We have talked for some weeks about prices, and have made the assumption that the gross margin a business needs to make, to cover costs other than care workers’ salaries and generate a profit, should be around 30%.
Actually that is a bit lazy, and we should dig a bit deeper.
Not least because local authorities, rightly, need to ensure that private sector companies aren’t gouging them for excess profit.
The lazy bit about 30% is that it depends on how many hours the agency is doing.
If the agency has many hours from the local authority, then the gross margin and hence the price can be lower.
Take the two examples of an agency doing 3000 hours per week, and another doing 1000 hours.
At a price of £18 per hour (this is for illustration purposes only – way too low), the bigger agency will be generating annual revenue of around £2.8m.
Its annual costs should be around £350,000. This includes staff of Branch Manager and Deputy Manager, and a contribution to central costs.
At a gross margin of 30%, this agency would be making around £490,000 profit, or 17.5% bottom line.
Annual costs for the smaller agency will be lower. One can estimate around £280,000. At 1000 hours it will generate £936,000 revenue and £280,800 of gross margin, or 0% bottom line. No profit at all.
The profit for the smaller agency is too small – non-existent in fact.
For the larger agency it is too big.
So what’s the answer?
A neat solution, which should suit both local authorities and companies, is for companies to offer local authorities discounts based on the volume of hours done.
So in the above case the smaller agency would charge at least £19 per hour, to try to make some profit.
But the larger agency could charge just £16 per hour and still make a profit of £180,000, or 7%.
So what we would like to see is local authorities setting prices say from 1 to 1000 hours per week, then cheaper price levels for volumes greater than this.