Budgets - Part I: Childcare Centers
Keeping a budget for your childcare center is crucial. A budget allows you to plan how you will operate your business, taking into consideration expected income and expenses during a 12-month period. A budget helps you develop your strategy for making money during a fiscal year (Jack, 2005).
A budget is created once a year. Once you set your budget for the year, use it as a tool to measure your performance. By evaluating your budget monthly, you can see if your actual costs and revenues differ from your plan, which will allow you to adjust how you operate your business to ensure you stay on track. If you notice you are not meeting your expected budget, you can make changes, such as reducing costs or finding ways to increase your revenue. In this blog, we will focus on ways to construct your budget and cover techniques to review your progress and make effective operational changes.
In the article “Looking at Revenue in a Different Way,” Bob Siegel recommends childcare providers focus on understanding their “Potential Slot Income (PSI)”. The PSI incorporate the maximum number of slots a childcare center can offer at any one time. PSI is calculated by determining the number of slots available multiplied by the fee charged multiplied by the unit of time on which the fee is based. For example, 100 slots available multiplied by $100 per child multiplied by 52 weeks = PSI of $650,000. The revenue you budget for the 12-month period should never exceed the calculated PSI for the year.
When calculating your PSI for the year, the following factors should be considered:
Flat Fees – Understand your fee structure. Most flat fees are based on a child’s age. For example, infants are more expensive to care for than toddlers.
Discounts – These include sibling discounts or staff member discounts. When you compute the PSI, the rate should account for any discounts provided.
Vacation time discounts – This includes when a family goes on vacation, and the center agrees not to charge any fees. In this case, when you compute the PSI, the unit of time should account for any weeks that will not generate any revenue.
Capacity – this includes the maximum number of slots a childcare center can offer at any one time.
Usually, when you find your business is behind on its budget, the first thought is to cut costs. However, it is recommended you review your PSI for potential solutions before you look at cutting your costs.
When setting up your budget, you must be cognizant that your center’s capacity or occupancy is going to be your primary limiting factor when it comes to improving your PSI. According to the book Child Care: Financial Basics by Lesia Oesterreich, most established daycare centers maintain a capacity of 85 to 95 percent. Beginning programs have capacities of 50 to 60 percent.
Estimating expenses can be a challenge. When estimating annual expenses, you must consider both fixed and variables costs. Fixed costs include costs such rent and insurance. These costs will be incurred regardless of the center’s capacity. Variable costs are based on volume, such as the number of children enrolled or teachers employed (Accounting for Small Business Owners, 2015).
As the year progresses, and you review your budget, it is important to understand how effectively you are operating your business – reviewing both revenues and expenses. A way to measure your effectiveness is to review your business’ Key Performance Indicators (KPIs). A KPI is a metric used to determine your center’s progress in achieving its strategic and operational goals and also to compare its finances and performance against other businesses within your industry. So, make sure to review your KPIs, such as your capacity rate, quick ratio (measure of your center’s abiity to meet short-term financing needs), operating expenses to sales, working capital to sales, etc. If you need assistance reviewing your budget and KPIs, please schedule a call with me at GritForce Bookkeeping here.
Jack, G. (2005). The Business of Child Care Management and Financial Strategies. Canada: Thomson.
Accurate Financial Statements - b2bcfo.com. (n.d.). Retrieved from https://www.b2bcfo.com/accurate-financial-statements.html
Looking at Revenue in a Different Way | ChildCareExchange.com. (n.d.). Retrieved from https://www.childcareexchange.com/catalog/product/looking-at-revenue-in-a-differ
Oesterreich, L. (1998). Child Care: Financial Basics. Ames, Iowa: Iowa State University.