to continue to deliver care.
  4. Prepare a budget and review actual results against that budget each and every month.Don’t overlook this vital step, it is really important for organisations to continually monitor their situation and tweak what they do to ensure they remain viable and profitable.

This Podcast Episode is part of a series about the business side of community aged care. Check out the other podcasts on this topic:

CD011: Understanding Your Market

CD012: Understanding Your Product

CD013: Strategic Planning for Aged Care Services

CD015: Taking a Collaborative Approach

CD016: Marketing and Promotion for Aged Care Services

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Carrie and Kell

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