How Much Profits can you Make with a Daycare?
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If you are planning to start a daycare, you may want to understand how you can turn your sales into profits. In other words, you must know how much revenue you must generate to reach break-even and make profits.
Despite being a huge industry ($54.3 billion), the US daycare sector is also very competitive: there are over 230,000 businesses across the country. This makes it even more difficult for business owners to break even and maximise profits.
How profitable is a daycare in the US? What is the average break even for a daycare? In this article we’ll look into how much profits you can expect to make with a daycare using public benchmarks as well as our own analysis below. Let’s dive in!
What is the average turnover for a daycare?
With a market size of $54.3 billion and a total of 230,000 Daycare businesses in the country, the average annual turnover for a Day Care facility is $235,000.
When it comes to pay, according to Day Care Business Boss, Daycare center owners can earn a salary of anywhere between $30,000 and $60,000.
What is the average profit margin for a daycare?
As per AZCentral’s Yourbusiness, the average net profit margin for a Day Care is 16%. That’s in line with the 15% average profit margin as per IBIS.
What does it mean for your daycare? The level of profits you can expect to generate will depend on your sales and costs. Now let’s have a look at the type of costs you can expect for a daycare business.
How much does it cost to run a daycare?
There are certain recurring costs involved in running a daycare, they include:
- Caregivers salaries (20-25% sales)
- COGS (15-20% sales): this includes both food & beverage supplies as well as essential supplies for kids
- Other salaries (10-15% sales): these are all management, operation and administration staff salaries (essentially all salaries excluding caregivers)
- Marketing (5%): online and offline advertising expenses (print media, pay-per-click campaigns, etc.)
- Rent (10-15%): assuming you rent the space where you operate the daycare center, you will have to pay a significant amount for the rent. That’s because you need a lot of space to operate a daycare (100 sq. ft. per kid on average)
- Other expenses: There will be other recurring costs such as bookkeeping, janitorial services, legal costs, utility bills, etc.
In general, you will be spending anywhere between $75,000 and $100,000 each month to run a daycare with 50 children. For more information on how much it costs to start and run a daycare, read our article here.
We’re including below the sales to net profit breakdown of a daycare center with 50 children (yearly revenue is ~$1,500,000 and net profit margin ~14% in line with the estimates provided earlier). The numbers comes from our daycare financial plan template.
How to forecast profits for a daycare?
In order to calculate profits for a daycare, you must first forecast sales and expenses.
Profits = Sales – Expenses
Forecasting sales for a daycare
In order to forecast the revenue for your daycare, you can simply multiply the number of children you will take care of by the average monthly rate.
Revenue = # children x average monthly care
For example, if you have 50 children and you charge $2,500 per month on average, monthly revenue is $125,000:
Revenue = 50 children x $2,500 = $125,000
In other words, your monthly revenue is about $125,000.
For more information on how to build financial forecasts for a daycare, read our article here.
Forecasting expenses for a daycare
There are 2 types of expenses for a daycare:
- Variable expenses: these are the supplies expenses (the COGS). They grow in line with your revenue: if your turnover increases by 10%, variable expenses grow by 10% as well
- Fixed expenses: salaries, rent, marketing and all the other operating costs listed above
Calculating profits for a daycare
When we refer to profits, we usually refer to EBITDA (Earnings before interests, taxes, depreciation and amortization) as it represents the core profitability of the business, excluding things such as debt interests, non cash expenses and other non-core expenses.
In order to get to EBITDA, we use the following formula:
EBITDA = Revenue – COGS – Operating Expenses
We’ve included below the illustrative profit-and-loss of a daycare with 50 children (from our financial model template).
EBITDA usually is around 20% yet can go up to 30% for the most successful daycare businesses. It’s important to note that EBITDA is very much linked to occupancy rate. The higher occupancy rate, the higher EBITDA margin.
That’s because most costs are fixed costs for daycare businesses (90% of expenses more or less, ie. anything that’s not supplies as explained earlier). Whilst some may argue that caregivers salaries are variable, we don’t fully with that: caregivers often have full-time and part-time employment contracts that aren’t always flexible.
What’s the break even point for a daycare?
Break-even is the point at which total costs and total revenue are equal. In other words, the breakeven point is the amount of revenue you must generate to turn a profit.
Because you must at least cover all fixed costs (that aren’t a function of revenue) to turn a profit, the break-even point is at least superior to the sum of your fixed costs. Yet, you also need to spend a certain amount for every $1 of sales to pay for the variable costs.
The break-even point can easily be obtained by using the following formula:
Break-even point = Fixed costs / Gross margin
As we explained just now, the vast majority of costs for daycare businesses are fixed costs. Let’s assume we are running a daycare with the following cost structure:
|Operating cost||Fixed vs. variable||Amount|
|Caregivers salaries||Fixed cost||$25,000|
|Other salaries||Fixed cost||$20,000|
The break-even point would then be:
Break-even point = Fixed costs / gross margin
= $70,000 / 80% = $87,500
In other words, you need to make at least $87,500 in sales per month to turn a profit.
Now, assuming the average monthly price per children is $2,500, that means you need to have at least 35 children to break even.
How to increase profits for a daycare?
There are various strategies to increase the profits of a daycare such as:
- Offer enrichment programs: Train staff and other vendors to offer various enrichment programs like yoga, language classes, art, cooking, etc., and charge for those services
- Increase other fees: Increase certain fees like return check fees, late fees, etc. Also, charge an annual registration fee, and if you are using modern technology, include tech fee
- Reduce credits and discounts: Check the amount of money you are losing because of credits and discounts and then, if necessary, reduce them
- Increase tuition fee: Ensure that you are increasing tuition fees every year but ensure that the price rise is not over the board. You must maintain a market balance
- Rent out: If there is additional space left, rent it out during the off hours
- Food program money: If the subsidy count is high for you, you may qualify for food program funds. The paperwork will be enormous, but it will be worth it in the end
- Look for grants: Your community may offer grants. Research and look for available grants
- Social media: Take it to social media and advertise your Day Care there and connect with more and more people. This will eventually lead to more customers/clients and hence, increased profits
- YouTube channel: Start a YouTube channel with videos of your Day Care activities, tips & tricks, guides for people aspiring to open Day Care, etc. This can open a new revenue stream for you