Understanding costs, improving profitability

There are many ways to consider and control costs within a childcare business and each approach offers a different perspective and level of understanding on what costs actually are and also, how a business is affected by the choice of operational delivery models.

Let’s consider one of the more challenging aspects of controlling costs in a childcare business namely, “The variation in costs from one age range to another”. Because each range requires a different staff ratio, the cost profile obviously varies by age range because of this. There is a general assumption that it is less profitable to deliver care for younger children because of the ratios, but actually this may not be true as profitability relies on a sound pricing strategy, and for some providers it is possible to be more profitable on younger children, if their pricing policy is well constructed, or they manage to ensure that staffing closely matches the ratios needed and they are not overstaffed unnecessarily.

The point about this is that by having a deeper understanding of how costs vary due to staff ratios, provides insight to support cost control, staffing policy and helps adjust pricing to ensure desired profit margins are achieved.

Another operational delivery model challenge closely related to the above is keeping occupancy in each age range, (and in total), to a level that is consistently above breakeven to achieve desired profit levels. The subtlety in this situation is that as occupancy levels ebb and flow from one age range to the next as children move up and others join, there is a corresponding change to costs levels in each age range due to these occupancy fluctuations, and with that a change to profit contributions in each age range.

This is true unless of course, there is a perfect balance of both the number of children moving up with those replacing them so the occupancy level is consistent within each age range, or a similar balance of staffing between the age ranges so there are never times of overstaffing unnecessarily.

Both of the above situations are difficult to manage for any childcare provider and the ups and downs of staffing and occupancy can result in an infinite number of effects on profitability. However, by having a deeper understanding of how costs shift in these circumstances is helpful to inform pricing policies, control staffing costs and understand which delivery model works best to deliver desired profit levels.

A simple cost review is worth the effort!

If a simple cost review is undertaken to look at costs perhaps across 3 different points in the year it will give a much clearer picture of what’s happening to profitability with current delivery model and occupancy profiles, but also what steps could be taken to improve it.

We have a cost calculator tool to help you do this and the only information you need is..

1. The number of hours attended for each age range in that period.

2. The total costs for the period you are analyzing, (say 4 months).

3. Total staffing costs for the same period.

4. Your chosen staff ratios per age range, (you may have chosen better than Ofsted requirements).

This information will provide enough analysis to…

a. Review occupancy levels for each age range to help compare with your place availability overall.

b. Compare cost levels per child, per hour to your prices per hour for each age range. This will identify profit contribution, (or loss), per hour, per child.

c. Which age range in that period has contributed the most per hour to profit?

d. What staffing as a percentage of total costs was, for comparison with expectations / budget.

By reviewing across the year you will get a range of results to show how changes in occupancy levels in each age range have affected your profitability which in turn helps you set goals to ensure balanced / desired occupancy levels and will advise staffing flexibility and cost effectiveness in general. This is valuable business information and helpful for developing more controlled delivery models and hence a more stable profitability and ultimately, sustainable business!