In a challenging economic environment and at a time when interest rates are at their lowest since Elvis Presley made his first TV appearance, uncertainty over interest costs or returns can make budgeting and financial planning increasingly difficult for nurseries. While views of short-term rate movements are easier to make, predicting the future is much more difficult.
Looking at the global picture, 2003 does not look much better than 2002 but not much worse either. The UK is likely to do well relative to most other European economies, as it did in 2002, and the US should improve modestly over last year.
In the UK, consumer credit and mortgage borrowing have continued to expand strongly, enabling the economy to carry on growing despite a drop in private investment. We can expect consumer spending growth in the UK to be moderate and the current rate of personal borrowing clearly cannot be sustained.
On the other hand, debt service costs have fallen sharply, and there is no sign of interest rates returning to the levels that existed when the house price:earnings ratio was last this high.
These factors suggest that the deceleration in personal borrowing and in house price inflation will be moderate and orderly. Moreover, with Government spending set to continue its rapid growth, and the possibility of a further modest drop in interest rates, the UK economy is likely to perform relatively well compared to the rest of Europe and better than in 2002. Last year's collapse in investment, when stock markets tumbled in reaction to slowing economies and corporate difficulties, should not be repeated, although they may take some time to recover.
This is certainly good news for nursery managers. The nursery sector remains one where demand for high-quality childcare continues to outstrip the availability of places, which means that future plans for expansion should bear fruit with the right business planning.
However, there remains a danger that a dramatically negative economic shift could create a consumer perception where nursery places could be seen as discretionary expenditure by parents who supplement their family income with either full or part-time work. Moderate economic shifts are likely to encourage parents to continue to invest in nursery places - even if their income is slightly lower - rather than withdrawing from the labour market to become full-time childcarers themselves.
Because of the significance of sound planning for business success, it is important that businesses explore all avenues that can increase certainty about the future.
Independent research commissioned by Barclays last year showed that fixed rate options can offer very real benefits to borrowers, in terms of protection against rate movements and increased certainty of future costs and revenues. In addition, research conducted by the Institute of Directors into business finance has showed that, of the 500 companies they surveyed, two-thirds have taken steps to fix some of their borrowing rates.
Most obviously, locking in to a lower interest rate protects against adverse rate movements, which, in the case of borrowing, would be a rate increase.
Fixing loan repayments from the outset so that they remain the same throughout the loan term, particularly when making large investments in the business, can assist with the crucial process of cost and cash flow management, budgeting and forecasting. By increasing certainty about cash out-flows, businesses are better placed to understand their likely future financial position, make informed decisions, and devise more accurate plans.
So, if nursery businesses could benefit from an even more managed approach to their finances, what would be top of their investment shopping list? Certainly the current trend with regard to takeovers within the sector is accompanied by a desire to provide a high-quality product rather than over-zealous cost cutting. With this in mind it is likely that investment in the bricks and mortar of the business and the quality of the facilities could well be high on the list of a growing nursery group's priorities.
This kind of investment naturally creates a strong infrastructure for the business which then needs to be matched by excellent childcare and strong marketing.
By being clear on future costs, nurseries are also able to consider how they will manage investment in long-term projects. Training, for example, is one area in which nursery providers often cannot afford the luxury of investing in blanket nationwide training schemes. Ensuring that staff are fully briefed on changes to Health and Safety policy and also up to date with the latest techniques and innovations in childcare is a never-ending process which appears to be akin to painting the Forth Bridge. By knowing in advance how much training budget costs will be for the next three years, it becomes increasingly more transparent for a finance director to decide on what is possible and over what period of time.
Fixed rate borrowing may even confer a competitive advantage. Protection from interest rate movements eliminates the need to pass on any associated cost increases to customers through higher fees, or to absorb the cost internally, by reducing margins. As mentioned earlier, as customers begin to keep a weather eye on their finances, it becomes increasingly important to provide parents with the satisfaction that they are getting a good return on their own investment.
For nurseries requiring greater borrowing flexibility, fixed rate periods do not have to apply for the full term or full value of the loan. This means businesses can avoid having to pay the often substantial breakage costs incurred when refinancing a fixed-term loan before the end of its term to take advantage of attractive rates elsewhere. Instead, the debt can be split between fixed and variable borrowing.
Additionally, depending on the individual circumstances of the business, fixed-rate borrowers may decide to opt for a loan repayment holiday at the start of their loan. This can be extremely valuable at times of uncertainty over future business direction - whether to grow by acquisition or organically for example.
Fixed rates are not going to be appropriate in all circumstances and there may be a cost involved to terminate the fixed rate earlier than planned. If borrowers wish to have the flexibility to make lump-sum reductions to their loan, it may well be that a variable rate is more suitable for their needs.
However, the importance of having the ability to examine a range of options and then to pick from the widest possible choice simply cannot be underestimated.
All nursery businesses understand the importance of sound planning for future business success. To plan accurately, there is a need for as much certainty as possible about future costs and income. The businesses that take this approach provide themselves with a sound financial base from which to capitalise on opportunities; the recently proposed changes to the treatment of childcare vouchers for income tax and NI purposes might be such an example.
No parent would invest in childcare unless they felt that it was a financially sound option, and neither should a nursery make a substantial financial investment without being clear on how it will manage the financial implications.
Managing and protecting against interest rate movements should now be high on the agenda of every nursery business.
Hayley North manages a portfolio of corporate clients in the healthcare sector with a particular focus on the day nursery market. Tel: 07775 542328, or e-mail hayley.north@ barclayscorporate.com
