Profit is not a word that you frequently hear within the day nursery sector. The idea that a setting is 'making money out of parents', it seems, is not acceptable.
But profit is central to the survival of nurseries as a business and to the sustainability of the day nursery sector as a whole. Without profit, a business cannot continue to be successful, as it has no means of raising the funds to invest back and improve quality further, nor can it build up reserves for when times may be tough or occupancy low. A lack of profit points to a lack of sustainability - even charities have to make a profit or a surplus for their services to remain available in the long term.
While private and voluntary nurseries are committed to upholding the best quality of care for children, and do invest heavily in improving this, they should behave as businesses and factor in a profit to the cost of services. But it seems that with the pressures already on parents in terms of fees, many nurseries are not doing this. Indeed, research from the DCSF reflects this, with a fifth of daycare providers making a loss and only around half of providers breaking even.
A nursery with good occupancy and a strong reputation that doesn't make a profit is a worrying picture. How does the nursery pay for staff training, invest in new resources or equipment, cope through difficult times when occupancy falls, or show staff how appreciated they are? Without a surplus, this is practically impossible.
In addition, it is often forgotten that some of the surplus will form the nursery owner's or manager's wage. There are a significant number of owners who are running a nursery and not taking any money or a living wage from the business; they are investing every penny in quality and retaining staff. While this demonstrates a huge level of commitment, there are questions about how long it can be sustainable for the owner.
Dirty word?
It is essential that the need for profit is recognised. The Government must see nurseries as a business and adequately fund them for the services they are providing, including the free entitlement to nursery education. Nurseries are treated as private businesses by the Government, paying business rates and VAT. For small businesses, there is often no way of subsidising any losses that are made, and there is no one other than the owner to pay staff wages if income is delayed.
Profit is fundamental to the PVI model. Whether the capital in a nursery has been invested by a large provider, or by an individual who has remortgaged their home, a large risk has been taken. It is important that profit is generated.
Perhaps it is the word 'profit' itself that is the issue. Profit can conjure up images of shareholders demanding a return on their investment. The truth is that the vast majority of nurseries are small providers running a childcare business because they passionately believe in it, rather than having a desire to make huge profits. With the current picture, huge profits are a concept many in the sector will find laughable. Many of the large groups, despite having on paper revenues that may run into millions, are making only a small profit.
Whether it is called a profit or a surplus, it is something nurseries must make. And ultimately, it will benefit children and parents.
For nurseries, a profit is ethical and should be seen as such. Quality costs money and the drive for improvements continues - but this comes at a price. Early Years Professionals, the Early Years Foundation Stage, increased training and higher-paid staff are all new ways that care and education is becoming even better.
But this investment has to come from somewhere. With the current sustainability issues the majority of nurseries are not in a position to fund these changes, even though they do see the benefits.
These initiatives will put an even tighter squeeze on day nurseries. A graduate leader will cost more in terms of salary, and as staff become better qualified, they will quite rightly expect a better wage. The big question is, who will pay for this? Already 80 per cent of parental fees go directly on staff salaries and with increased wage rises, this figure is likely to increase further.
Counting the cost
The National Day Nurseries Association understands that parents simply cannot afford to pay more in fees. Without direct Government investment, nurseries will continue to try to keep fee rises to a minimum. But at the same time, they will be seeing an increase in expenditure.
The small surplus that nurseries might make now will be the first casualty, followed by extra staff training and additional investment in new resources - all the things that nurseries do to ensure that they go above and beyond the stringent standards set by Ofsted and raise quality and outcomes for children.
The NDNA stressed the importance of profit in our contribution to the recent DCSF guidance for local authorities which will be used to carry out the cost analysis process for the free entitlement. While it is critical that the funding actually covers delivery costs, it is also crucial that profit is a factor in cost calculations. The DCSF guidance reflects this, and asks local authorities to recognise how profit is needed to ensure a setting can maintain quality levels and how often a surplus might be the only wage a nursery owner or manager receives.
Competition is often fierce in the nursery sector. Private and voluntary nurseries really do focus on their quality and their excellent level of customer care to ensure that they can remain attractive in the face of maintained settings charging often cheaper fees. As well as a strong focus on offering the best possible care, many are focusing on parental choice, such as by providing after-school pick ups and term- time-only contracts or part-time care. Some offer out-of-school care for older children.
The NDNA questions what will happen in the long term to parental choice and these extra services as nurseries face an ever-dwindling surplus. With costs on the rise, margins will become tighter and tighter, and nurseries will increasingly look where costs savings can be made. Some may even decide to close.
Any business adviser understands that some kind of profit, even a small one, is absolutely essential for a business to be successful in the long term. Private and voluntary nurseries have staff and bills to pay, as well as local business rates. There is no one to plug a hole in the budget if there isn't enough income to meet expenditure, and although sustainability funding may be available, this is limited and not a long-term solution.
The difficulty is that nurseries cannot simply price their services and factor in a surplus like a normal business would do. This would make fees unaffordable for many parents and is contrary to the Government's vision of affordable childcare for all.
Necessary service
Running a nursery is almost a social enterprise. Many settings are deeply rooted in their local communities and have been offering families in the area a high-quality service for many years.
Childcare is an essential service, not a luxury. Without it, businesses would lose their talent and thousands of families would not be able to make better lives for their children. For the 'mixed economy' to work and bring the resources of the PVI sector to all children and families, acceptance of the private and voluntary business model, including profit, is crucial.
Addressing the situation with business rates and VAT would be a major breakthrough that would immediately reduce a nursery's cost base and allow a surplus to become a much more realistic option. Nursery education funding should be factored at a level that recognises the long-term need for reinvestment, and direct funding should be made to the sector to ensure that nurseries remain sustainable while their fees are affordable to parents.
Profit or surplus, it is an essential word that providers should not fear using. Without profit, childcarers cannot improve, nor invest in the people in the business that matter the most - the nursery staff. Profit should be a word that everyone is proud of using in the right context.
A profit is a sign of a healthy childcare setting that is going to be around for years to come and one that is able to say that it is offering a service that truly improves outcomes for children.
- Purnima Tanuku is chief executive of the National Day Nurseries Association.
