Growth and expansion within the childcare sector remain high. Nursery growth is exciting and it’s important to manage it well and avoid losing track of the finances, explains Jonathan Amponsah CTA FCCA

This article looks at some of the financial traps associated with nursery growth, some practical financial burdens and how to avoid them. 

1. Structure

How you structure your nursery for growth can have an impact on your finances. Let’s say you want to acquire another setting. Do you set up a holding company structure, do you simply operate the new nursery as a standalone or do you operate the new nursery a branch within your existing setting? Each of these options would have a financial implication. And if the new setting has been making losses, then these losses could be wasted for a while.  It’s worth speaking to a tax adviser to ensure you are able to get tax benefits from the losses.    

2. Complexity of adding more people

As a people-based business, you already have the challenge of staff to child ratio and the need to add operational staff as you grow. You will also need some additional admin and finance staff. But did you know that if you were to expand from say two to just three admin/financial staff, the degree of complexity triples from 2 to 6? Let me explain. With just two admin staff, you have two lines of communication, from A to B and B to A. With a third staff member, you now have four additional lines of communications from A to C and C to A and from B to C and C to B. Add a fourth person and the level of complexity would have gone up by 24.

With complexity comes costs and financial traps for the unwary.

Depending on your size and the stage of your growth, consider a managed or hybrid outsourced function for some HR, admin and financial roles. For instance, it is not uncommon to have 4-5 people in your finance team, from bookkeeper, accountant, payroll, invoicing, financial controller and tax. You can certainly avoid financial burden by carefully outsourcing some of these roles.

3. Cash flow and bad debt mistakes

Cash flow mistakes are incredibly common among growing nurseries as the owner is focused on driving sales. The childcare sector is currently experiencing a surge in bad debt with some parents leaving without settling outstanding fees. And here’s the trap:  Did you know that if you make say 20% net profit margin and parents owes you £12,000 and never paid, you have actually lost a whopping £60,000? So in other words, you will need to get a fee of £60,000 to make back that £12,000 you lost (20% of £60,000 = £12,000)

It’s important to review your credit control processes and consider outsourcing this function to avoid this financial trap.

In addition how often do you work with your accountant to monitor and understand cash metrics including your cash conversion cycle, cash burn rate, your gross profit margin and something called marginal cash flow. This is useful cash metric because it takes the amount of cash retained by the nursey from its working capital (working capital percentage) and compares it to the amount of cash the nursery produces when new children join (gross margin percentage).

This tells you whether your growth is likely to lead to financial problems.

4. VAT trap 

Let’s assume you want to carry out some major refurbishment work to expand your current setting to that you can take on more children. The builder has quoted you £100,000 plus £20,000 VAT. Your childcare activities are exempt from VAT so you’re unable to reclaim this back. From a cash flow point of view, this is additional financial cost you perhaps did not plan for. 

To avoid this financial strain, do consider your future plans and whether you’re likely to be engaged in these sorts of activities from a commercial viewpoint. Then seek advice from a tax or VAT specialist to discuss if things could be structured differently to improve your cash.

5. Acquisition – some financial traps

Whilst I advocate acquisitions as an important growth strategy after a turbulent year, there are some practical financial risks to avoid.  Some of the common ones are abortive fees including legal and brokerage costs if the deal falls through (I have seen amounts from £19,500 to a whopping £100,000), contracts that don’t deal with pre-sale holiday pay which means that you take on the financial obligation of the seller, too many changes to the new setting leading to financial costs and lack of a implementation steps to embed the new setting into the existing operation to save on costs or benefit from economies of scale.

To avoid these please assemble your team of advisers carefully, get your contracts reviewed and ask plenty of what if questions. What if the deal falls through? What if there are some pre-sale costs or obligations?  What if things are not what they seem? What are the financial costs?

6. Tax claim oversight 

It’s easy to miss some financial benefits as you grow. If you own the nursery premises or you are looking to buy a nursery with the commercial premises, please get a tax specialist to review (at no cost) any inherent tax allowances that may have been missed in previous years. This is a common area that gets overlooked within the industry. And some of these tax reclaims can be substantial indeed.

7. Financial traps with recruitment

The great resignations are here with us. Flexible and part time working is now the norm among many nursery workers. And staff turnover continues to be high. With about 4.4million people quitting their jobs in the US in just one month, have you calculated the impact of resignations on your nursery as you grow? And the true cost of hiring the wrong person? Apart from your staff to child ratio, do you also review other financial metrics to support your decision to hire staff?

Growth and recruitment come with financial risks. And whilst there is no magic wand in this area, please do consider communicating your vision to new staff, do expand your talent pool outside of the UK and do consider a structured career development plan for staff to help you grow faster.

Jonathan Amponsah CTA FCCA is an award winning accountant and tax adviser who helps nurseries grow and scale profitably and tax efficiently. He is the CEO of The Tax Guys.