Accepting new children into your daycare program may be a promising way to bring in more revenue. However, before you begin to make plans for the extra cashflow, you will need to determine the true cost of adding each new child to your program. In this article, we will explore the variable costs associated with each child for whom you intend to provide care.
Estimate Your Variable Costs Per Child
In order to gauge how much additional profit you can expect from enrolling new children in your program, you will first need to figure out the direct costs associated with each child at your center. These direct costs are known as the variable costs per dollar of sales, and they represent the costs you will incur at incremental intervals for every new attendee at your daycare center. A business?s variable costs are expenses that rise or fall in direct proportion to its volume of production. Thus, as a daycare business owner, you can expect that your variable costs will increase with your increased enrollment.
What are the specific variable costs associated with each new child at your facility? Some of these expenses include groceries and food, if you provide breakfast, lunch, and/or snack, arts and crafts supplies, classroom materials, like an extra chair or cushion for each child, and payroll, to account for new hires that may be necessary to maintain your adult-to-child ratio. These variable costs directly impact your profits. Since your profits are determined by your total sales subtracted by your total costs, you can see why it is so important to calculate your variable costs per child.
Here is an example of a variable cost break-down for one child who attends daycare for one full day:
Breakfast – $2.50
Snack – $0.75
Lunch – $3.50
Payroll – $19.75
Arts and Crafts – $1.25
Total variable costs per child per day: $27.75
You can multiply the total variable costs per child per day by the number of full weekdays the child attends daycare to get your total variable costs per week for a full-time child: $27.75 x 5 days (full-time) = $138.75.
You can see the direct relationship between increasing the number of children enrolled in your daycare program and the increased variable costs you will expect to pay. Some of these expenses are less extreme than others; making room in your budget for daily snacks for a few additional children versus budgeting for another staff member or more to accommodate your higher enrollment numbers is a good example. You will need to keep these factors in mind as you consider adding more children to your program.
Lower Your Variable Costs if Necessary
If you are seeking to lower your total costs in order to maximize profit as you add new children to your program, your best bet is to focus on reducing your variable costs rather than your fixed costs. Generally speaking, it is more difficult for a daycare business to lower fixed costs, including rent, utilities, insurance, and staff salaries unless you are willing to go to great lengths, like finding a location with a less expensive rent payment or shopping around for different insurance. It is much easier to lower your variable costs per child to boost your profitability.
Consider various ways you can lower your variable costs per child: seek out donations of toys and classroom supplies from local businesses, community organizations, and churches; shop sales and buy in bulk to lower the cost of your arts and crafts supplies; stock your daycare kitchen pantry with food items from wholesale retailers to rein in your grocery expenses. You will find that although your variable costs will inevitably increase as you add more children to your program, you do have a reasonable amount of control over your direct costs per child.
The Honest Buck Accounting team is passionate about helping childcare business owners like you maximize your profitability and grow your business! Our Profitability Coaching services are designed to equip you with the financial strategy you need to take your business to the next level. Learn how we can help you analyze your variable costs per child, forecast your profits, and much more when you schedule a call with our accounting experts today.