What’s up, everybody? It’s Steve, “The Hurricane”. And for today’s episode of “A Drink With The Hurricane,” we are going to give you tips on improving your profit margins. So raise that glass and let’s toast to your success. Cheers!
This is “A Drink With The Hurricane” the talk show discussing all things growing your home care business. This video is sponsored by Home Care Evolution, where we help home care agencies adapt to changing circumstances, transform their business so that they can thrive for years to come.
Profit and loss. This episode is all about the business. You got in business to make money. You chose home care as the type of business because you care about people and you want to help people. What a great way to earn a living! Make great money taking care of people and helping them stay home. You could do anything. You could open up a McDonald’s, a Burger King, a Dunkin’ Donuts. You can have a Starbucks. You can own a Verizon. You chose Home Care because I know you are a caring person and taking care of people and making money at the same time is a calling. You were called into this industry. As a result, as a business owner, you should make money.
Now I’m gonna tell you, the most recent Home Care Pulse Report is showing a three year trend by the way of profit margin. So take a look at this. This is the Home Care Pulse report, benchmark study, profit and loss statement for agencies in 2021. This data just came out a couple weeks ago. And you see all the revenue ranges here. You got agencies that are doing under 800,000 in revenue. Then you have 800,000 to about one and a half million. Then you have one and a half million to about 3 million, 3 million to five. And then you have your masters who are doing over $5 million in revenue. So the median revenue generating of all of the 700 agencies with a thousand plus locations surveyed to come up with this data is that middle category of people doing one and a half million to $3 million in revenue. And you see the median range is about a $2 million agency.
So let’s use that for a moment here. You look down at the first thing, total cost of direct care. This is everything given to your caregivers, their bonuses, overtime, actual wages, perks and benefits of the job. All of this is factored into it. 62.2% of your total annual revenue went towards all things caregivers. The next bracket down is, caregiver recruitment and retention expenses. This is all things associated with getting and onboarding a caregiver to work for your agency. So we’re gonna add to this 62.2%, 3.3% which now gives you 65.5% of your total annual revenue goes towards all things caregivers and getting caregivers to work for you.
Next, let’s go down to sales and marketing because it costs us money to get clients and SEO of our website, marketing rep salaries, lunch and learns, sponsoring activities, all that other good stuff promo items and tchotchkes, all that cost money on average 4.6% of your total annual revenue or about 5% which is what I do recommend as a consultant goes into it. So now you add that to the 65.5%, and that gives you 70.1%. Now, moving down to the very bottom for all operating expenses, franchise, royalties, your CRM software that you’re using, your rent, your utilities, office staff salaries and bonuses and other things all factored into this comes out to 22.7%. And when you add that all up, it comes out to just shy of 93% of $2 million goes towards running and operating your business. Now, if I were to take $2 million and multiply that by 93% that means that as the owner of a $2 million business, I only generated $186,000. That’s not good enough for a $2 million business. The small business administration recommends that the average business owner generates 20 maybe 25% total profit off of all revenue generated which means if I have a $2 million business I should have $400,000 as profit, not $186,000. When I have only $186,000 or 7% profit, that means I can’t give raises to my staff. That means that I’m struggling to cover payroll expenses for my caregivers. That means I can’t invest in training and scaling and growing my business because I barely have enough money left over to live. And it also means God forbid something happens and we have a bad quarter, I don’t even have enough money for me to pay myself to get through this three month storm that I’m living.
