All too often an early childhood program will have a budget that balances on paper, but the cash just doesn’t come in the door. How come?
Full collection of all tuition fees, as well as any government funding, is essential. Successful early childhood administrators stay on top of fee collections: They have clear payment policies, are firm and consistent with families, thorough and prompt with billing, and on top of their paperwork.
If you can build these practices into the daily workings of your early years setting, you’ll have a solid handle on financial sustainability.
One key way to stay on top of collections is to use dashboards that report key metrics, and then use this information to guide your practice. In this part of my Iron Triangle series, we’ll walk through some of the best tips and practices to ensure you’re collecting all your fees on time.
In general, the term ‘bad debt’ refers to the proportion of revenue that is not collected. So if you had any child care tuition fee that you used to establish your budget and calculate a cost-per-child, and then you didn’t collect that revenue, that becomes bad debt.
The industry standard is to keep bad debt to less than 3% of your overall projected revenue. However, different directors might give you different ideas on what unpaid fees are considered ‘bad debt.’
The most common form of ‘bad debt’ is late payments on tuition. But here are some of the other main ways you might end up with bad debt:
All of these examples underscore the challenges of establishing a bad debt target of 3%. In some cases, it may be more appropriate to establish a bad debt benchmark as high as 10% of your overall projected revenue.
Regardless of the benchmark you’re using, bad debt should be tracked at least monthly and reviewed quarterly, so you can adjust your budget if your revenues are falling short of projections. Many settings monitor and assess their finances every week.
Collecting tuition revenue can be very time-consuming unless systems are put in place to streamline and automate the process. Using electronic funds transfer (that is, enabling automatic transfer of funds from a bank account, debit or credit card) is one way to strengthen fee collection. Many early childhood platforms, like Famly, have an integrated payment function that makes it simpler for parents to pay, which often leads to more timely payments.
Effectively managing bad debt also requires reconciling the dollars received from government support or grants with what was actually billed for each child, to make sure you don’t have any accounting errors. In many cases there is a limited amount of time to correct errors, after which funds may not be recovered.
While automated systems make the process easier, effective fee collection requires time and focus — two commodities that are often in short supply.
This option is relevant for early educators based in the United States. A Shared Service Alliance (or staffed Family Child Care Network) can significantly lower bad debt and boost provider revenue. It does this by centralizing responsibility for business tasks like enrollment, billing and fee collection.
This approach enables direct services staff to focus on building a relationship with the family, and engaging in regular communication, based on supporting the child’s development rather than money matters. Business tasks can be handled by another professional, whose sole focus is ensuring that fiscal transactions, and other administrative duties, are handled quickly, efficiently, and with appropriate focus on respectful customer service.
Separating business and pedagogical tasks works, and digital tools like an early childhood platform are one of the easiest ways to do this.
I worked with a large, multi-site provider that was able to reduce bad debt to less than 2% of tuition fees revenues after consolidating and automating its fee collection process. This central enrollment office now uses a digital solution to maintain occupancy information, track parent fees and enable simple payments.
Parents receive their bills a week in advance, and can pay by electronic bank transfer, debit card, credit card, cash or check. Those who have not paid by the beginning of the week are alerted when they check their child in each day via the automated sign-in system; if not paid within a few days of that alert, late fees are assessed. Due to improved systems, this provider has now set a goal of keeping bad debt to only 1% of tuition revenue. You can get these useful tools through Famly — find out more here.
Early years owners and administrators that replace paper transactions with an automated solution typically find that bad debt declines quickly, and – even more importantly – the amount of time spent collecting and reporting finances reduces as well. That freed-up time is now available to focus on supporting classroom teachers and the children and families they serve.
Louise Stoney is an independent consultant with over 30 years’ experience in early care and education finance and policy. In 2009, Louise co-founded Opportunities Exchange, a non-profit organization focused on transforming the business of early care and education to improve outcomes for children.You can learn more and get in touch with Louise at www.stoneyassociates.com or www.opportunities-exchange.org.
Please note: here at Famly we love sharing creative activities for you to try with the children at your setting, but you know them best. Take the time to consider adaptions you might need to make so these activities are accessible and developmentally appropriate for the children you work with. Just as you ordinarily would, conduct risk assessments for your children and your setting before undertaking new activities, and ensure you and your staff are following your own health and safety guidelines.