Wages and staff costs are a major part of the cost of running a care home. Best practices run at about 60% of overall income, but 70% and more is not unusual.
At a 10% profit level, before interest and tax, small increases in employee costs have a drastic effect on profit.
Conversely reductions in employee costs can significantly boost profit.
For a home with income of £1M per year, employee costs of £600,000 and a profit of £100,000 a 2% increase in employee costs reduces profit by over 10%.
So how can you reduce employee costs?
Wage rates
While keeping wage rates down is probably the most popular approach the room for manoeuvre is very limited. National Minimum Wage rates set a lower limit and, in most cases a margin above NMW is needed to attract and retain staff, especially those with NVQs. Where employees negotiate through a Trade Union, careful research and skilled negotiation may be necessary to avoid unwarranted increases in costs. Remember that 2%.
Recruitment
After the wages payments themselves recruitment is invariably the major cost in employing people. If it is being done time after time then it can suck the lifeblood from any business. But merely reducing levels of recruitment alone can improve the bottom line.
Good recruitment is a process involving understanding the labour market, having the best methods to attract applicants, using professional selection and training interviewers.
It is worth recruiting well because in administration, management time and induction training it costs an average of £3,000 to recruit an employee (Source CIPD) and “get them up to speed”. If you can do it for much less, then you are likely to be doing it again very soon. Poor recruitment will cost you a lot more in the medium term.
Reliability and attendance
Unreliable employees and poor attendees are hugely dis-proportionate in the cost impact they have on your business. Good selection is the first weapon against these but recognising offenders and acting early is crucial too. Some will get through to acquire full employment rights, but even there careful processes can deal with unwarranted absence and unreliability. One cost effective process is the return to work interview – well proven to reduce absence by 20%.
The care sector has high absence levels, around 12 ½ days a year per employee in some cases (CBI). The typical cost of a day’s absence based on £6 per hour pay and £12 per hour agency pay and including managerial disruption is around £100 In the worst cases that is £1,250 per employee per year! You simply “do not want to go there”.
Best practice achieves absence levels of around 5 days per year per employee. A saving of £750 per employee per year compared to the highest levels.