The childcare industry is among the fastest growing industries in Australia with roughly 1.6 million children, aged 12 and under, expected to attend some form of government-approved or funded childcare service during 2015-2016.
Research shows that 90% of 4 year olds will attend some form of childcare prior to commencing school. Based on these numbers, existing and potential childcare businesses have promising potential, however with this potential comes stringent regulation.
If managed well, a childcare centre can be a highly profitable business; the challenge is remaining profitable in the face of constant government reform and increased competition.
Childcare services include:
Family day care services
Babysitting / Nannying services
What we do for this industry
Our childcare client’s value having an accountant who understands their industry and who is able to help them maximise the value from their business. We work with single centre operators to those who have upwards of 20 centres.
With numerous regulations and significant associated costs (both in time and money) operators are often so caught up with the compliance side of the industry that they struggle with finding the time to analyse their operations to make it work better for them.
While we provide excellence in tax compliance assistance including BAS & Tax returns, we also can assist with:
Setting up new childcare businesses
Financial data analysis, Industry benchmarking and KPI analysis for existing businesses to help them maximise their potential
Structuring the business for the best possible sale price.
Challenges & Opportunities
Childcare centres have unique operational guidelines, including capacity limitations and minimum staff to child ratios. Achieving the optimum balance between children, staff and operating costs can be tricky. Childcare is an extremely staff intensive industry and having the right wages to income ratio, along with other contributing factors can determine whether a centre merely survives or thrives.
Cash flow is also a key consideration within childcare centre operations with both government payments and incentives often being prepaid and requiring repayment upon a child or staff member leaving the service. Payments from the Department of Human Services and the Child Care Management System (CCMS) including Enrolment Advances, Childcare Benefit and Childcare Rebate payments on behalf of families can often be a headache for centre management, occurring when either family details or the amount payable to a centre in respect of a child changes. It’s therefore imperative that the operator has a high quality CCMS software program to assist with accounting for these payments.
Centre owners also require a thorough understanding of the CCMS system in order to ensure that the correct amounts are being accounted for within their accounting software. There are also other specific systems that can make an operator’s life much easier, especially within larger centres.
Case study 1: Increasing profits
Our client’s profit margin was well below industry norms and was placing pressure on the business and its owners. They were not sure where they should concentrate their efforts to create a positive change.
We provided a comprehensive review of our client’s operations including their income vs. expenses. We compared these to our industry benchmarks and identified their major issues. This analysis showed the main areas of concern were:
- Higher than normal wages to income ratios;
- Non-competitive funding costs; and,
- Rent which was well above market rates.
We worked collaboratively with our client to come up with strategies to combat these areas. We reviewed staff allocations, eliminated wastage and excessive costs, refined some of their debt and negotiated a downward rent review with their landlord.
After identifying the key areas of concern and working with our client to address them, their profit increased markedly. The client was very happy with the outcome and their stress levels have been reduced substantially.
Case study 2: Selling a childcare centre
Our client was approached by one of the larger childcare groups to sell their centre, resulting in a significant capital gain. Their business structure meant they did not qualify for the 50% General Capital Gains Tax (CGT) exemption as the proposal was to sell the business out of a company so the CGT was significant.
We worked with the client to look at how the sale could be structured by selling assets that would attract both the general 50% CGT concession and the Small Business CGT concessions. The result was a significant saving in tax payable as the new structure of the transaction allowed the use of the General 50% CGT concession, a further 50% reduction for the Small Business Active Asset concession and the ability to put some of the proceeds into Superannuation.
A significant tax saving was realised for our client by critically looking at the proposed structure of the sale to find ways to legitimately structure the same sale to achieve a good result for both the buyer and the seller.