Childcare Financial Success: Cost Modeling and Forecasting Roadmap Guide

Budgeting and financial forecasting are crucial for the success of your childcare center, and yet many small businesses don’t prepare budgets. Financial forecasting uses past business performance to inform future strategic business decisions and helps you manage and allocate resources efficiently to yield profits.

Having an effective budget will help you track the income and expenses of your program, prepare for emergencies, and plan for growth, helping you achieve financial success. In this article, you’ll discover how to develop accurate financial projections and how you can use these forecasts to make informed decisions and secure the future of your childcare business.

Setting up your budgeting framework

A well-structured budget helps in estimating and allocating resources effectively, such as staff salaries, supplies, and equipment. It enables you to identify potential areas for cost-saving, optimize spending, and prioritize investments that contribute to the growth and development of your childcare center. Moreover, a budgeting framework serves as a benchmark for evaluating the financial performance and progress of the business over time, enabling adjustments and improvements to be made wherever necessary.

Identify fixed and variable expenses

When developing your childcare center budget, start by identifying your fixed and variable expenses. Fixed expenses remain the same every month (and you’re likely to pay them around the same time each month), while variable expenses change depending on your business activities. 

For example, your rent or lease payment is a fixed expense since it remains the same whether your enrollment numbers increase or decrease. Food and beverages, on the other hand, are a variable expense as they change depending on the number of children enrolled. Other fixed and variable expenses include:

• Daycare licenses and fees
• Wages
• Loan repayments
• Insurance premiums
• Utility bills: phone, internet, water, electricity, heating, trash

• Equipment: high chairs, cribs, outdoor play equipment, dining sets, and more
• Supplies: books, art materials, cleaning supplies , diapers, toys, and more 
• Advertising and marketing: flyers and business cards, social media ads, commissions 
• Transportation
• Pay for aides and substitutes

Estimate revenue streams

Another crucial aspect of budgeting is estimating your revenue streams. Your revenue streams may include:

• Tuition
• Late payment fees
• Additional services: late pick-up fees, early drop-off fees, special classes, events
• Government funding
• Donations and sponsorships
• Fundraisers

Enrollment numbers also play a significant role in budget planning. Including enrollment numbers in your budget helps to estimate your expected monthly and annual income. Projecting and monitoring enrollment figures also allows you to accurately forecast revenue and adjust expenses accordingly, ensuring financial stability and effective resource management.

Tools and techniques for cost modeling

Cost modeling is a strategic tool used to analyze and understand the various factors that contribute to the total cost of delivering a product or service. It involves creating models or frameworks that capture the drivers of cost, such as labor productivity, material costs, and overhead expenses. 

By utilizing cost modeling, business owners can establish the right prices, identify areas for improvement, and make informed decisions to optimize their bottom line.

Select the right budgeting tools and software

Using the right budgeting tools and software is crucial to helping you determine the cost of providing childcare services, how to allocate resources, and what services to offer. Factors to consider when selecting the right budgeting tool or software for your business include:

• User-friendliness: Easy to set up and use.
• Cost: Within your budget while providing value and offers flexible pricing options.
• Reliability and accuracy: Displays a successful track record with positive feedback from customers.
• Scalability: Accommodates increased requirements when your business grows without negatively impacting performance.
• Analytics and reporting: Provides comprehensive reports, customizable dashboards, and data visualization tools for identifying trends and analyzing expenses.
• Integration capabilities: Integrates seamlessly with your existing systems to ensure financial data consistency and reduce manual data entry.
• Security and compliance: Adheres to industry data security standards and regulations to safeguard sensitive financial information.
• Training and support: Provides responsive customer support and in-depth tutorials.

Brightwheel is an all-in-one childcare management software that saves time and money. It integrates automatic billing and payments, real-time communication with families, classroom management, and learning in one easy-to-use platform. The software enables you to efficiently run your program, saving each staff member 20+ hours a month.

Forecasting techniques for accurate financial planning

Childcare businesses generally use two main forecasting techniques for accurate financial planning: historical forecasting and research-based forecasting. Historical forecasting projects future business growth using data from previous financial statements, such as income statements, balance sheets, and cash flow statements. Research-based forecasting, on the other hand, forecasts financial growth potential based on competitor research and industry trend analysis. 

Each forecasting technique has disadvantages, so using only one may not give you accurate results. For example, historical forecasting is limited since it doesn’t account for the whole childcare industry and unforeseeable circumstances like a global pandemic. Also, market conditions, technological advancements, and consumer preferences are always changing, making it difficult to accurately determine the future return on investment. Research-based forecasting doesn't take into account all factors either, so it’s a good idea to combine both techniques for more accurate forecasts.

