It seems that the economy in the UK is recovering, but this recovery has been slower than expected and, of course, worries of a 'double-dip' remain. In addition, the effect of the recently announced public sector cuts has added a further layer of uncertainty.
It appears that the nursery sector has been quite robust when compared with the wider economy - total childcare places have remained relatively steady. However, on closer examination, the total number of nurseries has fallen. Recently-announced quarterly Ofsted figures show that there are 700-plus fewer nurseries when compared with the equivalent 2009 figures, while other published figures show that the number of nurseries has reduced by around 130 during the last quarter.
The shortfall in places seems to have been made up by existing providers expanding and increasing capacity. It is clear that some nurseries have been more successful at trading through the downturn than others. Some of this may have been due to circumstance, but it is likely that some nurseries simply are run on a more commercial basis. So, what can be learned from them?
Q: I hear people saying 'cash is king'. What does this mean, exactly?
Cash - or more particularly, cash flow - is crucial for any business. Businesses need cash as an asset in the short term to pay operational costs (for example salaries, rent and utilities) and make purchases (supplies). Unless they are able to convert debts and assets into cash quickly, they could have insufficient cash to pay immediate obligations, despite current assets exceeding debtors, and could be technically insolvent. Nursery businesses are no different.
Q: So what do well-run nurseries do to increase cash flow?
Successful, well-managed businesses will be in the best position to survive. In doing this there are a number of areas that any business can address:
- - Cash and borrowing: maintaining dialogue with the bank and investigating alternative lines of credit as a fall-back.
- - Staffing costs: reviewing staffing levels and ensuring that you get best value from any salary and bonus structures.
- - Suppliers: reviewing credit terms with suppliers and maintaining a dialogue with them to agree payment dates to manage daily cash flow.
- - Overheads: setting budgets and monitoring compliance with those budgets, reducing overheads where possible.
- - Property costs: reviewing lease terms and use of space, rationalising the property portfolio if appropriate.
- - Debtors: rigorously managing working capital and regularly reviewing 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.
Q: Are there any other techniques that successful nurseries use to ascertain whether cash flow may present a problem in the future?
Well-run businesses use financial management techniques. Every business should be acutely aware of certain key performance indicators (KPIs) such as child numbers, fee income, debtor days (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.
Successful nurseries react quickly. They have strong management, making it clear that children will not be allowed to attend the nursery if fees remain outstanding - it is, after all, unfair to ask some parents to subsidise others. Many nurseries also require large deposits to be paid up front, or even require references for prospective parents.
Q: What can I do in order to better manage my nursery's debts?
Your first step should be to ensure that the contractual arrangement between the nursery and the parents is adequate. The relationship needs to be transparent and the obligations of each party need to be as clear as possible. A written contract will help ensure that there is no misunderstanding in relation to fees, by dealing with questions such as: who is primarily responsible for the fees (it is the parents who are personally responsible irrespective of how the nursery place is funded), what the level of fees are, how those fees accrue (do they accrue daily, weekly, monthly or termly?) and when they are paid (in advance or arrears?).
Your second step is to pursue unpaid fees rigorously. Not only does this increase the likelihood of the nursery being paid, it also sends a message to parents that you are not a 'soft touch'. It follows that if parents cannot pay, they should be willing to explain why. It is unacceptable, however, to be given no explanation at all.
Before you take legal action you should attempt to meet with the parents. 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 now
- - 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 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; and that there can be serious financial consequences otherwise.
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 re-mortgaging their home or taking a bank loan.
Often, the solution may be a combination of these measures.
FURTHER INFORMATION
If you have any queries relating to the issues discussed in this article, speak with Rob Collier or another member of the Early Years Team at Veale Wasbrough Vizards on 0117 314 5472.
