The economic climate is putting nursery managers under intense financial pressure to maintain sustainability against a background of Government cuts coupled with a sharp fall in family spending.
However, necessity is the mother of invention, and providers are finding ingenious ways to cope with changing patterns of demand as well as launching new initiatives to build their businesses in these times of austerity (see case studies).
For the foreseeable future, the childcare sector has little prospect of seeing the financial pressures significantly easing. According to the Office of National Statistics, UK households suffered a drop in disposable income of 2.7 per cent in the 12 months to March 2011 - the highest in 30 years.
Going into the winter, the squeeze on the sector is likely to tighten as families face higher heating and food bills, and national and local government spending cuts begin to bite.
Nurseries have had to cope with rising costs across the board this year, says Adeline Garman, business development manager at nursery chain Early Years Childcare. It started with the 2.5 per cent increase in VAT.
'The rise in VAT has impacted across the PVI sector,' says Ms Garman. 'We are VAT-exempt and cannot reclaim VAT, whereas maintained sector settings are zero-rated so they can claim VAT back. That makes quite a difference.'
THE 'SQUEEZED MIDDLE'
Rising costs have, of course, hit family incomes too. This is leading some to switch from formal to informal childcare, says Vidhya Alakeson, research and strategy director at the Resolution Foundation, the independent think-tank which aims to improve outcomes for lowand middle-income families who have been dubbed the UK's 'squeezed middle'.
They are tracking a group of lowincome families directly and Ms Alakeson says, 'The sense I get is that people are prioritising. They are trying to make savings across the board. Childcare is not the first thing to go, but the issue for the sector is that there is much more substitution of formal with informal care.'
Jennie Johnson, managing director of nursery group Kids Allowed, says the occupancy levels at its settings have not fallen but there has been a higher turnover of places.
'We have been experiencing the churn effect, so we have had more children leave than in the past, but they are being replaced by other children. We are in the lucky position that we have got waiting lists in our established nurseries.
'In the past, the only reason children left was generally because of the family relocating for work or because the children were moving on to school. We have seen an increase in what we call a change in circumstances, such as redundancy, or someone has lost their job or had their hours cut.
'We have reviewed the take-up of places and found that while some parents have dropped the number of sessions they use, more have increased their take-up. It is a complete mix - but generally we are getting more sessions from existing customers, rather than fewer. Parents are working harder.'
Ms Johnson says that parents are also returning to work after maternity leave sooner. 'But in the past, when someone went on maternity leave they would have left their older child in nursery. Now they are taking the child out and caring for the new baby and older sibling together until they return to work.'
Take-up of places is changing, according to Mrs Garman. 'Attendance patterns are very different from two or three years ago,' she says. 'We have far fewer full-time children. They are attending fewer sessions in a week. Some mothers are not going back to work so early now and are taking their full maternity leave and leaving it later to start their baby in nursery. If they are going back to work for three or four days a week, then maybe for a couple of days their friends or family will care for the baby.
'Five years ago it was the case that almost immediately after you had your 20-week scan, you went and booked your nursery place. Nowadays parents are looking to book the place only a few weeks ahead - maybe it is to delay paying the deposit. I think people are uncertain whether their job will still be available and are concerned about losing their deposit.'
RETAINING STAFF
Settings are watching income, and being stringent on late payments, as well as reviewing spending and making every penny count.
Early Years Childcare is looking at promotions such as offering a discount for the first month, but only payable after several months' attendance, or waiving the deposit where the company has a link with a local NHS employer.
The company is also changing its marketing strategy. Instead of paying for expensive advertising, it is raising its profile in the community and getting involved in local events and celebrations.
Ms Johnson says staff retention is more important than ever, because recruitment is expensive in terms of time and money.
'It is not frivolous to spend on your staff - it is an investment. We have just introduced health care for our team. It is not full BUPA cover but what used to be called the Saturday Fund to cover dental fees and eye tests. We have also just introduced free food and drink in the staff room - free milk, tea, coffee, cereal, toast and jam.'
FREE ENTITLEMENT
Cuts in Government support for families' childcare costs are hitting the sector hard, according to research by the Daycare Trust, which says that parents' inability to pay is now the biggest sustainability issue for childcare providers.
The amount of childcare support available from tax credits was cut in April from a maximum of 80 per cent to 70 per cent. Creating a Universal Credit will further reduce the amounts families receive, as the support is being extended to include parents working fewer than 16 hours a week, but without increasing the overall budget.
The shortfall in funding for the provision of the free early years entitlement and what it actually costs providers is also a perpetuating financial problem for the sector.
Ms Alakeson says it is really challenging for settings in low-income areas where parents only take up the 15 free hours and there is no scope to charge top-up fees or augment the shortfall.
Even providers who can cope with the funding gap, which for Kids Allowed is as much as £2.60 an hour, experience difficulties with local authorities' interpretations of the entitlement. Ms Garman wants to see the guidance being more prescriptive on the supplements that can be paid, as some councils take different views on what flexibility means.
