Controlling and reducing the expenses of your childcare company or school starts with knowing what the expenses should be. Many company owners, presidents and CEOs started in this business with a somewhat vague knowledge of expense levels and an entrepreneurial spirit that told them they would figure it out. Approximately 20% survive the early years to discover a way to make the company work, but there is nearly always a way to improve your company’s bottom line. Half of that equation is controlling expenses. Here are some methods and ideas to help you with your equation:
1. Shop your vendors aggressively every two years or when contract renewals permit. Don’t settle for one or two bids from other vendors. If you can get ten bids from qualified vendors, then get all ten bids. At a minimum, it will give you a much clearer picture of the market cost for the service or product provided by each of the vendors. It is very easy to get comfortable with a vendor and choose to stay with the status quo, but this common occurrence can cost your company many thousands (maybe hundreds of thousands) of dollars over time … profits that should belong to your company, your family and you.
One of the biggest and most popular expense reductions is eliminating Moot Vendors—For Example: Some centers and schools hire a janitorial service to clean classrooms in the evenings. In other more profitable centers and schools, teachers are responsible for making sure that their classrooms are clean and orderly at the end of the day. This practice often coincides with greater teacher pride and ownership of “their” classroom. The same can said for the cook and kitchen….etc. Keep in mind that this is very light cleaning and organizing work. More difficult tasks such as buffing floors should be handled by professionals.
Note that the cheapest price does not always mean that you should choose the vendor. Some vendors cost more, and they’re worth it. However, shopping your vendors will give you far better information with which to make your decisions.
2. Make sure your payroll costs are no higher than 50% of your Gross Revenues. Payroll costs can be as low as 38% and as high as 50% of Gross Revenue and remain in the “normal” range. A very reasonable level is 45%. If payroll costs are over 50% for any reason, they should be reviewed and corrected. Corrected doesn’t always mean cutting employees’ compensation, but a review of the following items should be helpful:
a. Payroll Creep–Payroll Creep occurs when employee(s) have worked at the center for a number of years and received small pay increases every year. While teachers and staff certainly should be paid fairly, annual pay increases are not guaranteed to anyone. A raise of fifty cents per hour for 20 full-time (40 hours) employees for five years costs your company and you $104,000 plus payroll taxes.
b. Ratio Watch—The Teacher Student Ratio should be checked every hour of the day. This practice may seem “impractical” until it becomes part or your daily routine. However, there are times of the day in every center or school when the school is not at its maximum attendance for the day. Most commonly, this occurs before and during morning drop-off, mid-day for centers or schools teaching morning and afternoon classes and in the late afternoon when parents are picking-up their children. During these times, there is no reason to have “extra” teachers on the payroll. If you are concerned about implementation of these practices, don’t hesitate to contact us at www.bfsinc.net or 800-467-1774.
3. Target an occupancy cost (rent or mortgage) of 12% of Gross Revenues or less.There are three basic structures for occupancy cost. Your company pays rent to a third-party landlord, pays the mortgage to a lender (bank) for the real estate or pays rent back to you or your real estate holding company.
a. Third-Party Landlord—Remember when you are negotiating a lease or the renewal of a lease with your third-party landlord, there are many negotiable terms in a lease and all of them can be used to negotiate lower rent.
b. Bank Mortgage—Similar to the third-party lease above, a mortgage has many negotiable terms to be utilized. However, negotiating with a bank can be much easier. In 3a above and unless you’re willing to move your company’s operations, you are limited by the fact that you can only negotiate with the one landlord. But…you can move your mortgage to any bank that is willing to meet your terms. With the exception of supplying your own information, the banks do all the work and you get to make the decision. While banks have a longer checklist than in previous years, they are very eager to secure good loans and improve their own portfolios.
c. Leasing Property Back to Yourself—When you or an entity that you control serves as the landlord, you have more flexibility. You can choose to increase or decrease the rent to your childcare company or school. Adjusting rent paid by your childcare company or school will increase profitability as you see fit.
What are some things you do to control expenses?
In my next blog post, I will give you three more ways you can control expenses of your childcare company or school. You can read it here.
Listen to an enhanced 3-part audio version of this article below...
Shopping your vendors.
Target occupancy cost.
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