Ask an Accountant: Pt 2

February 27, 2023

What Percentage of My Total Income Revenue Should Go to Payroll and Rent?

After covering how much money you should keep in the bank as a childcare business owner in Part 1 of our Ask an Accountant series, we turn our attention to two major expenses on your childcare business budget: staffing and occupancy. Specifically, we answer the question, “What percentage of my total income revenue should go to payroll and rent?” Continue reading to learn the answer. 

Four Buckets of Expenses

When categorizing major business expenses, we encourage childcare clients to think of four expense buckets, consisting of staffing, occupancy, administrative costs, and costs related to your childcare program. Now let’s take a closer look at the two buckets in question. 

Staffing and Occupancy Expenses

Staffing or payroll represents a major expense for most businesses, regardless of industry. Your payroll expenses encompass employee salaries and wages, as well as taxes, benefits, and bonuses. Since payroll is one of the largest recurring expenses for your childcare business, it is crucial to keep payroll costs as low as possible. The cost of payroll as a percentage of your total income revenue is called your payroll percentage. The payroll percentage is a useful key performance indicator (KPI) to assess whether you are spending too much on payroll costs, which is a common problem childcare businesses run into.

Another major expense for Early Childhood Education businesses is occupancy or rent. If you don’t own your childcare facility, your monthly mortgage or lease payment represents another significant percentage of your total income revenue. 

We have found with many of our childcare clients that these two expenses are closely related; if your rent percentage is too high, for example, the most meaningful place to cut costs would be your staff. On the other hand, once clients are able to pay off the mortgage, they often want to be able to pay staff a little extra. It makes sense that both of these expenses have an impact on one another, but what percentage of your total income revenue should they be? 

What Percentage of Total Income Revenue Should Go to Payroll and Rent

We recommend our Early Childhood Education clients keep payroll and rent costs at or below 70 percent of the total income revenue. Doing so will put you in a position to generate a 10 to 15 percent profit margin. If we wanted to break out payroll and rent as two separate expenses, we would advise keeping payroll at or below 55 to 60 percent without owner’s wages, if the owner isn’t also the director. (However, if the owner is the director, then their wages should be counted in.) We would advise keeping rent at or below 10 to 15 percent. 

Overall Picture

It is important to keep in mind the complete picture of all expenses as a percentage of your total income revenue. Let’s briefly discuss the remaining expenses and the overall picture.  

We recommend keeping admin expenses at or below 5 to 10 percent and program expenses at or below 10 to 15 percent. Total expenses on the low side should comprise about 80 percent of your total revenue, leaving you with a profit margin of about 20 percent. Beware of total expenses that are too high; you could find them eating up 100 percent of your revenue, leaving you with no profit!

We hope this guide will help you determine whether your payroll and rent, and all four buckets of expenses, fall within the appropriate percentages of your childcare business’s total income revenue. 

The experts at Honest Buck Accounting can help you take a look at your business expenses and determine if and where you need to cut costs and increase profitability. Helping Early Childhood Education businesses lay a strong financial foundation is what we do best. Contact us to speak with one of our professional accountants.

Read Part 3 of the 4-part series or review Part 1.

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