By Jonathan Amponsah CTA FCCA. CEO of The Tax Guys
A recent survey revealed that 49% of all nurseries in England do not make profits. Parents, who believe child care costs are too high will be surprised by this. In a recent article by the National Day Nursery Association their chief executive said: “The nurseries closing tend to be small but much-loved and long-established preschools.”
How can nurseries like these improve their finances?
Review Your Business Model.
Knowing your target market and serving them well is a key profit driver so you need to ask questions.
Does the Free Hour Funding affect certain demographics or is it across the whole of your setting? Do you target certain age group? Do you know which age group makes you money? In a recent case study, a loss-making Nursery decided to focus mainly on a certain age group. Within six months, the nursey started to generate profits.
Get to grips with the numbers
Understanding your numbers is important to improving your finances and making decisions. One key number is your occupancy rate. This can help you make a decision on how to leverage the Free Hour Funding (see below). Other important numbers include: your break-even number, debtors figure and net profit percentage (or if you’re making a loss, your preferred profit figure.)
Use Free Hours Funding Strategically
One of the most powerful marketing words is FREE. Here are some ways Nurseries can use it to improve finances.
If you have excess capacity (say 70% occupancy rate) then use the free hour funding as a marketing tool. You have to pay for the rent and the staff whether you’re full or not. By offering One Month Free childcare, assuming a daily lunch cost of £2.50 over20 days your cost for the month will be £50. If this attracts a new child who stays for say three years, it will have big effect on your profits.
You can only allocate the free hours to days or sessions where you have low occupancy (Mondays and Fridays). Review the attendance profile in your setting to confirm the days and numbers. Here you will be getting some funding and contribution towards your fixed costs.
Another way to leverage the free hour funding is to consider increasing the average spend per family by adding ancillary products and services, and charging for all other services used (nappies, late pickups and others)
And finally; some successful settings recover the losses from the Free Hour Funding through the half terms and holidays when parents pay the full cost of childcare.
Avoid Profit and Cash Leakage
Many nurseries struggle with to manage cashflow. However there may be hidden cash!
For example, if you make, 10% profit margin and a parent owes you £1,000 and never pays, you have actually lost a whopping £10,000. You will need to get a fee of £10,000 to make back that £1,000 you lost (10% of £10,000 = £1,000)
Do you have a profit system in place to ensure that increases in the minimum wage and pension contributions are passed onto parents? Or do you simply absorb these? There are ways to makes small fee increments without losing clients. Most parents will understand. Will they take their kids elsewhere due to say a 4% rise?
Once these profit and cash leakages are blocked, Nurseries will see their finances improve.
Leverage Fixed Costs
For most settings, rent is likely to be the second biggest cost in running the nursery. Could you leverage the building and get additional income streams by offering after school clubs, parties at the weekends, or using the space for clubs in the evenings? Or could you acquire the property in a tax efficient manner?
Profit is an emotional word that can sit uncomfortably with Nursery owners. To deliver good quality childcare, you must embrace the profit mindset and make an acceptable level of profit. You must have systems to measure and monitor the level of profits for your business to survive long-term.
Get the Right Professional Support
Most nursery owners only meet their accountants to sign off year-end accounts and returns and miss the opportunity to ask about the numbers of their business and how to improve them. Seeking the right help, getting the right information at the right time and making a conscious business decision to improve the finances is another key attribute to turning a loss-making setting into a profitable one within a short space of time.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award-winning accountant and tax adviser specialising in helping Nurseries improve on their numbers. He is the CEO of The Tax Guys.