Centres almost never get into financial difficulty overnight. Financial difficulty generally builds over many months. If financial difficulties come as a surprise then there has probably been a lack of attention to finances on the part of the Board of Directors and staff.

Following are a few early warning signs that, in our experience, generally precede financial difficulty. Any one or a combination of them can often be dealt with and rectified over a number of months. The trick is to identify financial difficulties and act promptly as a problem identified six months in advance can almost always be resolved.

Declining enrolment
The most obvious indicator of financial difficulty is one of persistent declining enrolment. Actual declines in enrolment are preceded by a shrinking waiting list. Boards should insist on a monthly report on the status of the waiting list as well as on actual enrolment levels.

Waiting lists must be tended. At least once a quarter every family on the waiting list should be contacted and families no longer needing care should be deleted. We know of one centre which closed its waiting list down at 120. Eighteen months later there was an unexpected vacancy in the toddler room. Not a single parent on the waiting list was still interested in care. It took the centre two months to fill the vacancy at a cost of $1,600 in foregone revenue.

Increasing Salary Costs As A Percentage of Fees
Centres typically have a fairly stable ratio of salaries to fees. For most centres this ranges between 70% and 90% with 80% being typical for multi-age programs. Increasing salary costs as a percentage of fees results from:

  1. dropping enrolment levels without adjustment of staff costs;
  2. rising staff costs resulting from factors such as maternity leave, increased use of casual staff and, in some cases overstaffing.

Regularly reviewing the percentage of staffing costs to parent and Metro fees can give you an indication of your centre’s financial health.

Declining Financial Cushion
A healthy childcare centre will generally have an accumulated surplus or financial cushion (the excess of current financial assets over liabilities) of between one and three months’ expenses. For example, if you have a centre with a $360,000 expense budget, an adequate financial cushion is in the range from $30,000 to $90,000. If your surplus declines below one month’s expenses then you have limited resources to carry you through financial difficulties such as losses in the summer or a sharp decline in enrolment.

Typically, centres build up their accumulated surplus when they are at or near full enrolment and steadily reduce this cushion when enrolment drops below 95% for an extended period of time.

If your accumulated surplus is below one month’s expenses then you should attempt to budget a small surplus on an annual basis until the cushion is built up again.

Increase in accounts receivable
Steady increases in accounts receivable from parents and Metro can be indicative of financial problems. Failure to monitor and collect parent receivables is a sign of a lack of attention to finances at the centre. Consistent lateness in receipt of subsidy from Metro almost always results from lack of attention to bookkeeping and financial matters in general.

Insufficient and/or late reporting of financial information
If you are receiving insufficient financial information to determine whether you are in financial health on a monthly basis and/or if the information provided is more than one month old you have no way of knowing whether problems await you further on in the year. A current financial report should be prepared for each Board meeting. Financial reports should ideally consist of a report on enrolment trends together with a brief financial statement showing performance for the past month, current financial position and a comparison of actual results with the budget approved by the Board earlier in the year.

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