It would be strange to ask your insurance agent how much to charge your clients for child care?! However, because we work with so many businesses we begin to understand the core principals of calculating price and what others in your industry are doing as well.
Unfortunately, most child care business select their pricing based on what the competitors in their marketplace are doing instead of what it actually costs to care for their children. When I ask how they determine their rates they are confused by the question or tell me that they set the rate based on what the competition is doing.
The most successful businesses and those who are able to continue year after year know what the costs associated with child care are and what they need to break even and make a profit. There are several variables in calculating the fee that you will charge and they begin with labor and materials; overhead, the number of children you are legally able to care for and profit. Until you have at least 12 months of financial records you will need to break down the costs to understand what it will take to run your business successfully.
Labor and Materials: One of the largest costs of your business is the cost of employees and the materials (supplies) that you provide for child care. Even if you do not plan to hire any employees at first you still have the cost of your own labor to calculate. Begin by selecting the child to child care giver ratio. We will start with a ratio of 6 to 1 but depending on the age of your children that ratio could be lower. If the hourly wage is $12 (including wage, taxes and benefits) for one employee to watch six children then your labor cost would be $2.00 per child per hour. You will need to estimate your materials (supplies) at first until you have a year’s history to measure but 45% of labor costs should be adequate.
Overhead: This is all of your non variable costs that do not include labor and materials like rent, utilities, licensing etc. Create a list of all your fixed expenses and then add them up on a monthly basis. Once you have your total monthly fixed costs multiply by 12 to get your annual costs and then divide by 52 weeks to get a weekly cost. For the example that I intend to use I will select 40% of the labor cost.
Profit for most child care centers ranges between 10% to 15% of gross revenue
So based on the information listed above and assuming that a child could be in your care for 10 hours per day and 5 days per week, let’s take a look at our example and see what weekly tuition would run:
Labor (50 hours at $2.00 per hour) $100.00
Materials (45% of labor costs) $45.00
Overhead (40% of labor costs) $40.00
Profit (10% of $195.00) $19.50
Weekly Tuition: $214.50
Round the tuition to $215.00
This is just a basic calculation to show how to design your rates based on your estimated costs and desired profit. In our next installment we are going to discuss what to do when your rate is either less than the competition or more than the competition