Kindergarten and childcare accounts: the fees collected in advance are not your money yet

Hook

Boss, if you run a kindergarten or a childcare centre, the start of the year is the happiest time. In January the parents pay a whole term, sometimes a whole year, in one go — and the account is suddenly full. And you think: the year has started well. But most of that money is not your income yet. Today, the mistake this trade makes most often in its accounts, and how to see whether you are actually making money.

Fees collected in advance are a liability

The most important point first. A parent pays ten months of fees in January and you have the money — but the teaching has not been delivered. In accounting, income is recognised only after you have provided the service. So when that money comes in it is not income, it is a liability — called fees received in advance. Only when a month of teaching has been delivered do you move one month's share out of the liability and into income. (The accounting policies from the thirty-fourth lesson: when income is recognised has to be decided and applied the same way every year.) What happens if you do not? January's profit goes through the roof and the following months all show losses — the accounts turn into a sawtooth, you cannot see the real state of the business, and the bank cannot read them either. The more practical risk: you spend the money collected in advance as though it were money earned — renovation, a car, bonuses — and mid-year the teachers' salaries fall due and the cash is not there. The money you collect and the money you earn are two different things.

The many charges: which are income and which are not

This trade has an unusual number of separate charges, and each is recorded differently. Application and registration fees — collected once. If they correspond to the administrative work of enrolling the child, they can be recognised in the period; if they are in truth an entrance charge, they have to be spread over the time the child attends. Pick an approach that stands up, write it down, and use it consistently. Deposits and security sums, to be refunded later: always a liability, never income. School bus fees, meal fees, uniforms, textbooks — one question sorts this out: do you run it yourself, or are you collecting on behalf? Your own bus, your own kitchen — that is your income and it carries your cost, and the gross profit has to be looked at separately (the chart of accounts from the fourth lesson). Outsourced to a bus operator, outsourced to a caterer, and you are only helping to collect and pass it on — that is money collected and paid on behalf, and it is not your income. (We covered this in the nineteenth lesson: put money collected on behalf into sales and the turnover is inflated.) Sibling discounts and early-bird offers — record the net amount, do not record the gross and then book an expense, or both the turnover and the discount are distorted. A withdrawal mid-term with a refund — issue a credit note to reverse it, do not simply delete the document (the nineteenth lesson).

On the cost side: teachers, rent, renovation

Three blocks of cost. One, the teachers. The largest outgoing in this trade. Full time, part time, relief — salary plus the statutory items, all of it counted in. Do not look at the basic pay alone and think you know the cost. Two, rent and utilities. If you have several branches, one account for each (the fourth lesson) — otherwise you will never know which branch is subsidising which. Three, renovation and equipment. This trade puts a lot into fitting out: fencing, soft matting, playground equipment, air conditioners, tables and chairs. As we said in the forty-seventh lesson: different useful lives, so record them separately. Renovation lasts ten years, air conditioners five, playground equipment gets replaced after three — record them separately, and when one is replaced take the old one out and put the new one in, so the books do not carry a slide that was thrown away years ago. Why be this detailed? Because you have to be able to answer a question: is opening another branch worth it? Without knowing the real cost structure of one branch, all you can do is decide by feel.

The two numbers this trade really has to watch

Now the most valuable part. Get this trade's accounts right and you can see two numbers other people cannot. First: gross profit per child. How much revenue does one child bring in a year, and after deducting the costs that follow that child — meals, materials, the bus — how much is left? Second, and this is the lifeblood of the trade: the class fill rate. A classroom seats twenty and there are twelve in it — for the eight empty seats the rent is still paid, the teacher is still employed, the air conditioning is still on. Almost all of the cost structure in this trade is fixed. Which means: past a certain headcount, one more child is nearly all profit; one fewer is nearly all loss. So what you should be watching month by month is not turnover, it is how full each class is. (The fixed costs and runway from the forty-first lesson are especially visible in this trade.) One more thing: seasonality. Heavy collections early in the year, flat in the middle, and at year end the parents start weighing up next year — line your cash flow up with that rhythm, and do not judge the whole year's capacity by January's cash.

To close

In summary: fees collected in advance are a liability and only become income once the teaching is delivered; deposits are always a liability; for the bus and the meals, first sort out whether you run it or are collecting on behalf; teachers, rent by branch, and renovation split by useful life; and what you really have to watch is gross profit per child and the class fill rate — because in this trade most of the cost is fixed. And one old line this trade breaks especially often: fees collected in cash and the boss helping himself — keeping the two purses apart, from the third lesson, is here simply your cash flow. Want to know which of your branches is subsidising which? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.