Cost management and reduction strategies

As a childcare business owner, it’s essential to implement cost management and reduction strategies to achieve financial success. 

Identify areas to cut costs without compromising quality

By continuously seeking areas to cut unnecessary expenses, you can improve the financial performance of your business and ensure long-term success. These are some areas you can consider when cutting costs:

• Equipment: Buy affordable, good quality equipment from yard sales and thrift stores.
• Food: Register with the Child and Adult Care Food Program to receive reimbursements for food and snacks you provide.
• Learning materials: Ask for donations or buy from discount stores.
• Supplies: Buy in bulk.
• Staffing: Reduce staff turnover by offering competitive wages, providing training and professional development opportunities, and fostering a positive work environment.
• Systems: Use centralized childcare software like brightwheel to reduce time and money spent on administrative tasks.

Negotiate with suppliers and service providers

Negotiation with service providers and suppliers is a key aspect of cost reduction. The goal is to achieve a mutually beneficial agreement. Here are some helpful tips for a successful negotiation:

• Conduct thorough research and gather information about competitive pricing in the market. Armed with this knowledge, you can approach negotiations from a position of strength. 
• Build and maintain strong vendor relationships. By establishing trust and open communication with your service providers, you may be able to negotiate better terms, discounts, or bulk pricing. 
• Explore alternative suppliers and service providers to compare prices and offerings. Additionally, bundling services or purchasing in large quantities can often lead to cost savings.
• Be flexible with payment terms, such as negotiating longer payment cycles or exploring early payment discounts.

Forecasting profitability and growth

Set realistic profit goals

When forecasting, it’s important to set realistic profit goals to establish a clear direction for your business, measure progress, and make informed decisions. These tips will help you set realistic goals for your business:

• Analyze your current financial position
• Identify your objectives (long-term and short-term)
• Set specific and measurable goals. Avoid vague goals like “increase income.” Instead, set a goal to increase income by 15% in 12 months
• Focus on the most important goals first (e.g. which ones are most critical to business growth?)

After determining your goals, create a plan to achieve them. Assign tasks to staff members, track progress, and make necessary adjustments. Remember to seek help from financial advisors for professional insights.

Implement strategies for sustainable growth and expansion

As the demand for high-quality childcare services continues to rise, it is essential to develop effective growth strategies. The strategies below can help you grow and expand your childcare business:

Increase enrollment and retention

One of the key strategies for sustainable growth is to focus on increasing enrollment and retaining existing families. This can be achieved by implementing effective marketing and advertising campaigns targeting families in your local community. 

Offering referral incentives to current families can also help attract new enrollments. Additionally, providing high-quality care, nurturing relationships with families, and continuously improving services will enhance customer satisfaction and increase the likelihood of families staying with your childcare program.

Expand your services

Assessing the demand and market trends, you can consider adding additional classrooms, outdoor play areas, or specialized facilities like music or art studios. Introducing new programs or services, such as after-school programs, summer camps, or extended hours, can attract a wider range of families and generate additional revenue streams.

Invest in staff development and training

Employee turnover is a hidden cost, but it’s a huge one. Hiring new employees costs valuable time and money, so once you hire your staff, invest in their training and ongoing development so they can grow with your program. Providing regular training and professional development opportunities for your employees not only enhances their skills but also improves the quality of care provided to children.  

Collaborate with community partners

Establishing partnerships with local organizations, schools, or businesses can provide opportunities for collaboration and mutual growth. 

For example, collaborating with nearby schools can create a seamless transition for children entering kindergarten, while partnering with local businesses can offer discounted services or benefits for employees. Such collaborations not only increase enrollment potential but also strengthen your childcare program’s presence within the community.

Embrace technology solutions

Incorporating technology solutions can streamline operations, improve communication with families, and enhance overall efficiency. Utilizing software like brightwheel for administrative tasks like admissions, billing, and record keeping reduces manual effort and increases productivity. 

Additionally, implementing a robust online presence through a website or social media platforms can boost visibility, attract new families, and provide a platform for parent engagement.

Handling unexpected financial challenges

Businesses are prone to unexpected expenses like equipment repairs, rent increases, and increased costs from suppliers. Uncertainties like global pandemics, economic recessions, and political changes can also cause unexpected financial challenges. Here’s how to plan for tough financial times:

Build an emergency fund

Your business must have an emergency fund to help continue operations during difficult financial times. You don’t have to save a lot of money immediately; start with a small amount on each transaction. 

Open a business savings account, preferably an interest-bearing account, and treat your emergency savings like other important payments. Automating your savings will help you remain consistent. Save larger amounts during profitable times.

