TIPS - Table of Contents

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DEFINITIONS

BUDGET
A plan for how money will be earned and spent

START UP BUDGET
A plan for how to get from an ideas, to a point where a business will break even and begin to support itself
OPERATING BUDGET
Projection of what it will cost to operate the business, as well as what the income potential will be

FISCAL YEAR
A 12 month period of time which may or may not correspond with the calendar year.

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Developing a budget requires creative decision making; the ability to look at past business practices; and the vision to predict future expenses and income. A budget is written for a specific period of time, typically a year, and is a tool for helping child care providers predict business success, or in some cases, lack of success. Some businesses are destined to failure because their expenses outweigh their income. A good budget will determine success or failure before a provider invests a great outlay of financial and emotional resources. Budget information can also help child care providers make educated decisions about the potential growth of their business. In the child care industry, staffing will encompass the greatest portion of the budget. Between paying staff wages, payroll taxes, and benefits, there is, typically, not a great deal of money left to pay for all of the other expenses. The information in this brochure can help child care center owners understand the different types of budgets. Each budget generates different information.

START UP BUDGET
This is often the first budget a prospective business writes. During the planning phases of a new child care center, the business owner needs to know how much money it will take to get from the idea to the point where the business will break even and begin to support itself. Quite often a loan is necessary to cover expenses.

• The start up budget will list all of the one time expenses that the business will incur. These expenses may include:
  • Building renovation costs
  • Planning costs (architectural fees, building inspections, zoning fees)
  • Office equipment/supplies
  • Programming equipment/toys/supplies
  • Recruitment of staff, marketing (signs, ads, press releases, promotional items, etc)
  • Salaries of administrator, director and/or staff while in planning phase
• Another factor to consider when writing a start-up budget is the "underutilization phase" of the business.
  • When a child care center opens the doors, it is seldom full. In fact, typically enrollment is at around 10 - 20% of the licensed capacity. This means that although the business is open, it is not coming close to covering all of it's expenses yet.
  • Enrollment in child care centers builds slowly, with the big wave coming in August/September and a smaller wave again in January. But, there are no guarantees.
  • The amount of money a new child care business spends on marketing makes all the difference.
• Failing to plan ahead for the amount of money needed to get a business off the ground is a fatal mistake many new child care centers make.

OPERATING BUDGET

• Before investing large amounts of money into a new child care business, an operating budget should also be developed.
  • This is the business owner's best guess at what the ongoing costs will be, as well as how much money will be earned.
  • It is best to figure this out before you start your business. Sometimes a business will never make money, because the cost will always be more than the income.
• With the help of a lawyer, decisions will also need to be made regarding what type of business this will be: Sole Proprietorship, Partnership, Non-Profit and For-Profit Corporation are some of the possibilities.
  • Once this decision is made, the operating budget can more accurately estimate the business taxes that may be due based upon the profit earned.
• When writing an operating budget, develop a list of expense categories. This list will become your chart of accounts.
  • Examples of expense categories include:
    • administrative and teaching staff
    • field trip expenses
    • payroll taxes
    • food and related costs
    • fringe benefits
    • occupancy
    • training costs
    • liability insurance
    • employment expenses
    • utilities
    • cleaning 
    • professional fees
    • vehicle
    • telephone
    • advertising 
    • licensing & membership fees
    • office expenses 
• Income (or revenue) projections will also be part of the operating budget.
  • Remember to factor underutilization into the projections. Underutilization refers to the slots within the licensed capacity which are not being used.
  • It would be unrealistic to expect each classroom to be fully enrolled throughout the year. Typically, in the first year of operation, the enrollment may average 40 -60%. With a strong marketing plan, by the end of the first year the center should have 75% of it's licensed capacity filled.  (Example: In an infant room of 8 children charging $150 per week, the revenue projection for the first year would be: 8 children x $150 x 52 weeks x 50% enrollment = $31,200 per year.)
  • Other potential sources of revenue to consider: registration fees, USDA food program reimbursement (check into the milk program if you do not qualify for the full food program), fund raisers, grants or donations, fees from additional services such as transportation or field trips.
  • The difficulty in providing quality child care is this; the main source of revenue is parent fees. Centers can only charge as much as parents are willing to pay, and have to pay all their expenses (including staff) on that fixed income.

BUDGET JUSTIFICATION
This is the narrative report that accompanies the budget.

• It is an explanation of how the numbers in the budget were determined.
  • This justification helps explain your expenses and income to funders (banks), to the board (if your incorporated), and to parents (if necessary to explain a rate increase or policy changes).
  • Writing an explanation of how the expenses were calculated will help when the next year's budget needs to be written.

TIPS ON INCREASING THE UTILIZATION FACTOR
As stated earlier, a new child care center should budget for and try to become 75% full by the end of the first operating year. However, even during the following years, the revenue projections will never be for 100%. That would be unrealistic!

• It is reasonable to hope to be 85 - 95% full on average, knowing that sometimes enrollment may be higher than at others. There are ways to increase or maintain a high utilization factor:
  • Be aware of when there are openings, even part day openings, which can be filled. If there are several openings from 6:00am until 9:00am, perhaps the center could develop or enhance a before school program. The school bus may be willing to transport the children to school. Never develop a program that exists just to fill space and make money, though. If itüs not going to be a good place for children to be, donüt do it!
  • Even when the center is full, continue to market. Remember, the average consumer needs to hear or see about a business three times prior to making an initial contact. This means the business name and logo needs to be out there.
  • Centers which have developed good reputations in their communities are in demand. Parents will call these centers before their baby is born just to be put on a waiting list. The centers then have a list of parents waiting for slots when they become available. It is the centerüs responsibility to check this list regularly and stay in touch with parents waiting to get their children into the center.
• There are several tricks to balancing full time and part time schedules for children.
  • Look for opportunities to match up children with opposing schedules to become full time equivalencies. If a child is scheduled mornings and another is scheduled for afternoons, they fill only one slot as long as they do not overlap.
  • Develop policies for scheduling part-time care which allow this to happen. Perhaps parents who need half day care can be scheduled from 6:00 am until noon or from noon until 6:00pm. This allows you to fill empty slots more easily, and establishes a clear policy for parents to understand.
  • It is best to limit the amount of part-time care you offer. This helps to keep a steady flow of full time revenue that can be counted on.
  • Also, part-time child care is typically priced higher. Think of the two cans of tomato paste sitting on the shelf. The larger one costs less per ounce, because it contains more. The shopper who buys the smaller can knows they are paying more per ounce, but they are willing to do it because they only want a small amount. It works the same way with child care costs. A parent who only needs care on a daily basis may pay a daily rate equal to 1/4 the weekly rate rather than 1/5. (Example: If the weekly rate for a 4 year old is $100, then a daily rate might be set at $25/day. If the director can schedule a child on Monday and Wednesday, and another child on Tuesday, Thursday and Friday, the revenue for that slot will be $25 x 5 days or $125 for the week, more than the weekly rate for a full time child.)
  • If part-time enrollment leaves many openings in the enrollment, consider marketing drop-in care which can help fill the voids.

BREAK-EVEN ANALYSIS
In any business, it is important to know at what point you will "break even" or cover all your costs. In child care a break-even analysis is typically done for each classroom, since the child to staff ratios are different for each age group. By calculating the break-even point, the business owner will know how many children need to be enrolled in each classroom to cover the costs. In order to calculate the break-even point, first you have to look at the chart of accounts that has been established. Expenses have to be divided into categories: