Developing a Financial Management Plan For Your Child Care

Having a sound financial management plan is paramount to the success of any business. Each year, many small businesses, including child care centers, fail because of poor financial management.

If your operation is to succeed, you'll need a sound budget, i.e., a plan that provides a realistic projection of actual estimated expenses and income. Preparing both a start-up budget and an operating budget will tell you what you will spend, now and in the future, and where the money will come from for starting and operating your child care center. Most important, these budgets will indicate whether your projected income will meet your expenses.

Start-up Budget

The first step to building a sound financial plan is a start-up budget. This will usually include such one-time costs as major equipment, renovation, utility deposits and down payments. Additionally, your start-up budget should include at least 60 to 90 days of operating costs.

In estimating your costs, find out what it has cost other child care centers (i.e., planned and unplanned expenses) to open over the past two years and figure in the current inflation rate. Table 1 will help you identify the items to include in your start-up budget.

Table 1 -- Start-up Budget

Operating Budget

Prepare an operating budget when your child care center actually opens. This budget reflects your spending priorities, the expenses you will incur and how you will meet those expenses. From the moment the door to your new business opens, you will undoubtedly receive a certain amount of income. Do not count on this income, however, to cover operating expenses for the first 90 days.

As you estimate your expenses, the operators of other child care centers can help you project your actual costs, particularly for such items as telephone and supplies.

Table 2 includes a sample operating budget to help you project your annual operating expenses.

Table 2 -- Annual Operating Budget

* To cut operating expenses, you may be able to find volunteer aides through local community youth employment programs.

**Since enrollment is rarely a consistent 100 percent, it is safer to start estimating at 70 percent and work up to 85-90 percent.

Monthly Operating Expenses

The primary source of income for your child care center will be fees. It is important to determine if this income will be enough to pay each month's bills. An estimated cash flow projection, such as the one in Table 3, will help you make this determination. In this sample, all income is generated by monthly tuition fees.

Also, be sure to complete a cash flow sheet for each month. This will enable you to maintain an accurate record of business income and expenditures for projection and tax purposes. If you are operating your child care center from home, such a record is especially important to keep track of in-home deductions (see Tax Laws for Child Care).

Table 3 -- Estimated Cash Flow Forecast

Balancing Income and Expenses

Add your first-year operating costs and start-up costs to determine how much money you will need from the time you decide to open the child care center through the center's first year of operation. When including parent fees as income, remember that most child care centers do not have total enrollment until at least three months after they have opened for operation, and some take several years.

After completing your projected expenses and revenues, determine whether the expenses match the income. If not, you will need to lower the costs or reevaluate your market. If you cannot raise additional monies, decide where you can cut costs. For example, can you reduce your program's supply costs by relying more on recycled materials? Would such cuts help? You may be tempted to cut salaries or fringe benefits since they consume a large part of your costs. However, these are important in attracting and maintaining a well-qualified staff. Also, reducing staff may place you out of compliance with state licensing requirements and your own standards of quality.

You may want to consider increasing fees or tuition in addition to looking for other sources of revenue. Check your needs assessment and determine what parents can afford to pay and what seems to be the going rate at child care centers similar to yours. Be aware of tax credits available to parents for day care, and contact your local IRS office for the latest information on child care tax credits. Some child care centers have a sliding fee scale, which means that parents are charged different scales depending on their income level and number of children. Remember, if you lower a fee you have to make it up in other fees.

Fiscal Policies

Your budget should include fiscal policies. For example, determine when the staff is to be paid (weekly, biweekly, monthly), late fee payment policies for parents and tax reporting. Bill parents on a weekly or monthly basis. Don't let payments fall behind because the longer they are overdue, the harder they are to collect. Decide whether to charge parents for the days when a child is ill or on vacation or for holidays. There may be other policies that you will think of, so write them down and include them as part of the child care contract.

Audits

Audits play an important role in ensuring the sound financial management of a child care business. A review of appropriate financial records by an independent public accountant will determine whether you have spent money according to your budget and have met any requirements mandated by various funding sources as well as state and federal regulations. An audit also provides you with an accurate financial statement and recommendations to improve your financial management. Many funding sources require a financial statement or audit as a condition of future grants or contracts. You should, therefore, budget for an audit or look for an accountant who will do it for little or no charge. Contact your local accounting association for accountants who can help you.

Also, to ensure sound fiscal management of your child care center, contact an accountant or an accounting firm to help you set up your books. This help will be invaluable.