• This article is the third installment of Louise Stoney’s Iron Triangle series, which presents a three-part formula to help you boost your revenue when running a child care setting.
• In this chapter, we'll talk about the best tools to use to collect your child care tuition fees, and cut down on outstanding debts.
• To read part two, which explores how to achieve full enrollment at your setting, just click here.
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 child care tuition and fees, including any government funding, is essential. Successful early care and education (ECE) program administrators stay on top of 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 ECE 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 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.
What is bad debt?
In general, the term ‘bad debt’ refers to the proportion of revenue that is not collected. So if you had any child care tuition 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 revenues. However, different directors might give you different ideas on what unpaid fees are considered ‘bad debt.’ In addition to past due tuition, here are some of the main ways you might end up with bad debt:
In many states, public subsidy does not pay for every day when a child is absent. If you’re unable or not allowed to collect payment from the parents for those absent days, this uncollected revenue is bad debt.
Often, the government’s subsidy reimbursement rate does not cover your full tuition, but allows you to charge parents the difference. Essentially it’s a larger co-payment to cover the gap between private tuition and the state’s reimbursement rate. Some ECE programs are able to collect this larger co-pay, but others may not; any amount not collected is bad debt.
Sometimes providers have a sliding fee scale or charge lower child care tuition for siblings. These losses could also be considered bad debt if the budget is based on an assumption that full tuition will be collected for all children.
All of these examples underscore the challenges of establishing a bad debt target of 3%. In some cases, such as the current COVID-19 pandemic, it may be more appropriate to establish a bad debt benchmark as high as 10% of revenues.
Keeping track of your bad debt
Regardless of the benchmark chosen, 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 centers monitor and reassess their accounts weekly.
Child care tuition collection 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 child care management software 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 or philanthropy 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.
Shared Service Alliances and fee collections
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.
Better fee collecting with child care management systems
Separating business and pedagogical tasks works, and child care management systems (CCMS) are one of the easiest ways to do this.
I worked with a large, multi-site organization that was able to reduce bad debt to less than 2% of tuition revenues after centralizing and automating its fee collection process. This central enrollment office now uses a CCMS to maintain enrollment information and track parent fees.
Parents are billed 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 organization has now set a goal of keeping bad debt to only 1% of tuition revenue.
Child care center directors that replace paper transactions with an automated CCMS 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.
Official Danish Government Reopening Advice
Guidance from the Danish Health Ministry, translated in full to English.
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