How to Financially Plan for Your Early Childhood Education Center’s Future
This post was originally created and published by Procare Solutions on June 10th, 2022. You can find the original piece here. It is reprinted here with permission from Procare.
To ensure your child care center is profitable, you need to create a daycare center budget plan. That’s the only way you’ll be able to manage your business income and expenses effectively.
One of the key components of your child care center budget is forecasting.
What is Forecasting?
Forecasting, as it relates to your child care center’s budget plan, is the process of predicting the financial future of your child care business. How much money will you make by the end of the month, quarter and/or year? What expenses will you incur over that same time?
By analyzing past financial performance, as well as current revenue trends, you’ll be able to estimate business profits with a high degree of accuracy.
Why is Forecasting Important?
Forecasting takes a bit of effort, but is so beneficial that you shouldn’t avoid it. Here are three reasons why forecasting is important:
An accurate financial forecast will help you stick to your daycare center’s budget plan. When you understand how much money is coming in, you can better regulate how much money goes out.
This will allow you to manage cash flow effectively and avoid overspending — two essential things for every business owner.
Forecasting will also help you plan for the future.
For example, many child care centers drive less revenue between June and September because of family vacations or summer camps. If you predict, based on previous years, that your center’s revenue will drop by 20% this summer, you can plan for it.
Maybe that means you set aside money in March, April and May to help carry you through the lean months. Or perhaps you can use extra revenue generated in the spring to better market your child care business and secure new customers over the summer.
3. Financial Assistance
If you plan to apply for funding, either to get your early childhood education center up and running or expand operations, you’ll need to provide your lender with a financial forecast.
They’ll want to know how much money you’re currently making, what you project to make in the future and how you plan to grow your business. That way they can feel confident that the money they lend you will be paid back in full.
How to Add Forecasting to Your Daycare Budget Plan
Forecasting may seem complex, but it doesn’t need to be difficult. Follow the four-step process we outline below and you’ll be able to start forecasting in no time.
1. Gather Your Financial Records
You can’t forecast the future without looking into the past. With that in mind, gather your financial records from previous years. These include your profit and loss statements, balance sheets, payroll reports, and accounts payable and receivable details.
This is easily done using child care management software, which can pull up the statements in seconds.
If you’ve just started your child care business and haven’t created a budget plan, don’t worry. You can still forecast using current income and expense numbers, industry growth standards and your own intuition. Just keep an eye on your projections and adjust them as needed.
2. Choose Your Forecasting Type
There are two kinds of forecasts you need to be aware of: historical forecasts and research-based forecasts. In all likelihood, you’ll use a blend of both.
- Historical forecast: A forecast that uses historical data (previous income statements, balance sheets, etc.) to predict future financial performance
- Research-based forecast: A forecast that uses industry trends and competitor research to predict financial growth in the future.
Historical forecasting is easy to perform and typically doesn’t take a ton of time. But because it doesn’t account for your entire industry, it’s not always completely accurate.
For example, your own data may reveal that your child care business has grown by 20% year over year. But if the child care industry as a whole experiences significant changes (like a worldwide pandemic), your historical data alone won’t help you prepare.
Researched-based forecasting, on the other hand, analyzes data from an entire industry. These kinds of forecasts give detailed information about company growth potential, which is why many lenders like to see them. But they can also be expensive to conduct.
Most daycare budget plans should start with historical forecasting. Once you know the numbers for your own business, do your best to analyze the child care industry in your geographic location. Then use these details to help predict your finances down the road.
3. Create Your Financial Forecast
Now it’s time to sit down and actually add forecasting to your daycare center budget.
First, analyze your financial records for the past few years. How has your business grown in that time? If you notice, for example, that your business revenue has increased by 10% every year for the last three years, you can probably assume another 10% jump this year.
Second, take a look at the entire child care industry. Do you foresee any massive changes? Are COVID regulations in your area making it harder to find new customers? Take these things into account and adjust your revenue growth numbers if necessary.
Third, assess your personal goals. Are you happy with the standard 10% boost in revenue or do you want to grow at a faster pace? What would it take to do this? A bigger marketing budget? More employees? Estimate what it will cost to grow your business.
Fourth, add up all your expenses. This includes all your ongoing expenses such as rent, utility bills and food, as well as estimated costs to reach your new revenue goals.
Finally, add all these details to a spreadsheet so that you can easily see your projected revenue, gross profit, operating expenses, and net profit numbers in one place. Or if you have child care management software like Procare, you can pull all this information with a few clicks of your mouse.
4. Analyze Your Financial Forecasts
You need to analyze your forecasts on a regular basis. Are you on track to hit your goals? If you’re falling short, investigate why. If you’re making more money than expected, develop a new child care center budget to make sure you spend the extra funds wisely.
Remember, forecasts are projections of what your business might make. You need to compare your actual results to your estimates to properly manage your business and ensure future forecasts are as accurate as they can be.