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5-19-2009 Part 2 of a 6 part series THE OPPORTUNITY COST OF A VACANT UNIT
Using Objective Thinking to Make Tough Financial Decisions  The opportunity cost concept been taught in business schools for the last 70 years. Simply defined, opportunity cost is the net financial benefit lost by either avoiding or rejecting some alternative course of action. Let’s put this definition into simple real world senior living terms. We often forget how very expensive chronically vacant assisted living units can be to our overall operation. We frequently perceive our vacant unit “lost profit” as being in the range of our current operating profit margin. That is clearly flawed thinking. The solution to excessive vacancies frequently lies in the execution of some alternative strategies that could involve additional one time costs. This “investment opportunity” frequently appears either elusive or too expensive. But by applying simple opportunity cost concepts we can bring a cost-benefit comparison of necessary alternatives into very sharp, quantitative focus. Let’s look at typical opportunity cost of just one vacant assisted living unit. We’ll start by asking three fundamental questions involving the expenses involved with just one more assisted living unit being occupied at relatively high occupancies:
Click to download full Part 2 newsletter ASSISTED LIVING COST CREEP
IS A FATAL BUSINESS DISEASE
Many Owner/Operators Are Experiencing a $1 Million-Plus Wake-Up Call Keeping monthly fees reasonably affordable for seniors is a crucial part of survival, success and profitability for assisted living providers. But equally crucial is the other end of that economic balancing act, ensuring that increasing resident acuity and the resulting creeping costs do not infiltrate your profit margin, leaving your bottom line depressed and possibly bleeding red ink. We now know that assisted living costs constantly shift. Containing these costs at acceptable levels has become one of the most significant challenges of the industry. It is generally recognized that initial fill-up and turnover rates are difficult to predict. Obviously, the typical assisted living resident suffers from chronic conditions that gradually – but predictably – deteriorate with time. This can result in significant cost creep and profit margin erosion if higher levels of care are provided without corresponding increases in pricing. In order to compensate for 45 to 50 percent annual resident turnover, many operators have modified their admission and discharge policies in an attempt to extend the average length of stay. Dealing with incontinence and dementia has become an accepted operating policy for most assisted living operators. Both public companies and private assisted living operators are chasing the elusive optimum operating profit margins in excess of 30 percent. Identified as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) by public companies, this critical ratio is defined as net operating income divided by net revenues. Connecticut Assisted Living Association 70 Halls Road, PO Box 483, Old Lyme, CT 06371 Ph: 860 434 5760 Fx: 860 434 8976 Email: info@ctassistedliving.com |
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