Ofsted financial viability: what the numbers need to show for a new children's home

When you apply to register a children's home, Ofsted isn't only looking at whether you can care for children well. It also needs to be satisfied that the home can afford to keep doing so. That's what "financial viability" means in this context, and it's an area where a well-meaning application can come unstuck.

This article sets out what the rules actually require, what Ofsted asks you to send, and what I think the numbers need to show for them to be convincing.

What does "financially viable" mean for a children's home?

The starting point is regulation 47 of the Children's Homes (England) Regulations 2015. It says the registered provider must run the home in a way that is likely to keep it financially viable for the purpose of achieving the aims and objectives set out in its statement of purpose.

That link to the statement of purpose matters. Viability isn't judged in the abstract. The question is whether the money supports the home you've described: the number and needs of the children, the staffing model, the therapeutic or education support you've promised. A plan that only works if you staff the home more thinly than your statement of purpose implies isn't really viable.

The same regulation also requires you to keep adequate, up-to-date financial records, and to give Ofsted copies of them and your most recent accounts if it asks. So this isn't a one-off test at registration. Ofsted's inspection framework for children's homes treats it as part of good leadership: the provider is financially viable and can deliver high-quality, stable care for children.

What does Ofsted ask you to send with your application?

Ofsted's guidance on applying to register a children's home lists the financial viability evidence it expects. Unless you're a local authority or an NHS trust, you need to include:

• your business plan
• your cash-flow forecast
• your last two annual reports and accounts

New companies don't need to submit annual reports or accounts, because they won't have any yet. If you're part of a group, though, Ofsted also asks for the last two years' accounts for your holding company and all its subsidiaries.

Regulation 47 also gives Ofsted the power to ask for other information to assess viability, including:

• annual accounts for the home, certified by an accountant
• a reference from a bank giving an opinion on the provider's financial standing
• information on how the home and the provider are financed, and their financial resources
• information about any associated companies, where the provider is a company
• a certificate of insurance covering the provider's liability for damage, injury, death, public liability and other loss relating to the home

It's sensible to have these ready before you're asked, rather than chasing a bank or insurer while your application waits.

What should the business plan cover?

Ofsted says that, as a minimum, the business plan should include background information, a marketing plan, a financial plan and an operational plan. The operational plan should include a recruitment plan to support an increase in the number of children, and your plans for staff turnover and training.

From a finance point of view, I'd read that as Ofsted wanting to see that you've thought about the home growing and changing, not just the day it opens. The marketing plan should explain where your placements will come from. The financial plan should show what happens to costs as occupancy rises, and the operational plan should show who you'll recruit and when.

Ofsted has pointed out that business plans sometimes leave out the most obvious costs, such as staff salaries. Staffing is usually the largest cost in a children's home, so it should be the most carefully worked number in the plan.

What does the cash-flow forecast need to show?

Ofsted asks for a forecast of projected monthly income and expenditure for the first 12 months of operation. Monthly is the important word. An annual profit figure can hide months where cash runs out, and those are the months that put a new home at risk.

For the forecast to be credible, I'd expect it to show:

• Realistic occupancy. Placements built up month by month, not the home full from day one.
• Realistic fees. Weekly fees that match the children and needs described in your statement of purpose, and that you can explain if asked.
• Payment timing. Income shown when you expect to be paid, not when you invoice.
• Full staffing costs. The rota you actually need, including employer's National Insurance, pension contributions, sleep-ins, cover for training and leave, and some agency or overtime cost while you recruit.
• Fixed costs. Property, utilities, insurance, food, activities, vehicles, training, supervision and professional fees.
• Funding. Where the cash comes from to cover the months before income catches up: your own capital, a loan, or investment, and the evidence that it's available.

I've written separately about the cash-flow pressures in a new home's first year, which goes into the timing issues in more detail.

How do you make the numbers convincing?

Ofsted's inspection framework says inspectors make a lay person's assessment of financial information. They check whether the plans look broadly realistic and are likely to deliver at least acceptable outcomes for children. So the numbers need to make sense to someone who isn't an accountant. Ofsted has also said it will ask about your business plan at interview, which is the useful test. The registered provider, or the person nominated to speak for them, should be able to explain every major line in the forecast without notes.

A few things help:

• Show your assumptions. A short page explaining occupancy, fee levels, staffing ratios and payment terms makes the numbers easier to follow, and shows they weren't picked to make the totals work.
• Make the plan and the forecast agree. If the business plan says the home will reach full occupancy in month four, the forecast should say the same.
• Test the downside. Show what happens if the first placement starts two months late, or occupancy stays lower than planned, and how you'd fund the gap.
• Keep it consistent with the statement of purpose. Staffing, support and activities in the forecast should match what you've told Ofsted you'll provide.

Checklist before you submit

• Business plan covering background, marketing, financial and operational plans, including recruitment, staff turnover and training
• 12-month cash-flow forecast, month by month, with occupancy building up gradually
• A short note of the key assumptions behind the forecast
• Staffing costs priced from the actual rota, including on-costs and sleep-ins
• Evidence of the funding that covers the months before income catches up
• Last two years' accounts, if you're already trading, and group accounts if you're part of a group
• A bank reference and insurance certificate ready in case Ofsted asks
• A director or nominated individual who can explain the numbers at interview

The legal and regulatory side of registration is for you and, where you need them, specialist sector advisers. Where I can help is the financial side: building or reviewing the forecast, testing the assumptions and making sure the numbers tell a clear story. If that would be useful, I'm happy to have a no-obligation conversation. You can also try the free finance diagnostic or read the finance handbook.