School may be out for the next few months, but thankfully for America’s working parents, most of the nation’s 60,000 child care centers will still be providing year-round care for infants and children.
Child care is provided in dedicated facilities (referred to as private centers) as well as residences that double as child care facilities (also known as home-based centers). While there are some chain companies in the industry, most child care centers are small, independent operations with roughly 80 percent operating a single location and employing fewer than 20 workers (15 employees is the national average).
If you are a working parent of young children, you may know how tough it can be to find high-quality, affordable child care in this country, and the problem is only growing. For example, a recent study by the Center for Rural Policy and Development reveals that greater Minnesota has lost a quarter of its child care centers in the past 12 years, creating a troubling shortage of care options for parents in that state. Many of the centers closed as a result of an accumulation of minor violations of the state’s numerous regulations around child care centers, but the result is that thousands of parents are left without adequate care for the kids.
Learning your numbers…
A typical child care center generates about $640,000 annually, but the fees paid vary significantly by state, ranging from $5,600 to $20,000 annually. While most fees are paid directly by the children’s parents, about 13 percent of industry sales come from government assistance programs for low-income families. Operating margins for child care centers average 6 to 7 percent of sales, though compliance with state regulations can be costly for licensed centers, cutting into their operating margins.
Labor is usually the largest expense at approximately 40 percent of revenue, and turnover of those employees is high. Other top expenses include food, supplies, rent, utilities, and insurance. With so many fixed costs, it is crucial that centers maintain a steady enrollment level to keep their cash flow even.
Interestingly, infant care is often unprofitable for child care centers since babies require a higher staff-to-child ratio. Instead, profits usually come from the care of older children, which offsets the center’s cost of caring for infants. But centers continue to offer infant care in order to also provide care for older siblings and in hopes of retaining care as children age. Also, many centers base their tuition rates on the child’s age, charging a higher rate for younger children than older ones.
Trends within the child care center industry
Steady growth for key demographic
The population of children age 5 and under is projected to grow at a steady rate for the next decade and should drive increased demand for child care services. High-quality, affordable child care is critical for dual-income families and single parents. Almost two-thirds of mothers with children under age 6 are in the workforce. Among more affluent households, the need for child care has increased as more women delayed marriage and children, resulting in critical periods where demands for both career and family coincide.
Child care becoming less affordable
The average annual price for child care is rising faster than the rate of inflation and accounting for a larger chunk of household income. Under certain conditions, the annual price of child care exceeds the annual cost of college tuition. Rising prices combined with difficult economic conditions have forced many families to look for less expensive alternatives or rely on family members.
Slowing growth for state-funded preschool
While total enrollment and spending on state-funded preschool has been increasing, progress has slowed considerably as states deal with the aftermath of the recession. State-funded preschool programs target low-income families to better prepare children for kindergarten. School districts may choose to contract pre-k services to private child care providers. About 29 percent of 4-year-olds and 5 percent of 3-year-olds attend some type of state preschool, according to the National Institute for Early Education Research.
Corporate child care increasing
Recognizing the benefits of on-site daycare, more employers are opening child care facilities. On-site care has been shown to reduce worker absenteeism and tardiness and increase productivity, according to the Upjohn Institute for Employment Research. Employees enjoy greater peace of mind and reduced stress by having their young children close by. On-site child care also has become an important recruiting tool and means of retention. While providing on-site care is generally only feasible for large companies, small companies may partner with off-site providers and offer subsidies for care.
How bankers can help child care centers
- Ensuring timely payment from parents and government assistance programs.
Solutions to consider: Merchant services, remote deposit capture, ACH services with blocks and filters, online banking/mobile banking
- Efficiently managing staff expenses (40 to 41 percent of revenue) and turnover (about 33 percent).
Solutions to consider: Employee payroll card, workplace banking solutions - Efficiently paying suppliers and funding overhead costs, such as liability insurance.
Solutions to consider: ACH services with blocks and filters, line of credit - Funding facility improvements to meet state regulations and attract new customers.
Solutions to consider: Real estate loans, term loans
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The industry information in this post all came directly from the Vertical IQ Industry Profile on Child Care Centers. Reviewing this profile, or even doing a quick 5-minute review of the industry’s Call Prep Sheet, gives you valuable insights into your child care center banking prospect – their opportunities as well as the challenges that may be keeping them up at night.
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