There are many factors contributing to the growth of the child care industry in Australia – continued government support through subsidies; higher fees and enrolment numbers driven by higher maternal workforce participation rates; and higher disposable incomes (Connect, Insights for Business by Bankwest).
Research house IBIS World also reports that the child care industry is set to surge by more than 34 per cent as Australia's birth rate increases by 6.4 per cent over the 5 years to 2019-20. The rise of child care in Australia has been so rapid that Colliers now considers it an investment grade asset.
Although the macroeconomic conditions paint a bright future for the industry and child care owners and operators, it's worth considering the importance of the numbers at a centre-level and understanding how they contribute to the value of your centre as a business.
At the end of the day, a child care is a business like any other and the importance of regularly reviewing the figures can't be underestimated. 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 a function of fees and occupancy. The higher the fees and occupancy, the higher the top line figure, the better the profitability, the better the value. The issue here is determining whether your centre’s fees are at the optimum point - too low and you encounter poor cash flow, reduced profitability and a diminished ability to draw from the business, not to mention reduced value. Too high and you also potentially encounter the same issues!
This simple equation can be surprisingly powerful in revealing underlying problems with your centre. For instance, not being in a position to increase fees on the basis the centre is a little run-down or in need of a makeover. Any increase in fees risks parents withdrawing enrolments to a more modern centre in the next suburb or down the road! It also means families are not enrolled at your centre so much as for the quality being delivered as for the price point of the fees. It isn't a good predicament regardless of the line of business you're in!
Low occupancy, and even fees may point to issues with staffing. There are a plethora of issues that might be lurking here – high turnover; low morale; lack of progression opportunities; poor relationships with families and children; the list goes on. Building an effective team is arguably more important in child care than in any other business or industry.
Child care centres build value through relationships and this inevitably translates to higher gross revenue, in turn profitability and in turn value! It can't be emphasised enough that staffing in child care is key, key, key!
High fees and low occupancy may point to the perceived low value parents are placing on the quality of care and education being delivered by your centre as compared to other centres in the area. It is likely there are other centres delivering a better quality of care and education for the same fees or even lower! It would be wise to review where you’re going wrong – staffing issues; poor relationships; substandard educational program; a run-down, tired physical environment; all negatively impacting reputation and value!
More than often, it's a classic case of what came first, the chicken or the egg. Do you increase fees first then invest in your centre or vice versa? 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.
Child care is a competitive market at the local level, and continuously investing in your centre will almost always generate above average returns.
This article was written by the Founder of Perris Knightsbridge Chartered Accountants, Peter Khalil who has a special interest in providing expert service to the child care sector.
Peter Khalil has a passion and drive to provide high quality accountant, tax and business advice to the child care Industry. Peter has been a child care owner for more than four years and has multiple centres around New South Wales.
Peter has extensive knowledge in accounting, taxation, audit and risk management within the child care Industry and can help providers devise a financial and strategic plan to minimise your child care centre’s tax obligations. During his career Peter has worked with distinguished organisations including the Commonwealth Bank; ING; AMP; Australand; Mirvac; Lindt & Sprungli; and Southcorp, delivering financial audit; risk management compliance; enterprise risk and process re-engineering services.
Peter's passion lies with small business clients especially child care, helping them make sense of an increasingly complex regulatory environment and putting them on a purposeful path of wealth creation and a secure financial future.
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