Running a financially sustainable child care business isn’t easy. But if you ask any successful manager, they’ll tell you that if you’ve got control of your cash flow, you’ve got a lot of your problems taken care of.
How do you make sure you’ve got a steady flow of revenue, the funds needed to meet payroll each week, you’re complying with tax withholding requirements, and covering all other operating costs? It’s a juggling act. And to do it well, you’ve got to be able to accurately project and track revenue.
The Iron Triangle of Early Care and Education Finance is a simple formula to help you stay on track.
It focuses on the three most important elements in child care business sustainability:
In this article, we’ll get an overview of each of the three core aspects of the iron triangle. Then, in the following articles, we’ll take a deep dive into how each element works.
Almost all your revenue in an early care and education (ECE) program is tuition and fees collected on behalf of an enrolled child.
While government grants and philanthropy sometimes help finance ECE, in the United States, child care funding is rarely provided as general operating support. Typically, the child care funding provided by the government (and often philanthropy as well) comes in the form of a portable voucher that is linked to enrollment of a specific child, or a contract to pay for a specific number of eligible children.
If children aren’t enrolled, the funding doesn’t flow. This makes full enrollment a cornerstone of ECE finance, regardless of whether your program relies mainly on public funds, or on parent fees, or a combination.
Generally speaking, it’s not possible to operate at 100% enrollment. Some experts suggest that a well-run center can operate at 95% enrollment; others suggest framing your budget around a more achievable rate, such as 85% enrollment.
Regardless of the target, any time enrollment drops below the budgeted target, your ECE program is losing money.
Monitoring enrollment and acting quickly to address any shortfalls is key to fiscal stability.
This means program administrators must carefully track attendance, in each classroom, on a regular basis. You should plan in advance when children will be ‘aging out’ of your program, or moving to a different classroom. Without careful monitoring and active outreach to fill upcoming vacant slots, it’s easy for these natural transitions to cause funding gaps. Tuition, especially if it’s reimbursed by the government, may also be dependent on actual attendance, so staying on top of this is crucial.
It’s easy for non-attendance to turn into non-enrollment. And especially in small programs, every day a slot remains open can make a big difference. These little daily losses can start to add up, and can lead to serious financial shortfalls. Predicting enrollment in the current environment is tricky business — and yet it is essential to the bottom line.
Automated Child Care Management Systems (CCMS) like Famly make tracking enrollment easy. In future blogs, we will explore ways to view CCMS dashboards to better understand enrollment trends and respond to fluctuations.
Tuition and fees only become revenue when you can collect them.
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 can we fix that?
The most successful ECE administrators stay on top of fee collection because they plan for it. They have clear policies, they’re firm and consistent with families, thorough and prompt with billing, and on top of the paperwork required by third party funders.
Fee collection can be very time-consuming — unless systems are put in place to streamline and automate the process. Electronic funds transfer (automatic electronic transfer of funds from a bank account, debit or credit card) is the best way to ensure prompt and consistent payment from families. Today, it should be the norm for all tuition and fee collection in ECE.
When it comes to tuition, the electronic check-in systems in child care management software like Famly make it possible to create a daily touch point for families. You can confirm that tuition funds have transferred, or send gentle reminders when fees are due, or a problem with the electronic transfer has occurred.
If part of your income relies on vouchers, reimbursements or scholarships from the government or a philanthropy, it’s still essential you get those funds when you need them.
While many US governmental agencies have ‘swipe card’ systems for payment, these systems cannot replace good record keeping by ECE providers. It’s essential that child care centers and family child care home providers have systems in place to generate an invoice for every child enrolled, regardless of who pays their tuition. This is a great safety net for your own bookkeeping, but especially so if your setting relies on outside funding.
Errors do happen, especially when payment is based on the child’s attendance (which is current policy in many states), and if you need additional paperwork signatures provided by parents. Most states have a narrow window of time when errors can be identified and corrected, and after this window has closed it is not possible to recoup funds even if errors are found.
In short, systems to track and reconcile fee collection are essential to your financial sustainability.
Automated Child Care Management Systems (CCMS) like Famly not only help monitor collection of tuition and fees, but depending on your funding type, can also generate the documentation needed to reconcile payments from government and philanthropy on behalf of children eligible for financial assistance.
Determining your tuition and fees involves many factors — and some of them are beyond the control of your ECE program.
What parents can afford to pay is based on what they earn, and the cost of living in your area. What government agencies or other funding sources will contribute is typically based on the year’s budget.
That said, determining the actual cost per child, comparing this cost to the price charged, and when fees cannot cover the full cost, identifying third party funding to fill the gap, is essential to sound fiscal management.
The bottom line is that parent fees and outside funding must add up to equal your per-child cost. If the math does not add up, your program is losing money.
Calculating per child costs isn’t easy in the child care business.
Infants require a lower child-to-staff ratio, along with special equipment and supplies designed to meet the needs of babies. Simply put, it costs more to care for infants. The cost of serving school-age children is typically much lower, on the other hand, since these children can be in larger groups and may not attend for the full day. But the word ‘typical’ is key here — things aren’t exactly typical right now.
The cost of serving all children may be much higher at the moment, due to the additional operating expenses of pandemic precautions — and because we can’t always rely on our usual sources of income. The pandemic offers a host of new cost calculation challenges, including costs related to front-door screening and check-in, PPE, temporarily lower group sizes, and more. Unfortunately, the right answer is not simple or obvious, and it may vary from center to center based on the services offered and the families served.
Enrollment and fee collection also impact actual per-child costs. If a program is not fully enrolled, the per-child cost increases. If bad debts go up (fees are not being collected), the per-child cost increases. In some cases, a budget gap can be addressed by boosting enrollment and/or lowering bad debt rather than raising fees. The three factors are interrelated. In tough fiscal times, when government and/or philanthropy are cutting budgets and parents are squeezed financially, ECE programs often face a difficult choice: keep fees high and risk increased vacancy rates and higher bad debt, or lower fees to boost cash flow.
In future blogs, we will delve deeper into each of the three elements of the Iron Triangle. We’ll explore how to calculate per child cost, as well as how technology tools like CCMS can help centers and homes benchmark progress, flag concerns, right-size programs and more.
Balancing the Iron Triangle of ECE Finance has always been a challenging task. Now, in the midst of a pandemic that makes enrollment unpredictable and families less able to pay full fees, it’s even more challenging. Yet it remains as essential as ever — so you deserve all the tools and knowledge to make it easier for you.
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.