The Secret To Profitable Nurseries

Avoid These 6 Common Mistakes!

Transcript

INTRO

Why some nurseries don’t make money! 6 mistakes you need to avoid. 

This is what we will go over in this video, so that you can make sure that your nursery is successful. 

But first, welcome to the channel. 

INTRO VID 

Welcome to the channel Open a nursery, with myself Curtly Ania.  Where I support you to open run and grow your own nursery. 

If this is your first time here, then make sure you subscribe.  I post regular videos from the 7 steps to open your own nursery to the different nursery set-up costs.  

There’s lots here to support you on your nursery business journey. 

But today we are going over why some nurseries struggle and don’t make money and some mistakes you should avoid.  As just because you have your nursery has money in the bank at the end of the year, it doesn’t mean your nursery will be profitable long-term and doesn’t always equate to success. 

Arguably the most important purpose and focus of your nursery should be to make a profit.  Without making a profit every single plan or desire you have for your nursery will fail.  You won’t be able to support the children in your care, you won’t be able to provide services for your community and won’t be able to provide a good income for yourself or your staff. 

Not focusing on making a profit. 

Which is why the first thing you should avoid doing is not focusing on making a profit. 

This sounds simple but so many businesses, including nurseries don’t do this. 

They don’t sit down and work out how much profit you will make or how much you can make. You need to be profit-focused.  You need to work out how much profit you intend to make on your income. Then make every effort to ensure this profit target becomes reality. 

Despite the importance of this, I still find many childcare providers I begin supporting not prioritising this.  Far too many childcare providers don’t really understand or focus on profit. 

Work out your profits, by working out how much you can generate from each child and then taking away all of your potential expenses. 

Make sure you are realistic and conservative with these figures. 

Not working out your margins 

Now, hopefully you understand the importance of focusing on your profits, you need to think about what sort of margins you want to make. 

Margins are an important indicator to profitability, but it’s vastly ignored or misunderstood among most settings. 

Now think, do you know your current margins? Is that comparable to other nurseries in your area? 

If not, do you know how to work out your margins? 

If the answer to this is no or I don’t know, then I’ve got some homework for you. Work out your margins. 

It’s not actually that difficult. 

Simply, take the direct labour costs and direct expenses out from the revenue/ income.  Then divide that number by the revenue.  So, for example your income/ revenue for one child is £16,000 a year.  Your direct expenses for things like food come to £2,000.  And your direct labour costs comes to £6,000 (which is worked out by paying one member of staff £30,000 looking after 5 toddlers).  30,000 divided by 5 makes 6000. 

This makes the total direct labour costs and expenses £8,000. 

You then minus this amount from the revenue and then divide by the revenue. 

This works out your gross profit margin. 

So, in this example you would do 16,000 – 8,000 and then divide by 16,000. 

Which makes you margin 0.5 or 50%. 

This means for every £1 that you receive per child, you make 50p in gross profit. 

You can then use this gross profit margin to compare 33% with other nurseries to gauge where you are at. If this margin is too low, then you’re unlikely to be making net profit because there won’t be enough to cover your overheads or fixed costs like your rent. 

So, make sure that you work out what gross profit margin your nursery can expect to make. 

Not working out how much to charge 

Another reason some nurseries don’t make money and a mistake you should avoid, is not working out how much to charge. 

Many nurseries just copy competitors’ prices or just base it what the feel they should charge. 

Please don’t do this. 

You’ve worked out your gross profit margin, now use this as well as your other expenses to work out how much you should charge. 

Work out how much it costs for example 20 children to attend your nursery. 

Your direct costs, based on the previous calculations for these 20 children would be 8000 times 20, which is £160,000. 

Fixed costs may be 40,000.  For example, £30,000 on rent and another £10,000 on other costs like your utilities. 

This brings your total costs to £200,000 for 20 children. Or £10,000 per child.  This means you will have to charge more than this in order to make a profit. 

If you goal is to get a 33.3% net profit margin, then you would need to charge £15,000 per child a year or £1,250 a month.   

Ensure you work this out properly, as it may be easy to confuse charging £15,000 a year as a profit margin as 50%. 

As remember the profit margin is the revenue 15,000 – 10,000 divided by 15000. 

If your costs increase and you want maintain the same profit margin, then one should be doing is increase your prices. 

This is something many are scared to do, and leads onto the next mistake people make. 

Taking too long to increase your prices 

If you realise your not charging enough, maybe minimum wage has gone up which has increased your costs or your landlord has raised the rent then you need to raise your prices.   

Many nurseries procrastinate and put off putting up their prices due to the fear that they will lose parents or the fear of having these awkward conversations. 

It’s important to realise, although some parents may not be happy with the increase, it is unlikely that many will leave. 

A parent is unlikely to leave if their fees go up by 5%. Using, the previous example, this means their fees would increase from £1,250 to £1312.50.  An increase of £62.50 per month.  It’s unlikely parents will take their children elsewhere due to an extra £60 odd per month, especially if you explain the reasons why you need to.  But this increase will mean you go from earning £300,000 per year with 20 children to £315,000, which will help you to cover the costs involved with a potential minimum wage rise or increase in rent. 

Not cutting costs 

If one of your costs does increase, you don’t just have to raise your prices. 

You should also be looking at what costs you can cut.  This is another mistake nurseries make.  Not cutting costs. 

You should regularly look at costs to see where you might be spending too much or wasting money.  This can also be challenging as it can lead to awkward conversations with staff around resources or changing suppliers you’ve been loyal too or even letting people go. 

But, sometimes in order to make your business successful this is something that needs to be done. 

It’s important to remember as well that cutting a direct cost has a much greater effect on profit than cutting a fixed cost.  Though, both should be checked to see where to can reduce your expenditure. 

Not understanding your finances 

Putting this all together one of the biggest mistakes people make is not trying to understand their finances.  Now you don’t need to study accounting and know how much your assets are depreciating. 

But, it is important that you take the time to understand the things mentioned in this video. 

You should know how much profit you are making per child.  How many children you need to reach your profit margins and what your costs, income and expenses are. 

These are important and simply concepts you should grasp if you plan to open your own nursery. 

You should then use these numbers and feed it into your nursery business plan. 

To support you doing this, feel free to download the free business plan structured just for a nursery which you can assess by clicking the link on the screen and scrolling to the middle of the page or by clicking the link in the description. 

So, head over there to get started and download your free business plan template.  God bless. 

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