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Caring for Children
30 April 2012
In his recent Budget speech, the Chancellor offered a glimmer of hope to working parents through the softening of the withdrawal of Child Benefit. Many parents, however, will find themselves financially worse off going to work once they have paid for the cost of childcare. It follows that those sectors reliant upon working parents, and in particular, the childcare sector, face challenging times.
Whilst the general outlook for the childcare sector remains positive with under capacity in the short term, following the closure of Local Authority nurseries, and a shift to two-earner families, nurseries are increasingly finding their profits squeezed by rising costs and by downward pressure on fees.
As with other parts of the care industry, private childcare nurseries face high fixed costs: staff are generally low paid, with wages typically set at the National Minimum Wage, but with adult to child ratios dictating high staffing levels, the overall staff cost is pushed higher.
"Nurseries face the difficult decision of balancing fee increases against the risk of alienating parents"
Food and property costs make up the other key costs for childcare providers, and with inspections and reputation a key consideration, these are often difficult areas to cut costs.
The recent above-inflation rises in food and utility costs, combined with the high fixed cost of staff, has placed private nurseries in the difficult position of having to balance fee increases against the risk of alienating parents.
Bearing in mind the high fixed costs of nurseries, a loss of fee income can have a disproportionate impact on profits and on cash flows.
Indeed, working parents are increasingly turning to grandparents for childcare support or opting for a mix of family support and paid-for childcare nurseries. This has lead to a decline in full-time nursery care and left nurseries with periods of over-staffing.
Private nurseries also face the issue of balancing the number of fee paying children to those enrolled under the Government’s free places scheme which allows for 15 hours free nursery care for 3 and 4 year olds. Government funding is typically lower than private fee income.
Regulation represents a significant cost to nurseries with adult to child ratios determining minimum staffing levels, whilst inspection and staff training costs further contribute to overheads. Meanwhile, Local Authority funding for staff training has recently been withdrawn, leaving private nurseries to self fund the cost.
Childcare nurseries are required to register with their Local Authority and with their regulatory body.
"In our experience, owner managers are care professionals rather than a from a business background."
For England, the regulatory and inspection body is Ofsted and nurseries must comply with the Early Years Foundation Stage.
In Wales, meanwhile, the Care and Social Services Inspectorate in Wales (CSSIW) is responsible for nurseries, which are required to comply with the National Minimum Standards for Full Day Care.
And in Scotland, nurseries must register with the Social Care Social Work Improvement Scotland (SCISWIS) and comply with the National Care Standards.
Regulatory bodies monitor the provision of care and if necessary step in when nurseries are failing. Options open to them range from issuing warning notices to cancelling a nursery’s registration, leading, effectively, to its closure.
Particularly at the smaller business end, owner managers are often care professionals rather than from a business background. They are typically dedicated to maintaining a high level of care for children but are weak on management information and cash management.
In our experience, management information is all too often lacking. We have therefore pulled together an aide memoire of points to consider on childcare customers.
- What is the corporate structure of the nursery? Does it allow you to take a debenture?
- What were the findings of the most recent regulatory inspection? Is there a capital requirement to bring the nursery up-to-date?
- Are there cash pressures on the business: regular excesses; aged debtors and aged creditors?
- How do fees compare to those of competitors? Is there any scope to increase fees?
- What is the mix of fee paying children to free places?
- What is the level of enrolments for the next academic year?
- Does management provide regular MI and commentary on KPIs?
- How does the management control costs? What is the level of agency staff?
With operators facing rising costs and parental resistance to fee increases, there is a need for lenders to monitor operators and react quickly to underperforming businesses.
In such a highly regulated and sensitive sector, it is important that lenders engage professionals early to maximise options, both for the lender and for the operator.