A non-medical home care business is a service that is provided by caregivers and principally encompasses personal hygiene and care, assistance with mobility and activities, household chores, making meals, and monitoring the health for the elderly and the disabled.
Given the ageing baby boomer population, there has been a lot of interest in this space from entrepreneurs who are looking to start up.
Calculating the Profit Margin of Non-Medical Home Care Business
In this article, we will discuss how much profit and margins you are likely to make if you start a non-medical home care business. The profitability of your business will depend on how quickly you are able to scale and how well you are able to align your resources and costs with your business volumes.
Your business will only be profitable if you can successfully cover the fixed costs of your business – which may include payments made to permanent staff, rental payments for office premises, royalty payments (if you are a franchise owner), and the minimal marketing costs.
The flexible costs can then be incurred based on business volumes.
To arrive at the likely profits and margins of a non-medical home care business, below, we will look into the revenue stream and some of the major costs that the business will incur.
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Is Home Care a Good Business?
A non-medical home care business is one of the better businesses that you can look to set up. A few benefits of the business are as follows:
- You do not need to worry about the shrinking market size or customer segment. While in 2018, the seniors in the US demographics (65 years and above) comprised 16 percent of the population, this figure is expected to rise to 22 percent of the population by 2050, or in just about 30 years
- It is a great business where you can serve your community and help the elderly maintain an independent lifestyle while earning a profit – it helps you build trusted relationships over the medium to long term in your community
- The business is characterized by a very low risk of default on payments – that’s one headache that’s out of the way. The industry norm is to get pre-paid by your customers with a maximum credit period of 15 days.
Overview of Revenue of an Ongoing Business Against its Costs
A business performance metric that you should closely track is the revenue per customer (RPC) – you must aim for a higher than average RPC, which can be driven by client satisfaction.
High client satisfaction can manifest itself in a high RPC when your customers are willing to pay you more than the industry average for your caregiving services, or they employ more of your services, being satisfied with the existing ones.
The average revenue per customer for non-medical home health care businesses is somewhere between $2500 – $3500, depending on the responsibilities of the caregiver.
Once you achieve your target RPC and a pre-determined number of customers, only then you should look to expand your business beyond your stronghold area.
The major cost heads have been summarized below and we have estimated the margin that you should be making at each stage.
- Staff Cost: Typically, staff costs will make up about 60 – 65 percent of revenues and will constitute the largest cost bucket for you. Caregiving staff, technically, is the only raw material in your business. Therefore, the gross margin for your business should be in the range of 35 – 40 percent. While initially, you may lose money or have a lower margin due to permanent employees on your payroll and low business volumes, this is the guided margin percentage that your business should aim to achieve in the steady-state.
- Marketing and Business Promotion Cost: Marketing expenses including e-mail marketing and software for your healthcare business should ideally form the second major cost item, depending on the marketing campaigns that your business employs – typically it should be no more than 4 – 5 percent of your revenues. Over a period of running your business, you will be able to identify the more effective channels of marketing and then should be able to optimize marketing costs to about 3 percent of your revenues. Marketing revenues are also expected to come down gradually, as you will likely build reputation capital in your local area and generate leads automatically through word of mouth.
You may choose to spend less on marketing and promotion but offer a higher salary to your staff.
This will help you attract the best talent in town, which will help you, in turn, to attract more business through favorable word-of-mouth publicity.
Therefore, the staff cost and marketing expenses can be balanced out in the medium term, once you figure out what is working for your business.
- Rental Cost: Rental Cost, avoidable in the earlier days of your business, should not be more than 2 percent of your revenues. It is advisable to go for a low-key office set up, which is conveniently accessible by most of your staff.
- Franchise Fee: If you are running your business as a franchise, you must pay the franchise fee, typically, 2 – 3 percent of your revenues. While this may look high, it will provide you with the required training upfront and may also generate leads for you through the overall brand building exercises.
- Interest on Loan: Assuming that you are funding fifty percent of your initial startup cost through bank debt, your interest cost in the steady-state should be close to 4 – 5 percent of your revenues. It is obvious, however, that the lesser the loan, the higher will be your margins. Having said that, a lower debt percentage will also reduce your return on equity or the return on your own contribution.
- Miscellaneous Costs: Miscellaneous expenses include indirect costs that are incurred to keep your company running and exigency covers like insurance. Some of the common miscellaneous costs incurred by businesses in the non-medical home healthcare domain are accounting and legal expenses, utilities like electricity, telephone, heating, and the internet, website maintenance costs, and out-of-pocket repair costs. All these costs put together should not exceed 1 – 2 percent of your revenues.
At this stage, just before paying federal taxes, your profit margin should be in the range of 25 – 30 percent.
- Taxes: The percentage of taxes that you need to pay depends on the tax bracket your net income falls under and on the state in which you operate your business. Some key elements of the US business taxation system and relevant tax rates can be found here.
After-tax, the ballpark margin that you should be making in your non-medical home care business is approximately 20 percent.
While this is an approximate number, once you achieve this margin, you can further take advantage of operating scale to expand your margins. As an owner, you are free to pay yourself a dividend from these proceeds of the business.
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Is Home Health Care Business Profitable?
Therefore, as you can see from the above analysis, a non-medical home healthcare business will only be profitable once you can cover the bare minimum fixed costs of your business.
However, once you are able to do so, the business quickly scales on to become a profitable venture.
The profitability will likely increase with scale, as your fixed costs will remain the same (in absolute terms, they do not increase in the same proportion of your revenue – an example of this is your rental expenses – you are not likely to shift to a larger office with the addition of every 5 new customers) – only your incremental resource costs will partially offset your additional revenue from new customers.
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Home Care Business Owner Salary
As a non-medical home care business owner, you have two choices to collect your proceeds from the business – either pay yourself a salary or pay yourself dividends, from the proceeds after tax.
You can, of course, go for a combination of the two. While paying yourself a wage, you must keep in mind that the income in your hands will be taxed as per individual income tax brackets.
On the other hand, dividends are generally taxed at much lower rates than a salary income. However, there are pros and cons for both, and your accountant will be the right person to guide you regarding which one you should go for.
Having said that, dividend pay-out is once a quarter or once a year exercise. If you want more frequent cash flows from your business, you must pay yourself a wage.
As far as the quantum of salary is concerned, due to tax efficiency, you should consider paying yourself as low a salary as possible to meet your personal expenses, and dividend out the rest of the proceeds.
Finally, the profitability of your business will depend on how efficiently you can scale your operations and how closely you can control your costs.
While it is often counterproductive to control costs too much – they either lead to employee dissatisfaction or customer dissatisfaction – we should look to curb excesses like plush commercial offices, or overspending on a marketing channel which has not been giving you enough leads.
You must always acknowledge that a non-medical home care business works at the intersection of community service and a profitable enterprise and aims to improve the quality of life for the elderly in the golden years of their lives.