Let’s face it, most sets of accounts with numbers and jargons don’t make for bedtime reading, do they? And if you don’t currently pay much attention to your end of year nursey accounts, then take heart. You are not alone. When most business owners are quizzed on their accounts and numbers, a common response you hear is “My accountant looks after the numbers”. But unless you understand the story your numbers are telling you, you are likely to be running your childcare business on luck.
So let’s look at 6 ways to understand your year-end or management accounts, take the fear out of accounting and help you connect with your numbers.
1. Is Your Nursery Making Money?
Yes, I know profit can be an emotive subject in the sector but since nearly half of nurseries do not make money, we need to embrace profits. So the first thing you want to do is check if you’re making a profit and see if that profit figure makes sense. This is done by looking at the profit and loss account and scrolling down to the bottom figure which will show a profit (positive figure) or a loss (negative figure). Then ask yourself, why are we making this amount of profit or loss?
Then look at the top figure (the sales) and quickly glance through the list of expenses.
Do they all make sense? Are they in line with what you expected?
2. Can You Spot The Margins?
Gross profit margin is an important number to calculate from your accounts, but some nursery accounts do not show the direct expenses in the correct category thereby distorting the gross profit margin. The staff ratio costs should all be shown under the direct cost of services since they are contractual costs which enable you to serve the children and they vary according to the number of kids. The next time you get your accounts, take the direct labour costs and direct expenses (e.g. food) and deduct them from the revenue. Then divide that number by the revenue. That is your gross profit margin.
Let’s say your revenue is £140,000 and direct staff costs or direct expenses are £100,000. The difference of £40,000 divided by £140,000 revenue gives you a margin of 28%. This means that for every £1 of child income, you are making 28p in gross profit.
How does this 28p in the pound work for your nursery? Is it enough to cover all your other expenses and rent?
3. Let’s Work Out The Breakeven Point
If you’re currently making a loss, then one of the quickest ways to start making profits is to at least cover all your costs and get to a point where you’re neither making losses nor profits. So you need the revenue number that will allow you to break even. How do you get this number from your accounts?
You first need to know your gross profit margin.
You then need to know your fixed costs which will mainly be things like rent, admin team costs, and rates. In your profit and loss account, it should be most items listed under admin expenses although do watch out for any direct or variable costs (staff, food, nappies) that find their way under admin costs.
You divide the total fixed costs by the gross profit margin and this tells you the amount of sales you need to make at any given period to cover all your costs.
Let’s assume you’re now falling in love with your numbers and you have calculated the margin as 28% and your fixed costs as £46,000.
So £46,000 divided by 28% gives you a figure of £164,285. If your current income is £140,000, then your nursery needs to find £24,285 income or review its costs if you’re to stay in business for long. Armed with this number, you’re no longer flying blind or fearful of the numbers. You know what to do and you’re back in control. You can now focus on getting say two new children (say £12,200 per child per year) this month to break even.
4. Your Nursery’s Assets and Liabilities
The next thing you want to check is that the nursery has a positive balance sheet value. You do this by looking at the balance sheet statement which shows what your nursery has and what it owes. Scroll down to the bottom and make a note of the last number. It’s normally called capital and reserves. Is that figure positive or negative? A positive figure means your business has some value.
A negative figure is a red flag and means you need to look at the breakdown of the assets and liabilities and take action to improve this.
5. Let’s Find The Cash
If your setting is making profits but you’re constantly dashing for cash to meet the payroll, then there is another financial statement called cashflow statement which reconciles your cash to your profit and will tell you where the cash went. But if you don’t get this from your accountant, no need to panic. Here is what you can check:
Do parents owe you money?
Have you drawn more money or dividends out?
Have you paid your suppliers early?
Have you purchased some equipment?
If you answer yes to any of the above, then chances are that’s where the cash drain on your nursery is.
6. Trends Are Your Friends
When it comes to reading and understanding your nursery accounts, trends are truly your friends. So what you do here is compare the current year or the current month figures to the previous year or month to make sure you are making progress towards your milestones and also to help spot any anomalies. In your setting, nearly every decision you make gets turned into a number. For instance, if your food and nappy costs have gone down by say 30% compared to last year, ask yourself why. What is the story behind this number? Is this because of less children this year? Or the change in supplier? Or improved efficiencies? Once you start seeing the numbers this way, you take the fear out of accounting.
There are certainly other important numbers including your occupancy rate to measure. It’s important that you or someone skilled in numbers interpret them so you can understand the story and power behind the numbers and make the right decision. Hopefully, the above 6 areas would help you make sense of your numbers and improve your nursery’s finances.