Calculating the Cost of Success

Central to the viability of businesses in the NDIS is a very simple concept that does not require a degree in quantum physics to understand. If your costs are greater than your revenue your business will not survive for long.

While this message sounds ominous, its simplicity also sends a message of hope and opportunity. With the NDIS, one of the key “known entities” will be the new pricing structure; so if you take your number of clients and attach to each the service you provide them, all you need to do is plug in the new fee for service to each and you have your total revenue from government.

Revenue = Services x Fee for Service.

The challenge however is understanding your true costs for these services. Again, simply put:

Revenue – Cost = Profit (viability).

Until now it has been simple enough to make these calculations at the end of the year through manipulation of your profit and loss statement. You simply add together your total income, deduct your total costs and voila – you have your bottom line. There are of course other issues to be factored in when it comes to your balance sheet; the basic principles however, remain the same.

Now that it is known that there will be significant change and in many cases a reduction in the fee for service provided by the NDIA, it will no longer be good enough to wait until the end of the year to do the sums.

So the time for reckoning is upon us, and one of the fundamental components in beginning to tackle this challenge will be to be able to identify the true unit cost of service provision.

But the reality is that in the service industry it is extremely difficult to articulate the exact cost of each of service. There are assumptions, drivers, exceptions, and a whole range of accounting and financial concepts couched in jargon that confuses the answer to the simple question: “What does it cost us to provide service ‘X’ to client ‘Y’?

A key message coming from the NDIS is that Boards and management will need to improve their financial literacy in order to be able to understand the issue of unit costing. However, another key message is that service providers must urgently invest time and effort to gain a clear understanding of the unit cost of their service delivery.

In practice, the key principles to effective unit costing will apply across the board for all service providers. They are not complicated, and they follow a straightforward formula.

In simple terms if you can articulate what your Direct Costs, Indirect Costs, Fixed Costs, and Variable Costs are you will have covered most of the groundwork necessary to establish your unit costing. Everything else such as drivers, assumptions and a range of other external issues impacting your overall costing become academic.

With this in mind, the costing process becomes far less daunting. There have been some wonderful tools developed (see the Financial section on our website) to assist with calculating the unit cost of service provision. These tools provide a ‘calculation engine’, whereby you enter in the data at one end and the unit cost comes out the other. There is not one specific tool that works for every business, and some reworking might very well be required, however each of these tools follow the same principles, which when understood can be applied in specific contexts.

To summarise, now is the time to undertake a rigorous analysis of your base costs. One of the easiest and most effective ways of doing this is by developing a ‘calculation engine’ which will ultimately become your unit costing tool. You can then apply it across your services and you will be in a position to establish an informed strategic view to not only survive but thrive in the new NDIS environment.