Just under a third (31 per cent) of nurseries went into deficit between January and July 2021, according to research from the University of Leeds. The survey of 821 nursery managers, published in February 2022, revealed significant financial challenges across the sector, which if not caused directly by the pandemic, were likely worsened by it.
Clearly the importance of balancing planned expenditure with predicted income has never been greater. ‘It is often cashflows that close businesses – money isn’t coming in at the right time, and it’s going out at the wrong time,’ says James Hempsall, director of consultancy Hempsall’s.
CHALLENGES
In recent years, cashflow has been impacted by shifts in demand, with falling occupancy rates over the pandemic period. Jo Morris, director of Playsteps Day Nursery in Swindon, says while the number of children needing places has not diminished, the amount of childcare needed has fallen. ‘Many want two or three days where they might have wanted five in the past.’ Soaring energy costs, increases to the National Minimum Wage and extra spend on cleaning products and other pandemic-related resources will also impact costs.
Staff sickness and self-isolation have increased reliance on expensive agency staff, exacerbated by challenges around recruitment. Lack of staff has also forced many settings to reduce the number of children they can accommodate, thereby reducing income.
Settings often plan to take on more children in May and June to balance those that will be lost to school in September, and there are concerns that without being able to do this, they will take a hit come the autumn. ‘We have to keep faith that when we open our books again, the families are still there,’ says Morris, who plans a marketing campaign over the summer to build up occupancy.
Meanwhile, Government rates for the funded hours continue to lag behind what settings need to deliver them, says Gary Croxon, business manager at the Early Years Alliance. ‘The alliance’s Freedom of Information request revealed that the Government predicted funded places would cost an average of £7.49 per hour to deliver by 2020/21, and yet, in 2022/23, the average rate paid to local authorities will be just £5.05,’ he explains.
Uncertainty around funding rates makes financial planning challenging, says Morris. ‘We’re finding local authorities are not revealing their funding rates in a timely manner.’
Research undertaken as part of the Mayor of London’s Strong Early Years London programme, delivered by the Early Years Alliance, highlighted the need for business support, including around budgeting and cashflow. ‘We are trying to empower early years to think of themselves as businesses as well,’ says Croxon.
CASHFLOW
There are a number of tools available to help settings plan. Hempsall’s, for example, has developed a Business Map to help early years providers identify risks and opportunities, including tools to help develop a cashflow forecast (see Further information).
The Early Years Alliance has developed an interactive business support toolkit which allows settings to work out how many sessions they need to sell to break even. ‘When it comes to occupancy, rather than thinking about individual children, think about how many sessions you’re selling, and about matching that to your staffing and your expenditure,’ says Croxon.
A cashflow or financial forecast enables a business to forecast income and expenditure for the year and plan activities – moving an expense to later in the year when the business is bringing in more income, for example. Settings need to record the funding, fees and other sources of income they expect throughout the year on a monthly basis. This is then balanced against outgoings, including salaries, business rates, spend on resources, energy bills and training costs. ‘Sometimes this will show a period of deficit, but later in the year, we may start to see profit,’ says Hempsall. ‘If you can’t survive the periods of deficit, if they are prolonged or deep, that’s what compromises the business.’
Where there are unknowns, such as predicted occupancy, settings need to make their best estimate based on the data they have. The cashflow is a living document and needs to be revisited throughout the year, updating estimates with actual figures or more informed predictions. ‘Autumn term tends to be the quietest term, so settings have to be aware that the income you make from the other terms does need to support you moving forward,’ says Croxon.
RESERVES
Childcare businesses should try to build up and maintain enough reserves to cover at least three months of average staff wages and operating expenses in order to make it through periods when income is not enough to meet outgoings, and also to meet the cost of unexpected expenses such as repairs. Some settings struggle to build up a ‘war chest’ because they want to make childcare as affordable as possible while also paying their staff a decent wage. ‘This is not an industry where we are sitting on a stack of money in the bank – settings want to invest in staff, training, resources,’ says Morris.
Money saved for a rainy day supported many settings during the pandemic, but this has led to a sector with hugely diminished resources. The University of Leeds report found loss of income during the pandemic drove two in five nurseries (40.4 per cent) to tap into their financial reserves, leaving them vulnerable to future downturns.
Building reserves back up during challenging times might seem to be impossible, but Hempsall maintains that it can be done. A setting’s biggest expense is usually staffing, and this is where money can often be managed differently, he explains. ‘You need a really good review of what you are spending on staff time and how that needs to change.’ [Read more on staff deployment in May’s article.]
Settings also need to ensure fees are paid on time, says Croxon. ‘If there is debt coming on, talk to parents in the early stages because it’s not fair on them to increase that debt.’
BREAKING EVEN
When income falls below expenditure, managers are often engaged in firefighting during the day and have little time to take a look at the bigger picture. Struggling settings should make sure they are aware of what support is available to them. ‘Some local authority early years and childcare teams do still have some money to fund interventions, whether that is a repayable loan or a grant, or business support,’ says Hempsall. ‘You have got to put a business case together.’
Managers also need to take a detailed look at how outgoings can be reduced. They may be able to negotiate a rent-free period or a reduced rent, remortgage or go to a lower-interest-rate deal, find a cheaper energy provider or renegotiate their existing deal. Nurseries may also need to review their model of delivery to maximise the hours available, in order to bring in more Government funding. ‘If a setting can’t offer the 30 hours themselves, can they work with childminders or other settings?’ suggests Croxon. ‘If you are a sessional setting that’s only offering five mornings and three afternoons, can you offer the other afternoons and maybe a breakfast club? It’s time to reflect on that and see what families need.’
Practical tips on managing financial challenges by James Hempsall
Listen to the research, but only with a critical ear. It is imperative we look at trends and what other settings are saying, but there are alternative and counterviews. Sometimes the research can focus on one aspect disproportionately. For example, two-thirds of settings are not going into deficit. That is a positive finding. But why might that be? Are they just lucky? Or are they in the right place at the right time? What can we learn from those that are in this fortunate position? It is not easy, but neither is it impossible.- Take an objective and critical look at what is happening in our own businesses. During Covid-19, our business income halved, projects ended abruptly, and what the customer wanted and needed changed instantly. We needed to change – fast. We used some of our reserves; that is what they were there for. Our strategy included remodelling our offer and staff team. It is always hard, but always necessary to do so – and fast!
- Problems are rarely solved with extra cash alone, instead we need to change. Some childcare settings are seeing paid-for places demand remain the same, in others, demand has fallen, and in some, demand has grown remarkably. In all cases, managers need to think about what families need now and to anticipate what will come next.
- I advocate small regular increases in fees. These should be at least annually, and when new families sign up, they should be on the new-joiner higher rate right from the start. When you reach the fortunate position of being able to build up reserves again, then you can decide what you do with fees for the benefit of the business, the staff team, and the families using your service.
FURTHER INFORMATION
- Hempsall’s Business Map: https://bit.ly/3MR6D4c
- Early Years Alliance: www.eyalliance.org.uk