'I think the free entitlement should be means-tested so it can be focused on the most deprived children and be paid at a sensible level.'
RECESSION STILL HURTING THE SECTOR
Nursery owners are increasingly concerned about parents' ability to afford childcare, according to a report published by the Daycare Trust this summer.
The survey of 430 childcare providers in London, where nursery costs are the highest in Britain, found that four out of ten are worried about parents' ability to pay their fees. A third of them say the situation is so serious that it threatens the sustainability of their business.
The key findings of the study, based on the impact of the recession, are:
- Half cite rising costs
- About half have suffered a drop in demand for places
- Nearly 20 per cent have had an increase in fee arrears, with two settings reporting arrears of more than £10,000
- More than 20 per cent say the level of funding for the free entitlement is putting the most financial strain upon them.
The top five concerns voiced by full daycare providers are:
- Sustainability of the business (39 per cent)
- Parents not being able to pay the fees (37 per cent)
- Improving outdoor play (37 per cent)
- Staff recruitment, pay and retention (32 per cent)
- Training (31 per cent)
- The level of EYSFF funding (31 per cent).
The impact of local authority cuts
- More than 60 per cent say there is less training available locally
- More than 40 per cent say there is more charging for training
- Nearly one in five has seen their local children's centre either closed or cutting its services.
CASE STUDY: PHOENIX DAY NURSERY
The twice-yearly school intake in Essex meant that Janet Elnaugh, principal of the Phoenix Day Nursery in Brentwood, had a cohort of 30 children leaving, putting the business at barely breakeven point.
By reviewing her business plan and with new ideas and policies in place, she is confident of returning to 90 per cent capacity, and rising, by November.
'We could see capacity falling to where it barely covered our costs,' she says. 'We had a pre-school room for eight with two practitioners empty. We are merging the pre-school rooms for a term.
'We reviewed the business plan with our team, who are fantastic, and looked at prioritising projects. We don't hide issues from them. If something was needed for health and safety reasons or the children's welfare, we would have done it.
'As a priority we sorted out the shade in one of the garden areas and bought industrial-sized parasols costing £4,000. The staff wanted a bathroom re-fitted. We got quotes.
They know it will cost £19,000 and it won't happen before Christmas.
'The staff are now tackling jobs like painting the fence or shed, where before we would have got someone in. It is almost a team-building exercise.
'The flow of children from one room to the next in the nursery creates short-term vacancies and we now promote and sell these extra slots. Around Christmas parents like the chance of an extra session to go shopping or attend a sibling's nativity play.
'We are now balancing the waiting list between children with autumn birthdays and those born earlier, so we will not lose such a big cohort again.
'We had a policy requiring children to attend for a minimum of two sessions. The EYSF paperwork is almost as much for a child attending for two mornings as for a child in a full-time place. I know this is going to change, but children now do a minimum of four sessions or two full days. It has frozen us out of the market of parents wanting socialisation sessions, but our parents are working.
'We are honouring the original session bookings for people already with us but are saying a baby has to do two days. Once the child gets to two-and-a-half we will cut the minimum sessions to three.
'From a practical point of view, we had key persons with 14 children and that will reduce down to nine, which is much better for continuity of care. It means the children can enjoy an enriched curriculum and enriched experiences.'
CASE STUDY: ROSY APPLE CHILDCARE
Sharon Alexander, managing director of Rosy Apple Childcare, which operates the chain of five Little Achievers nurseries in Lancashire, has launched several initiatives to combat problems such as rising outstanding debts, fluctuations in occupancy and the scrapping of the local authority training programme.
'We had an in increase in outstanding debts. At one of our settings we have implemented a policy of payment by standing order only for all new customers. We will review it in January and see what effect it has on our occupancy levels and consider introducing it across all of the company.'
She is looking at putting staff on to term-time contracts after the experience this summer where children left the nursery at the start of the holidays, only to return at the end. 'Their parents took the risk that there would be a place here when they came back. Rather than spend money on six weeks' childcare fees, they used it for the family holiday.'
Spending is kept under close scrutiny, with Mrs Alexander running a weekly cash-flow forecast. When graduate leader funding in the county suddenly ended, it was an enormous blow to the company, she says. 'We have Early Years Professionals in all our settings and it came to about £60,000. The EYPs are now on performance-related pay where they get a bonus for meeting goals relating to quality and occupancy rates.'
The economic crisis has also thrown up opportunities. 'In the current climate the local authority needs me more than I need them.
'A nursery became vacant in a children's centre and we bid for the tender. I was in a strong position to negotiate, so we got the rent down to £1 per square metre rather than the £6-£7 they normally charge.
'The county council ran subsidised training for years at £10 per head, per session. We have now set up our own training organisation with exciting, innovative, high quality training. For the first term we charged £15-£20 per person and just about broke even. We had very positive feedback and will be charging £35-£80. People are booking.'
The company is even running very popular mini-Ofsted inspections, where former inspectors go into a setting for a morning, do an inspection, offer feedback and produce an action plan for a fee of £500.
'Providers are booking these up. This is what they want.'
