Vital services are rarely thought of as businesses, sometimes even by the people that run them. Few people would look at their local childcare centre as a business in the same sense they would a retailer or financial services company but at the end of the day, childcare provision is a business just like any other.
Some may even struggle to think of childcare as a vital service but with Australia’s birth rate set to increase by 6.4% over the 5 years to 2019-20 and the much welcome higher maternal workforce participation rates it is fast becoming one. In fact, Research house IBIS World also reports that the childcare industry is set to surge by more than 34% over the next few years.
There are many factors contributing to the growth of the childcare industry in Australia: continued government support through subsidies, higher fees and enrolment numbers, and both families with higher disposable incomes and those who need two incomes to make ends meet. This growth has been so rapid Colliers now considers it an investment grade asset.
Although the macroeconomic conditions paint a bright future for the industry and childcare owners and operators, it’s worth considering the importance of regularly reviewing the figures at a centre-level and understanding how they contribute to the value of your centre as a business. A good grasp of the financials will no doubt uncover areas where you can improve the financial performance and the underlying operations of your centre.
A good starting point is the top line or gross revenue of your centre. This line item is function of fees and subscription. The higher the top line figure, the better the profitability. The issue here is determining whether your centre’s fees are at the optimum point – too high or low and you encounter poor cash flow, reduced profitability and a diminished ability to draw from the business, not to mention reduced value.
This simple financial health check can be surprisingly powerful in revealing underlying problems with your centre. For instance, attracting new families to enrol their children in your centre will be made easier by better staff provision and facilities. However, a centre makeover or modernisation is often funded by an increase in fees. It’s a bit of a chicken and egg situation. Do you increase fees before you invest and risk parents enrolling their children elsewhere or do you invest first and hope the changes justify the increased fees?
Low subscription, and even low fees, can also cause issues with staffing. There are always plenty of staffing challenges in childcare anyway – high turnover; low morale; lack of progression opportunities etc. – yet a lack of profitability or uncertainty over future turnover can stunt wage growth and make recruitment an issue. Building an effective team is arguably more important in childcare than in any other business or industry. Childcare centres build value through relationships and this inevitably translates to higher gross revenue, profitability and value. Therefore it may be that investment in staffing is more critical than facilities.
In my experience as an owner, investing in your staff, educational systems and physical environment will no doubt place you in good stead to be charging fees at a point that will contribute to consistent profitability and value. No doubt it’s easier said than done. However, a good network of advisors and financiers goes a long way to ensuring you’re getting the most out of your centre and securing its value in the long term.
The best thing you can do for your centre right now is review where you’re going wrong or what can be improved up whether it’s staffing issues, poor relationships, a substandard educational program or a run-down, tired physical environment. If there is anything at all negatively impacting your reputation and value you need to be honest with yourself what it is and get to fixing it.
Childcare is a competitive market at the local level and parents will always be on the lookout for the best quality and value so you need to continuously invest in your centre. Investing in your centre, staff and curriculum will almost always generate above average returns and prime your business to take maximum advantage of this industry’s growth.
First published in Early Learning Review