It is important for every childcare setting to monitor its occupancy level as this has a tremendous impact on the sustainability of your setting. In the previous article, I raised the issues of budgeting and cash flow forecasting - this can never be accurately predicted if the occupancy figures are not correctly captured or forecast.
Forecasting occupancy levels should be an action point in any business plan as it is a key indicator of the setting’s potential sustainability. It provides an early warning system to spot when numbers are beginning to fall, so steps can be taken to recruit replacement children before the effects of reduced income begin to bite. We have designed a spreadsheet, which can be downloaded on our website (www.hants.gov.uk/childcare/providers/business-support), that offers help in setting up your own occupancy monitoring system to help keep your setting sustainable.
Why is it important?
Like it or not, in business terms – whether you are in the voluntary, private or public sector – childcare is a ‘product’ or ‘service’ like any other. Unless somebody pays for it, the costs of providing it can’t be covered. A setting with permanently low occupancy is unsustainable. At best it will require constant bailing-out with grants and subsidies, a scenario that is going to change in the current economic climate. At worst it will fail and have to close, which has serious implications for our childcare sufficiency and financial loss for its owners, staff, customers and suppliers.
‘Number on roll’ – a dangerous illusion
Looking at occupancy in terms of ‘Number on roll’ - as many settings do - can be dangerously misleading, because it only measures how many children are being reached by their service, but is of no value whatsoever for working out how much fee income is going to come into the setting or how much outflow in salaries is going to be required. The common saying ‘we are full’ on register does not show the full reality.
A 24-place setting offering two sessions per day. It has 36 children on roll, half as many children again as there are places. At first glance it therefore looks to be doing well. But, if the average number of sessions booked each week is only three per child, then, on a basis of:
no of children on roll x no of session booked each week per child = sessions per week
The number of sessions per week is:
36 children x 3 sessions = 108 sessions
The capacity of this setting is 240 sessions per week, given by:
24 places x two sessions per day x five days per week = capacity
The setting is therefore running at 108/240, which is 45% occupancy - less than half full.
This is just an illustration, but we all know of settings that fall victim to the illusion that they are doing well simply because they have a lot of children on the books.
What counts is not how many children are ‘on roll’, but how much childcare their setting is actually managing to sell, which is its occupancy.
Unfortunately, this is only realised when there is no more money to pay the bills. What is surprising though is that this occurs year after year.
Working out the occupancy level
The objective should be to work out what the actual take-up was and compare it with what your occupancy level could have been, if every single place had been full all the time.
All you need is your registers, a calendar, and a calculator or use our spreadsheet. This should be done as best practice by the manager, owner or committee of every childcare setting at the end of the month at least (though weekly would be even better).
Compare this month to last month - and to the equivalent month last year, and so on - to see what is different and ask yourself why has it changed?
One picture is worth a thousand words, as the saying goes, so best of all is to plot it week-by-week, or month-bymonth, on a graph that is kept on the manager’s or owner’s wall.
It is unlikely that a setting can realistically have 100% occupancy for 100% of the time, but by doing this you can then very quickly spot what the trends are for your own setting, and use this information in making your forecasts.
Our spreadsheet has an added bonus of calculating the staffing ratios that are required at any given time of the day. This spreadsheet can be used to produce an estimate of your occupancy levels for the whole year.
Most settings forget that they are only open on average 38 weeks of the year but that the income and expenses are for 52 weeks of the year.
Working out your break even point
There are some basic sums that you will need to do in order to monitor the progress of your business.
How to work out your fees
Use your budget plan, discussed in the previous article, to work out your weekly costs:
Total yearly expenditure / number of weeks you are open = weekly cost
Work out exactly how many hours you will be able to sell per week. You have to calculate the total number of hours:
Hours per day x days open per week x registered places = total hours per week
If you offer sessional places, simply use the hours in each session in the calculation above.
Now you can calculate what you need to charge per hour in order to cover your costs when your occupancy is at a realistic level:
Weekly cost / realistic hours occupied = break even hourly fees
Break even occupancy
When you have decided on an hourly fee you can work out how many children you will need to attend each day to meet your costs.
number of hours that need to be sold / hours per day ? days open = number of children needed to break even
If a business was registered for 28 children, the yearly expenditure was £60,012 and it was open for 38 weeks per year, its weekly cost would be:
£60,012 / 38 weeks = £1602
The business is open for three hours per day, five days per week with 28 registered places. Its total hours would be:
3 hours x 5 days x 28 registered places = 420 hours
It might expect to achieve 80% occupancy. This would mean that it could expect to sell 336 hours on average. Its hourly break even charge would be:
£1602 / 336 hours = £4.77 per hour
Using this hourly rate its break even occupancy would be:
336 hours / 3 hours / 5 days = 22.4 children
In reality this means that it needs at least 22 children per day to meet its costs. More than 22 and it will make a profit, less than 22 and it will make a loss.
You will need to repeat this process each time one of the factors changes. For example, if you want to increase your fees or the number of hours that you are open.
You can find out more about good practice in occupancy monitoring through your Children’s Links Development Officer, Senior Development/Development Officers or Business Support Officer.
Business Support Officer