Written by: Stephanie Thompson

This is Part 2 of a 3 part blog.  If you haven’t read Part 1, you can find it here. This blog is recommended to childcare business owners who want to learn more about accounting for their business.

This blog is about your Profit & Loss (P&L), otherwise known as an Income Statement.  Your P&L is made up of 2 sections, your revenue and your expenses and this statement can be looked at for any period of time, as opposed to the Balance Sheet, which is for a particular point in time (not a date range).  Revenues minus expenses equals your Net Income, which tells you whether you have a profit or a loss. Simple enough, right? Well I’m going to go into more detail!

Revenue

Revenue is always at the top of the P&L.  It’s important to look closely at your revenue accounts to ensure accuracy.  Each month, you should look at your General Ledger report for all revenue accounts to make sure nothing seems out of place.  Regarding revenue accounts, it’s recommended to separate out your private pay tuition and your subsidy income (if applicable).  Separating them out will give you a good idea of how much of your income is coming from each revenue source.  

It is recommended that you break out your revenue into categories that you bill for in your billing system (not necessarily by age group), for example: discounts, registration fees, ACH/credit card fees paid by families, late payment fees, etc.  This can be done as a journal entry after each month has ended.  To break it out, you would run a detailed report from your billing system.  Please note that security deposits collected is not something that should be reported on your P&L, it belongs on your Balance Sheet as a liability, because those monies will ultimately get returned to families (in most situations).  If a family leaves and does not get their security deposit returned (they didn’t give enough notice of their withdrawal, if that’s your policy), you would clear out the liability and recognize that family’s security deposit on the P&L, with an account named Forfeited Security Deposits.  At that point, the money belongs to the company and should be recognized as revenue.

After running the billing reports for the month, you would make the following journal entries to break out your revenue:

Registration Fees (credit)

Discounts (credit)

Late Payment Fees (credit)

Security Deposits Refunded – Liability (debit)

Security Deposits Collected – Liability (credit)

Tuition – plug # to balance the entry (could be a debit or a credit)

* Note about security deposits collected: when you refund the security deposit to the family (or apply it to their last month’s tuition payment) you’ll want to make sure to reduce the account balance of your Security Deposit account on your Balance Sheet.  A good way to record this would be to run a report at the end of the month to see how much in security deposits were refunded and collected.  It’s important to know how much you owe to families in total, as you’ll want to make sure you always have the cash in your bank account to return those funds.

Funds received from Grants

One-time grants (or grants that have an end date) should NOT be accounted for at the top of your P&L with your normal revenue, they should be “below the line” and coded as Other Revenue.  This is important because you do not want grant money to distort your normal revenue line, which might make you think your revenue is higher than it really is.

Expenses

You have to spend money to make money, right?  While that’s true, it’s also very important to keep a close eye on your expenses so you come out with a profit at the end of each month.

Payroll will be your largest expense, so it’s important to staff your school as efficiently as possible.  Staff turnover has a huge impact on this expense category, so not only is having a good staffing model and good staff you can count on is important, but it helps save you money in the long run in staffing costs.  The better your teachers, the better your school culture, the lower your staff costs will be and not to mention the happier your families will be (you can use those savings to increase teacher wages!).

At the end of each month, you should review your expenses in detail, by looking at the General Ledger report.  Do you see any recurring expense items that you could cut out or find alternatives for?  Perhaps shopping out vendors for items that you always need (gloves, toilet paper, paper towels, etc.) would find you savings.  Using delivery services such as Instacart, while convenient, comes at a premium (fees to Instacart and tips to drivers).

Net Operating Income and Net Income

You will find your Net Operating Income under your operating expenses and is your normal revenue minus operating expenses.  Net Income is found at the very bottom of your P&L and includes Other Income (Grants, Interest Income, etc.) and Other Expenses (Depreciation).  It’s important to look at both numbers. 

Net Operating Income is good to look at because that is your normal operating profit or loss before any grants. Looking at Net Income is also important because it gives you the true numbers (which is important for your tax strategy), however some of the items in it cannot be counted on moving forward, so it’s best to use Net Operating Income when evaluating your center’s performance and decision making.

If you are a childcare center business owner and this blog makes you feel a bit lost, look no further! We’d be happy to set up a free consultation for our financial coaching or accounting services where we can learn more about your business and explain how we can help. Please email Stephanie at Sthompson@hingeadvisors.com or visit https://hingeadvisors.com/success-services and click on Financial Coaching services to learn more!