The UK economy is now officially in recession and many businesses (some of which have been household names for several generations) are succumbing to the market conditions. The main reason for this is that irrespective of the balance sheet value of those companies (which in some cases has been quite healthy) cashflow has suffered. Insufficient income has been received to allow debts to be paid.
Problems have been exacerbated as banks impose tighter lending criteria upon their business borrowers.
As the pressure on household budgets increases, parents may find it increasingly difficult to pay their nursery fees.
However, in the medium to long term there could be an increased demand for nursery places as mothers are forced back to work earlier, and they may be working full-time rather than part-time.
These days, it isn't always so practical to enlist help from grandparents as they may be older and find the job too demanding, or they may live too far away.
It remains to be seen whether this will be the case and businesses need to plan for the worst-case scenario.
Successful and well-managed businesses will be in the best position to survive.There are several areas that you can address:
- Cash and borrowing. Maintain dialogue with your bank and investigate alternative lines of credit as a fallback.
- Staffing costs. Review staffing levels and ensure that you get best value from any bonus and reward structures.
- Suppliers. Review credit terms with suppliers and agree payment dates to manage daily cashflow.
- Overheads. Set and monitor budgets, reducing overheads where possible.
- Property costs. Review lease terms and use of space, rationalising your property portfolio if appropriate.
- Debtors. Rigorously manage working capital and regularly review your credit control procedures.
You may be undertaking some of these actions already, while it may not be possible to readily address others. For example, compliance with statutory ratios will limit your ability to reduce staffing costs.
One aspect of any business that can certainly be addressed is the last item on the list above - the position in relation to debtors. The remainder of this article deals with this issue.
Terms and conditions
Your first step should be to ensure that the contractual arrangement between the nursery and the parents is adequate.
A written contract should be put in place by all nurseries, which will form the basis of the contractual relationship when the parents accept the offer of a place. The written contract is not the end of the matter, however, and account needs to be taken of the many implied terms and conditions which arise out of legislation and case law such as the
- Data Protection Act 1998
- Human Rights Act 1998
- Contracts (Rights of Third Parties) Act 1999
- Unfair Terms in Consumer Contracts Regulations 1999
- Disability Discrimination Act 1995 incorporating the Special Educational Needs & Disability Act 2001
- Various other regulations and case law.
The relationship needs to be transparent and the obligations of each party need to be as clear as possible. Broadly, the main obligation is to provide care for the child in question between the designated hours. For the parents, it is to pay the nursery fees as and when they fall due.
A written contract will also help ensure that there is no misunderstanding regarding the basis for fees that you charge, by dealing with questions such as:
- Who is primarily responsible for the fees. Is it the parents who are personally responsible irrespective of how the nursery place is funded, and perhaps both parents in the event that they are separated or divorced?
- What the level of fees are?
- How those fees accrue. For example, do they accrue daily, weekly, monthly or termly?
- When they are paid - in advance or arrears?
If you need to pursue unpaid fees in the courts, the contract will also form the basis of your case.
Financial management
Every business should be acutely aware of certain key performance indicators (KPIs) such as child numbers, fee income, debtor days (ie how long on average it takes to be paid) and expenditure.
It is only by keeping abreast of these KPIs that trends can be spotted and early action taken to address them. If one of these trends is parents taking longer to pay fees, or not paying them at all, then you should deal with those issues as early as possible.
A privately run nursery business needs to operate as efficiently as possible; not only does the business need to generate a profit for its owners, the wages and job security of staff also depends on this.
In addition, it is wholly unfair to ask those parents who pay fees in full and on time to effectively subsidise the places filled by poor payers.
It needs to be made clear to parents that their child will not be allowed to attend the nursery if fees remain outstanding and action needs to be taken, particularly as arrears can grow quickly.
This requires strong management - barring a child from attending a nursery can be a difficult decision to take - but nevertheless nursery managers need to be clear on what their responsibilities are.
Some nurseries take the issue further by requiring large deposits to be paid up front or even requiring references from prospective parents.
Pursue unpaid debts rigorously
In the event that debts accrue and remain outstanding, they should be pursued rigorously.
Fees will be due in accordance with the underlying contract. You are entitled to an explanation if the fees have not been paid or some other arrangement reached. It follows that if parents cannot pay they should be willing to explain why.
Before you take legal action, you should attempt to meet with the parent(s) as soon as possible. The main points to establish are:
- That the child is happy and doing well at the nursery. Experience shows that there is a striking coincidence between non-payment of fees and complaints being raised for the first time
- Whether the parents can pay in full now and, if not, whether the parents can settle part of the debt
- Whether both parents are willing to face up to the fact that they cannot pay, and discuss constructively the various options, and if not whether there is really any alternative to excluding the child
- To ensure that the parents understand:
- that the fees are already a debt
- that they attract a much higher rate of interest than borrowing from a bank
- that they will have to be paid or some alternative found
- that there can be serious financial consequences.
During the meeting, solutions may present themselves to you. For example, it may be possible to:
- Agree that the parents can repay the debt by means of instalments
- Agree that you can take security for the debt by means, for example, of a legal charge over the parents' home
- Agree the assignment of any private debt to you
- Refinance the debt through remortgaging their home or taking a bank loan.
Often, the solution may be a combination of these.
When meeting with the parents, you should be aware that you may ultimately have to pursue them for the debt owing to you. With this in mind, the more that you know about them from the beginning the better. In particular:
- Have you got the full name, home address and telephone number of each person to whom you can look for payment?
- Do you know their occupation, place of work and work telephone number?
- Do you know their date of birth or National Insurance number should they move house?
No system that you put in place will be foolproof, however you can mitigate the risks if you:
- Put in place an appropriate contract
- Find out as much as possible about parents before you grant a place to their child
- Structure fees and take deposits in order to mitigate the risk
- Act decisively if fees remain unpaid for a prolonged period
- Do not be afraid to litigate if debts remain outstanding.
For further information, please contact Robert Collier, Partner, at Veale Wasbrough Lawyers on 0117 3145472 or rcollier@vwl.co.uk
Veale Wasbrough operates a Nurseries Fees Recovery Scheme. Details can be found at www.vwl.co.uk.
