Transcript Slide 1

Understanding Cost Structures
at Child Care Centers
Workshop Presented by
Good Work Network
Funded by Louisiana Department of Social Services
Child Care and Early Childhood Education Division
TODAY’S AGENDA
Breakeven Analysis
Pricing Your Services
Budgeting
Cash Flow Projections
Benchmarking Costs
• Trend Analysis
• Ratios Method
• Expense Analysis
Quality Rating System
Cost Impacts
Excel 101
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What is a spreadsheet (worksheet)?
What is a column
What is a row?
What is a cell?
Entering data
Formulas
Practice
Spreadsheets
A spreadsheet is a computerized equivalent of a paper
ledger, used in businesses to create budgets and to
perform financial analyses.
Spreadsheets are made up of columns, rows, and cells.
Columns
In a spreadsheet the COLUMN is defined as the vertical
space that is going up and down the window.
Letters are used to designate each COLUMN'S location.
In the above picture column C is highlighted.
Rows
In a spreadsheet a ROW is the horizontal space that goes
across the worksheet.
Numbers are used to designate each ROW'S location.
In the above picture row 4 is highlighted.
Cells
In a spreadsheet the CELL is defined as the space where
a specified row and column intersect.
Each CELL is assigned a name according to its COLUMN
letter and ROW number.
In the above picture cell B6 is highlighted.
NOTE* When referencing a cell, always put the column letter first
and the row number second.
Entering Data
• Three kinds of data can be entered into
cells:
1) labels – text with no numerical value, used to
explain the numbers
2) constants – just numbers, do not change
3) formulas – mathematical equations used to
calculate values, can change depending on
inputs
Formulas
Formulas are entries that have an equation that calculates the value to display.
Instead of typing in the numbers we are looking for; we type in the equation.
This value will be updated upon the change or entry of any data that is
referenced in the equation.
Symbols:
This image shows a basic
multiplication formula –
C3 = C1*C2 or 6 = 2*3
Addition:
+
Subtraction:
-
Multiplication:
*
Division:
/
Sum:
∑
Basic Definitions
• Revenue: The amount you receive from all
sources for the services you provide.
• Expenses (Costs): The amount you
expend for operating your business.
• Profit or Loss: Revenues minus expenses,
profit if revenues exceed expenses; loss if
expenses exceed revenues.
Breakeven Analysis
Breakeven Analysis is a tool that lets
us determine that level of activity
(number of paying customers or
dollars of revenue) that will cover all
of our expenses. The breakeven
point is that point where the business
has no profit and no loss.
Types of Costs
• Fixed Costs are those that do not change in
total regardless of the number of children
enrolled. Examples are rent, insurance,
telephone.
• Variable Costs are those costs that vary
directly with the number of children enrolled.
An example is food costs.
• Step-Variable Costs those that vary with the
number of children served but in increments
larger than a per child amount. An example is
teacher salaries.
Contribution Margin
Contribution Margin is the amount of each
dollar of Revenue that is available to cover
Fixed Costs. The formula is:
Revenue per Child
- Variable Cost per Child
Contribution Margin per Child
Breakeven Methodology
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Determine Average Revenue per Child
Divide Costs into Variable and Fixed
Determine Fixed Cost for the Period
Determine Variable Costs per Child
Subtract Variable Cost per Child from
Average Revenue per Child to get
Contribution Margin per Child
• Divide Contribution Margin per Child into
Fixed Costs to get Breakeven Point
BREAKEVEN ANALYSIS
EXERCISE
Pricing Your Services
• Pricing is an art not a science
• Have to be competitive
• Have to cover costs
• Important to understand how
costs work
Law of Supply and Demand
Generally the lower the price for an
item the more demand there will be
for it. Lowering your prices COULD
(but certainly not always) increase
your profitability.
Pricing Exercise
Assume the following
Fixed Costs: $20,000 per month
Variable Cost per Child per Month: $120
What should the average price per child
per month be?