Adapt budget plans during economic uncertainty

In a "normal" economy, your usual budget plan may work for you, but not in a downturn. The traditional budget assumes businesses can predict their future accurately with forecasting tools. Creating a solid budget plan will require you to understand your business's challenges and how they affect your budgeting process. Here’s how you can adapt your budget for economic uncertainty:

Change your goal

Focus your resources on providing quality childcare services and improving learning outcomes rather than meeting your budget. Learn and adjust instead of making long-term predictions in the face of uncertainty. Avoid dismissing genuine uncertainties and challenges and confront them instead.  

Increase cash generation

Having cash is crucial during tough economic times. Focus on integrating cash generation projects into your plans, such as the following:

• Utilizing grants like Think Small: Grants and Financial Opportunities and USA Grant Applications
• Improve your online presence and marketing techniques
• Provide additional services, like enrichment activities and camps
• Rent out your facility for community events during the holidays
• Partner with vendors to provide educational workshops to families and educators

Monitor the progress of your cash generation efforts to determine which ones you should focus on. 

Review your expansion plans

Examine any business expansion plans you made before the economic downturn, like building new structures or opening at a new location. Decide whether to execute, adjust, postpone, or cancel your plans.

Plan for potential scenarios

Determine how an economic downturn would affect your childcare business. Will you face low enrollment? What actions would you take in each case? Who should take them? Adjust your plan every week, month, or quarter to improve budget accuracy. A flexible budget strategy will help you navigate uncertainty as you can quickly adjust it to changing conditions.

Accounting for regulatory compliance and financial reporting

Following best practices for financial reporting and staying compliant with regulatory standards helps monitor your finances properly and make the right decisions for your business.

Understand childcare regulations impacting finances

Childcare regulations and laws have a significant impact on the financial aspects of your childcare business. These regulations often require you to maintain specific staff-to-child ratios, adhere to safety standards, and meet licensing requirements. While these regulations are essential for ensuring the well-being and safety of children, they can impose additional costs on the business. 

Meeting staffing requirements may mean hiring more employees, increasing payroll expenses. Compliance with safety standards may involve investing in equipment, renovations, or regular inspections, adding to operational costs. Licensing fees and ongoing regulatory compliance also contribute to financial burdens. 

Moreover, changes in regulations or the introduction of new laws can require businesses to adapt their operations, which may involve further expenses, such as additional training or modifications to facilities. As a result, it’s important to carefully budget to accommodate these regulatory obligations while maintaining profitability and delivering high-quality care.

Best practices in financial reporting and transparency

Here are common best practices for financial reporting:

Follow GAAP principles

Generally Accepted Accounting Principles (GAAP) are a set of accounting guidelines issued by the Financial Accounting Standards Board (FASB). GAAP is widely used as a common set of accounting standards in businesses across the US.

This framework helps business owners achieve excellent financial reporting and success by providing clear, consistent, and accurate company financial data. With the right data, you can make smart decisions for the future.

Ensure accuracy

Financial reporting must be accurate for effective decision-making. Ensure that your data follows the 4 "Cs": current, correct, consistent, and complete, to increase trust and credibility among stakeholders.

Leverage technology for efficient reporting

Use specialized financial reporting software designed to help automate repetitive tasks, reduce human errors, and enhance accuracy. With brightwheel billing, you can keep track of your balances, payments, and cash flow in one place.

Automating data collection and consolidation processes eliminates the need for manual data entry and minimizes the risk of errors. This guarantees data integrity and accelerates reporting timelines. 

Provide context and analysis

Instead of only mentioning numbers, interpret the data to help other stakeholders understand how the data affects the business. Highlight trends with past data to understand the company’s financial performance better. Remember to include non-financial information, like operational changes, to provide a complete picture of the business. 

Review regularly

Review and update the data to ensure relevance and reliability. Your financial report should include business changes in strategy, operations, or structure. Stakeholders’ feedback is crucial to improving the relevance of the report.

Financial success for your business

As a childcare business owner, it’s your job to ensure that your business achieves financial success. So whether your business is doing well or facing unexpected financial challenges, you have the tools to keep your business afloat by creating realistic forecasts, following best practices, and making smart financial decisions.

Brightwheel is the complete solution for early education providers, enabling you to streamline your center’s operations and build a stand-out reputation. Brightwheel connects the most critical aspects of running your center—including sign in and out, parent communications, tuition billing, and licensing and compliance—in one easy-to-use tool, along with providing best-in-class customer support and coaching. Brightwheel is trusted by thousands of early education centers and millions of parents. Learn more at mybrightwheel.com.