Balancing a budget can be difficult no matter what industry you’re in, but it’s so important to get it right. Luckily, there’s a simple blueprint to keep in mind when structuring your budget for the new year.
The Iron Triangle is a financial model made up of three key factors:
- Full enrollment
- Full fee collection
- Ability to cover per-child costs with revenue
All of these pieces are interrelated with one another, which is why it’s crucial each of them is equally considered when planning your child care center’s budget.
Let’s take a deeper look at each side of the triangle:
The biggest chunk of your revenue is going to come from the center’s tuition costs, and it won’t be very helpful if you’re unable to actually fill the seats. If you are paying to staff an entire room, but you only fill the room to say, 60 or 70% capacity, then you are losing money.
A good child care budget should be based on staffed capacity, not licensed capacity. It won’t matter how many kids your center can support if you’re unable to get them in the door.
There are some early child care experts that say a well-run center can operate at 95% enrollment, but many suggest setting the budget at a more achievable rate, such as 85%. There are a few different factors affecting a center’s ability to fill their classrooms, but the bottom line is anytime enrollment drops below the budgeted target the center is losing money.
Full Fee Collection
It’s important to collect fees in full and on time. Why? Fees can only become revenue when they are actually collected.
Many child care providers have a great budget on paper, but when it comes to applying it to the real world, the money just isn’t coming through. The best way to ensure parents stay on top of tuition and fee payments is by setting clear expectations for yourself, as well as the parents. Fee collection can take up a lot of your time which would be better spent engaging with the children and their parents.
Consider implementing child care software that can help save time and streamline the process. Features like online payment make it easy for parents to pay on time, and access to reports can help you identify the gaps in their budget so they can act swiftly to resolve the issue.
Revenues Cover Per-Child Cost
The third side of the triangle refers to the cost per-child and whether or not the center’s revenue will be able to cover it. Start by determining the per-child cost, and then compare the number with the rate parents are actually being charged. Parent fees (and third-party funding, if applicable) must either equal or be greater than the per-child cost, or money will be lost. Similarly, if a program is not fully enrolled or there is bad debt (i.e. parents missing payments, the cost per-child increases.
Comparing these two numbers is one way you can find gaps in your budget and make any necessary adjustments. At the end of the day, parent fees (and third-party funding, if applicable) must equal or exceed the per-child cost.
Why is the Iron Triangle Important?
To maximize your ROI, it’s imperative to think about all of the pieces surrounding fee collection and enrollment. There is almost no room for error, so the per-child cost should be the driving factor behind the budget. If your revenue does not exceed it, then you’re going to be in trouble.
Filtering your budget through The Iron Triangle model will help you stay on track and monitor the ’s progress on a day-to-day basis. Working to fill the gaps immediately is the key to maintaining an effective budget.
There are many moving pieces to consider when planning your child care center’s budget, and The Iron Triangle should not be the full extent of your efforts. The strategy helps you highlight the most important data you should be measuring for financial success, but it is not an exhaustive to-do list.
Learn more about Procare’s family accounting and how it can help you improve your overall management in early childhood education.