PRICING EXAMPLES
Developing a Budget
• Establish a time period the budget
will cover (usually a month or year)
• Determine fixed costs and fill in
• Determine variable costs per child
• Determine revenue per child
• Determine number of children to be
served
Budgeting Tips
•Start with last years actual
numbers and adjust as necessary
•Include amounts for contingencies
in many items
•Be conservative when preparing
budget for internal use
•Be optimistic but realistic when
preparing projections for lenders
•Compare actual to budget
regularly
•Make adjustment quickly when
profits or cash flows turn negative
BUDGETING TEMPLATE
CASH FLOWS vs. PROFITS
• Not all revenues are received in the month in
which the services are provided (state subsidies)
• Not all expenses are disbursed in the month in
which they are incurred (payroll taxes)
• Some expenses do not result in cash
disbursements (depreciation)
• Some cash disbursements are not expenses
(purchase of equipment or repayment of loans)
• Some cash receipts are not revenues (loans or
investments by owners)
Importance of Projecting
Cash Flows
• Overdrawing your checking account is not
a good thing
• Not having the cash to pay your
employees is not a good thing
• Not paying your payroll taxes when they
are due is not a good thing
• Having to go out of business when you are
profitable but run out of cash is
heartbreaking
Moving from Budget to
Cash Flows Projections
Subtract from Profit or Loss
Increases in Receivables
Decreases in Payables
Repayment of Loans
Dividends to Owners
Purchases of Equipment or Fixed Assets
Add to Profit or Loss
Depreciation
Decreases in Receivables
Increases in Payables
Money Borrowed from Bank
Money Invested by Owners
Keeping Track of Actual
Revenue and Expenses
• Deposit all revenues to business checking account
(do not pay cash expenses with cash receipts)
• Pay for all expenses out of business checking
account
• Don’t pay personal expenses from business
checking account
• If possible use accounting software (for example
QuickBooks) to record all business financial
transactions.
• Produce Income (Profit and Loss) Statements
monthly and review.
Sample Income Statement
Sample Budget vs. Actual Income Statement
Benchmarking Costs
Ratios, trends and expense
analysis
Trend Analysis
Trend analyses track cost
percentages over time and can
give us a better picture of what is
happening with our business.
Trend Analysis Exercise
Ratio Analysis
Ratios can measure certain aspects of the
business and can be compared to industry
averages to gage how well we are doing in
relation to other childcare providers.
Industry:
Location:
62441 - Child Day Care Services
All Areas
Average by Sales Range (Number of Reports)
Financial Metric
Under $1MM (120)
1 to $10MM (26)
Over $10MM (5)
Current Ratio
1.95
4.17
1.05
Quick Ratio
1.38
3.27
0.72
81.87%
72.22%
46.42%
5.60%
4.32%
5.82%
Inventory Days
1.59
0.03
0.00
Accounts Receivable Days
7.78
10.03
12.05
Accounts Payable Days
8.90
30.15
10.04
Interest Coverage Ratio
5.81
14.38
32.43
Debt-to-Equity Ratio
3.76
1.87
0.59
Return on Equity
11.41%
10.69%
17.36%
Return on Assets
10.44%
10.49%
10.84%
12.01
8.10
2.76
Sales per Employee
$31,060
$43,416
$0
Profit per Employee
$1,935
$1,826
$0
Under $1MM (90)
1 to $10MM (21)
Over $10MM (5)
Profit Growth
28.40%
59.38%
15.00%
Sales Growth
2.56%
1.15%
7.99%
Gross Profit Margin
Net Profit Margin
Fixed Asset Turnover
Growth Metric
Quality Rating System
•Improving staff-child ratios by the
age of the child and the setting of
care
•Improved minimum credential
requirements for child care providers
•Increased average salary and
benefit levels of providers
•Improved professional development
opportunities
•Improved monitoring or evaluation
requirements
•Improved ERS ratings
North Carolina
Quality Rating System
Cost Structures
Quality Rating System/School
Readiness Tax Credit Incentives
• For Providers (based on star level):
2-star = $750 per child, 5-star = $1500 per child
• For Parents (based on star level of center):
Increase to existing credit of 50% for 2-star center, 200%
for 5-stars
• For Teachers (based on teachers education):
Up to 15% income increase
• For Businesses (based on star level of center):
2-star=5% of expenses, 5-star = 20% of expenses
Quality Rating System/School
Readiness Tax Credit Incentives
• Eventually will show up as added revenue
• Will create wage supplements for teachers
-centers will be able to retain quality teachers
without taking on additional payroll costs
Thanks for being here.