Cash flow in a new children's home's first year: what to plan for

A new children's home can be busy, well run and profitable on paper, and still run short of cash. That isn't a sign that something has gone wrong. It's the way the first year works: most of the money goes out before any placement income comes in, and the income that does arrive often comes later than planned.

When you apply to register with Ofsted, you have to include a cash-flow forecast showing your projected monthly income and expenditure for the first 12 months of operation. It's tempting to treat that as a box to tick for the application. It's much more useful than that. Done properly, it's the document that tells you how much money you need before you open, and when the tight weeks are likely to come.

Here are the five things I'd make sure any first-year forecast allows for.

1. The costs that come before registration

You'll be paying for the home well before you're allowed to use it. Rent or mortgage payments, utilities, insurance, furnishing, certificates and safety work, and registration fees for both the provider and the registered manager all fall due while you wait.

Ofsted is clear that it doesn't expect a full staff team at registration, but there must be enough staff for the home to open and be ready to accept its first child. So some of your payroll starts before you have any income at all.

How long that period lasts isn't entirely in your hands. Ofsted says applications that meet its priority criteria are generally decided within six months, as long as you provide the right information on time and are ready to open. For applications that don't meet the criteria, it can't give a timeframe. Plan for the wait to be longer than you hope, not shorter.

2. Occupancy builds up gradually

Your forecast will show the home's capacity. What it needs to show is how quickly that capacity actually fills.

Placements depend on matching the right child to the right home, and that takes time. A two-bed or four-bed home might take several months to reach the occupancy in your business plan. Meanwhile, much of your staffing cost is fixed: you need a safe rota whether you have one child or three.

A simple test: model your first year with occupancy building up month by month, rather than starting full, and see what happens to your cash. Then run it again with the first placement starting two months later than planned.

3. Income arrives after the work is done

Placement fees are usually invoiced monthly, and paid after the invoice is processed. So the fee for a child who arrives in March might not reach your bank account until April or May.

Public bodies buying under contracts covered by the Procurement Act 2023 have to pay valid invoices within 30 days. The important word is valid. An invoice that's missing a purchase order, quotes the wrong rate, or includes extras that haven't been agreed in writing can sit in a query queue for weeks. In practice, much of the delay providers experience comes down to paperwork, which means much of it can be prevented.

Before your first placement starts, it's worth agreeing exactly what each placing authority needs on an invoice, who approves it, and where it should be sent.

4. Staffing costs usually run ahead of plan in the early months

Recruitment takes time, and a new home often relies on agency staff or overtime to keep the rota safe while the permanent team is built. Agency cover typically costs more per hour than employed staff, so the early months can be more expensive than the steady-state budget suggests.

Sleep-ins need particular care. Time spent asleep on a sleep-in generally doesn't count towards National Minimum Wage, but time spent awake and working does. Getting this wrong can create back-pay liabilities later, so it's worth setting payroll up correctly from the first rota.

5. A buffer sized to your payroll

Payroll goes out on the same day every month, whether or not your invoices have been paid. That makes it the number to size your cash buffer against.

A practical starting point is to hold enough cash to cover at least one full payroll cycle, plus PAYE and your main fixed costs, on top of what your forecast says you need. If that isn't possible, it's better to know before you open, so you can arrange funding while you have time to do it properly.

Keep the forecast alive after you open

The forecast you submit with your application is a starting point, not a one-off. Once the home is open, I'd recommend rolling it forward every month for the next 8 to 12 weeks, updating it with:

• actual admissions and expected start dates
• invoices raised, and when each one is realistically likely to be paid
• payroll, agency and overtime costs from the latest rota
• PAYE, VAT (if it applies) and any loan repayments

That way, the tight weeks show up while there's still time to act on them.

Checklist before you open

• A 12-month cash-flow forecast, built month by month, with occupancy building up gradually
• A second version with the first placement two months later than planned
• Pre-opening costs listed in full, including registration fees and pre-opening payroll
• Invoicing requirements agreed with each placing authority
• Payroll set up for rotas, enhancements and sleep-ins
• A cash buffer of at least one payroll cycle, or a plan for how you'll fund it

If you'd like a second pair of eyes on your forecast, or help building one, I'm happy to have a no-obligation conversation. You can also try our free finance diagnostic, which shows how occupancy, staffing, debtors and cash work together.