This is a problem because this is the industry average. Even let’s go to the masters and move over a couple of categories. The average master survey is doing $7.7 million in revenue but their profit margin at the end of the day is still only 14%. Now yes 14% is $7.7 million is still a lot more than 186,000. That’s actually closer to a million in revenue, but again an agency that size only 14% profit when it should be 20 to 25%, these are problems and challenges. And so the biggest tip of advice that I can give you, on increasing your profit margins is to take a look at your target customer and make sure that the people that you’re bringing into your business are those N.E.R.D.s. Great need, elderly, resources, disabled and or dementia. When you are bringing in that type of customer that will allow you to charge the rates you need to charge so that you can pay caregivers, 50% margins which makes up the difference and gets your business over the 20% profit margin. That’s where it comes down to. We’re giving too much of the revenue away to the caregivers. We cannot pay caregivers less. If anything we gotta pay our caregivers more to get them to do the work. So it means that we need to charge more to be able to offset to make the business profitable the way that it needs to be.
Now, I know a lot of folks have issues with that. They’re like “Steve, but what about the person who can’t afford it?” “Or what about the person who only has so much income?” This is where I’m gonna describe right now the three different types of people who need care. In the United States of America, our revenues are as follows: the bottom 40% income earners are on Medicaid. The good news for Medicaid recipients is they can get services through Medicaid. There’s Medicaid agencies that provide home health aids for those people. There are services such as assisted living, adult daycare and nursing homes that are available that accept direct Medicaid. That’s what those individuals will do to get care. The next bracket, which is about 40% of the population, these folks are the people who have some resources but they don’t have unlimited. The unfortunate thing I will tell you, is they are not a N.E.R.D. target customer because they lack the resources to be able to afford the agency and this is where a lot of agency owners have a hard time. Caring.com, care.com and other websites where someone can hire a caregiver directly, that is much more affordable and that is what’s available to the individuals who have some resources but it’s not a high enough resource to afford the higher rates. And I know that sounds hard, but it’s the truth though there are resources. So that’s what these folks can afford. That’s where they have to go to get the care.
Now we all know there’s disadvantages like if that caregiver calls out there is no backup, there’s no oversight this is why you go with an agency, right? But this is also why an agency costs more money because you have to pay for that. Which now means that from a financial aspect you’re really targeting the top 20% in a geographic area. So it’s the person who has the greatest needs, who’s elderly, who’s disabled, who falls in this top 20% who can afford the level of care. The good news, because there’s always a good news on this for the agency owner out there, you don’t need to have thousands of clients on your services in a geographic area. The average agency survey by the Home Care Pulse last year, only signed on and started 60 new patients. That’s like one patient every single week. It does not take a lot of work and effort to get one patient every single week. As a matter of fact, my clients average more than double that. 120 patients a year. So you’re not trying to find and serve everybody in your market, but rather the top 20% with the greatest need which when I go through, at the Home Care Evolution conference or you can actually read it, when I break it down in the ‘Home Care Evolution Quarterly’ magazine, you can get this by subscribing to it. It’s free on my website, homecareevolution.com and then you can get your subscription where you can access it, and you can read the articles that have been written in there.
But I talk about how many people fall into this top 20% income bracket with great need in every single market. Even if you only have a hundred thousand people that you’re servicing, there’s at least 800 patients who can afford the services who are looking for care who need an agency to take care of them. You sign on 60 to 80 of those patients and you’re gonna scale and grow your business to four and $5 million. Like many of my clients do. So there’s your tip. Understand your target customer, understand that there are folks who have some resources and don’t just turn them away. Show them where they can get the care that they can afford. Like that’s doing right by the patient, help the patient. Don’t provide the care, help them get to someone who can provide the care at the level they can afford and then take care of your 80 plus clients that are signing up with you every single year. We’re literally talking about, one, two new clients every single week at the proper margin that will help you, so that you can run your business, give raises to your employees, and make the income that you should be making all while providing a superior service. Because your caregivers will provide better work when they’re compensated appropriately, and those patients who are using you, who can afford using you at the higher rates, they will get a superior level of service that’s not being provided right now.
You can do this. If you want help with this, this is all that we do for 10 plus years now. I have helped thousands of agencies all over the planet, blow away the competition.
So folks, I’m Steve “The Hurricane”, I’ve spent three days teaching all these people how to–
“Blow away the competition!”