Human services providers are the unsung heroes of our communities. Most didn’t seek out this career; we somehow fell into it. And yet we then became directors, CEOs, and owners of companies. This was often because of a personal experience, sometimes concerning a friend or family member.
For this reason, most people who run human services companies lead their agencies from the heart. This approach to leadership and management often makes it difficult to set limitations within the business, such as capping hours, denying unfunded services, or paying more for staff than reimbursement or budgets allow. In fact, what I often find when we conduct a financial valuation of a company getting ready to sell or planning for a transaction is that it often has little profit at the end of each year. When I discuss these numbers with potential buyers, especially those new in the space, I take the time to explain how human services companies are usually owned by entrepreneurs who run the business like a non-profit and are typically happy just to be in the black at the end of every month and year.
That’s how I was when I owned my human services business. No one talked to me about the importance of not only making a profit but setting the goal for at least a 10% profit margin. In fact, there is often a level of guilt associated with the idea of profiting from our businesses. This can be compounded by staff members who don’t understand why any profit isn’t just automatically reinvested in staff or services.
As human services business owners and operators, we should not apologize when our businesses earn a profit. Rather, it’s time to stop shielding our staff from the important discussion of budgets and bottom lines. They should have some exposure to the budgeting process and understand the need for a healthy bottom line. Here are seven reasons why your agency and its staff should work towards earning a consistent profit.
What COVID-19 has reminded us is the importance of saving for a rainy day. During the pandemic, many companies stopped providing services all together for several weeks, such as those providing therapeutic or day treatment services. Others had to determine how to provide the necessary 24-hour supports with enhanced safety measures. The financial burden felt by companies was not simply due to the lack of income, but the extra expenses associated with personal protective equipment, coronavirus testing, overtime, and heroes/hazard pay. Paycheck Protection Program loans have provided some relief for many small businesses, but numerous staff were still laid off and other businesses have been forced to close. Those that have survived and even strengthened their market position usually had a cushion in the bank that helped bridge the gap during closures and stay-at-home orders.
I have spoken to some providers that get paid 60-90 days after the first day of services rendered. This leads to a tight cashflow that can create challenges, such as when a new individual starts services. Establishing a positive relationship with a bank can be vital during this waiting period. To qualify for a line of credit that can help your business manage those 2-3 payroll months, banks want to see a healthy bottom line.
It takes money to make money. With a strong bottom line, your company will have the ability to invest in growth opportunities and take calculated risks.
4. Exit planning
After I sold my company and joined VERTESS, I learned that every dollar I spent unnecessarily to run my business was actually money that I could have earned in the final purchase price. In fact, if I received a 4x of adjusted EBITDA, I actually missed out on $4. Therefore, a $25,000 extraneous expense was essentially a loss of $100,000.
We often hire unnecessary staff or are relaxed about paying excessive overtime purely because there is enough money in the checking account to cover the cost. However, these inefficiencies will cost you as the seller when you decide to pull your equity out. Additionally, buyers are more interested in an organization that is run efficiently. They will likely eliminate unnecessary expenses post close. That additional revenue will go back to them, not you.
5. Economic Health
You can equate your bottom line to a report card for your business. A strong bottom line indicates that you are running your business efficiently and hopefully ensuring that you spend a bit less than you bring in. This is the recipe for a sustainable business.
Earned profits can be reinvested in your business in ways that create long-term sustainable value. For example, investments in technology can improve organizational performance and agility, community engagement, employee retention and morale, and enhanced security.
7. Enhanced social impact
Profit increases a company’s value. That value may allow for expanding the scope of services provided to people in need. Most new Medicaid-funded service applications include a request for a budget that will illustrate how the company’s financial stability will support the new line of services and cover the necessary startup expenses. Human services organizations exist to make a difference. When money is available to expand services, more people can be supported.
The Bottom Line as a Top Priority
Leaders in human services must know how to engage in real conversations with their staff about the importance of budgets, saving, and intelligent spending. These are often difficult discussions since it is perceived that the money in the bank should always go toward helping someone who doesn’t have services or staff members that deserve to be paid more — and there are a lot of those!
However, when you and your staff run your company with the sole goals of making payroll and keeping the lights on, you are jeopardizing the viability of the company. I witnessed one owner fail to pay the water bill for his homes because he didn’t have enough money in the bank to cover his expenses. Next thing he knew, the state was pulling people from the homes because a shutoff notice had been posted on the doors and officials were worried about the safety of the individuals who lived there — and rightfully so. If we can’t meet our financial obligations, we can’t continue to provide services. It is that simple. Profit helps ensure that day never comes.