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Understand your costs, or risk making a loss!

June 9, 2017

 

Why do you need to understand your costs?

 

As business advisers when we talk about understanding costs we are really focused on a couple of important areas. Firstly, we concentrate on what each service you offer costs you to deliver per child, per hour. So if you provide care for 2, 3 and 4 year olds there is likely to be a different cost per child, per hour between age ranges.......obvious really!...... you have different staff ratios for different age ranges, so costs will be different.

 

The second key area we concentrate on is helping providers figure out that they have fixed and variable costs, 'fixed' costs that the business needs to pay irrespective of the level of childcare occupancy they have, (like rent or telephone costs), and those costs which are called, 'variable' because they directly vary with the number of children being cared for, ( like food, consumables, and some elements of staffing**). It's important to ensure that variable costs do not become fixed due to the way you manage, as this will reduce profits significantly.

 

So there goes a bit of theory.... but why understand costs?

  • If you don't know your cost per hour per child, how can you set your selling price?

  • You need a clear picture of where costs are too high so you can make changes and get back to profit!

  • If you understand your costs you know if the rate / hour / child  a local authority gives in free entitlement funding for 2,3 &4 year olds, allows you to make a profit!

Many childcare providers set their fees to be similar to local market rate, that's fine but if it costs you more per hour to deliver than the local market rate, you’re into a loss making situation! Analysing your costs allows you to make changes to the areas where costs are too high as the business progresses, something that could change frequently. Don't forget also that the rate the local authority pays you for delivering the free entitlement is actually a 'Sales Price' you are accepting!, so by knowing your costs you will know how much profit you make on the funded rate.

 

Don't ASSUME that you make a loss on certain age ranges - PROVE IT to yourself!

 

Just because you have a 1:4 ratio for 2 year olds and 1:8 ratio for 3&4 year olds, doesn't mean you make a loss, (or less profit) per hour, on 2YO's because of the higher staffing. This is not necessarily true, partly because your costs profile is partly determined by your control of staffing to ratios at each age range and the fact that you get a higher rate / hour for 2 year olds. So whilst it might be true, it can only be proven by calculating costs per age range, per hour for your given operational situation and every childcare provider will be different!

 

Don't wait until the year end to see if you have made a profit! 

 

Actually, it doesn't matter if you make more profit on one service than another, or if one service makes a small loss, as long as you make an overall profit from your business activity. HOWEVER, waiting until the year end when your accountant or bookkeeper does the sums, is not a good strategy to ensure you make a profit. This approach will only show you what your profit or loss is, it will not give you information through out the year in time to change things to ensure you DO make a profit! - Another good reason to know your costs....!

 

So you can see why we wobble on about understanding costs, both total costs, and unit costs,........it's a good exercise to undertake and it might just save your business!

 

For a quick and easy tool to estimate your costs / hour / age range download the COST CALCULATOR from our RESOURCES page, just search under "FINANCES"

 

** Staffing as a variable cost - In a childcare business you have to meet staff ratios, so that dictates how many staff you need, but unfortunately attendance and occupancy can often vary greatly throughout the year, so unless an element of your staffing is flexible to meet demand peaks and troughs, you will likely lose money or at best reduce your profits or surpluses, but that's a whole new subject...!

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