As inflation soars, we’re experiencing the worst drop in living standards since the 1970s

Your nursery needs a strategy to help with the cost of living and the cost of running the setting, explains, Jonathan Amponsah CTA FCCA and chief executive of the tax guys.

Cutting costs without crippling your nursery

In addition to staff retention and price increase, you’ve decided to focus on costs. A study by McKinsey and Co (global consulting firm) revealed that whilst a 1% reduction in fixed costs can have around 2% increase in profits, the same reduction in direct costs has a bigger 7% increase in profits.

In this article, we would look at ways to cut costs without crippling your nursery.

Costs Classification

The first thing to do is review your profit and loss accounts to see whether all your costs have been correctly classified. So you should separate your fixed costs (rent and admin) from your variable costs (direct staff costs, food and other direct expenses).

The reason this is an important first step is that fixed costs are generally incurred whether or not you get fee income, whereas variable costs tend to increase or decrease as a result of your revenue. So the more children you take on, the more direct staff, food and nappies you may incur.

Unless you know where these costs are sitting in your accounts, you may start off by looking at fixed costs which may have little impact on your profits whilst ignoring the variable costs.

A key variable cost to look at are those associated with certain age groups. If you’re aware of the profitability of certain age groups, then using this as a guide will have a greater impact on your profits.

Costs percentages

Here you take each expense item and divide it by the total fee income of the nursery. Let’s say your annual fee is £500,000 and catering, toys and rent for the year costs £20,000 £5,000 and 30,000 respectively. Your cost percentage analysis will reveal that catering accounts for 4% of income whilst toys and rent account for 1% and 6% respectively. Whilst this will focus your mind on where your profits are going, you will not necessarily go and cut the biggest expense. You will carry out the next cost trend exercise and then bear in mind the cost classification point above. 

Costs Trends

Trends are certainly your friend when it comes to reviewing your accounts and making financial decisions. Here you will compare the cost over a period of time to gain a bit more insight. Let’s say your direct staff costs have been creeping up over the last few years. You also notice an increase in fees which is perhaps driving the variable costs (staff ratios). So here you have two options. You either carry our age group profitability analysis to assess which variable costs to cut or you simply increase prices a bit.   

Cost Benefit Analysis

The forth step is to conduct a cost benefit analysis. I include the following 6 exercises when consulting with clients:

Relevance

Just because you’ve been incurring a cost for the past few years does not mean that the cost is adding value to your setting or that it’s still relevant or fit for purpose. As you go through each line of expenses (especially the ones on monthly payments), ask yourself these three questions: Is this expense adding any value to the setting? Will a key part of the nursery suffer if we stop the payment? Have we made the most of this expenses in the 2 years? If you answer no to these questions, then it’s time to eliminate this cost.

Automation

Let’s assume the cost is relevant. The next step to consider whether the task can be automated. So if you have an admin person manually issuing invoices or engaged in any manual nursery admin paperwork, then you may find that a cloud based nursery management software could cut the hours down and reduce costs as well as errors. Or perhaps a Robotic Process Automation could offer a better solution   

Outsource

If the task cannot be automated, then ask whether it’s vital that the activity is done in house. For example you have a part time accounts and admin person who comes in say 2-3 days a week and you’re paying say £15-18k a year. Can you outsource all or part of the accounts and only pay a fraction of the costs?

Return on Investment

To simply cut a cost without knowing or understanding its return on investment could prove detrimental to your nursery. Let’s take staff costs, marketing, PR or accountancy. It’s important to have a measurement in place to assess the return you’re getting. If a PR company is getting you the exposure, a marketing agency is getting you the leads, an accountancy firm is saving you money or staff are meeting their key performance indicators leave these costs for now. 

Price shop

Whilst this is normally the first step some nurseries take, it should actually be further down the list. Have a conversation with your suppliers. Tell them that your new accounting team or finance or co directors have suggested you price shop for the services they are offering. Ask them the best they can offer you. Compare this with 2 or 3 quotes you’ve received. Do bear in mind that new suppliers may promise the earth to get your business. See if you can simply try them out with a small project first. Besides an existing supplier who is adding value may always be looking to increase their prices and may not accept a price reduction.

Tax expense

This is often forgotten as an expense. Yes, we all need to pay tax and no responsible nursery can get away with paying no tax. For a nursery, it’s important to concentrate on tax reliefs around payroll and property as there are often tax breaks to consider including tax free perks and property capital allowances

Recruitment and retention costs

Focus on retaining your best staff using various tax and non-tax incentives. Recruiting new staff is costly. Retention, even if it means spending a bit more money on perks is considerably cheaper.

ABOUT THE AUTHOR

Jonathan Amponsah CTA FCCA is an award winning chartered accountant and tax adviser. He helps nursery owners retain top staff reduce tax and return to profits. He is the CEO of the tax guys.

www.thetaxguys.co.uk