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The U.S. Bureau of Labor Statistics projects that day care businesses will have some of the fastest employment growth of all industries through 2020, and, according to new data from Sageworks, child day care businesses in the U.S. have consistently grown sales in recent years, even as many other industries struggled in the economic recession and subsequent recovery.
Sales among privately held firms providing child day care services (NAICS 6244) have grown nearly 9% over the last 12 months, according to a financial statement analysis by Sageworks. Perhaps more impressive is that businesses in this category grew sales, on average, by 6% to 7% annually between 2008 and 2012 -- even during the recession. Other privately held companies saw a decline, on average, of 5% in 2009.
Sageworks’ data also show profitability for child day care businesses has improved since the recession, but industry experts say operating a child day care business can be an ongoing struggle to balance expenses with parents’ ability to pay.
In addition to handling increasing demand, owners of child day care services must also focus on industry regulations, since scrutiny from customers (parents) and government agencies comes with the territory. Arkansas, for example, is considering proposed changes for child care providers that cover a range of issues, from safety, such as the ratio of staff to children, to psychological (eliminating behavior charts), according to a published report.
Regulations can add to costs – sometimes before operators are able to recover the increase through higher fees.
Average net profit margin for child day care businesses in Sageworks’ database lagged the average for all industries in 2010 and 2011, but rebounded to around 8% in the last 12 months, which is on par with all privately held companies.
“On average, the industry has a healthy net profit margin and somewhat consistent sales growth,” said Sageworks analyst Libby Bierman.
Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, and aggregates the data at an approximate rate of 1,000 statements a day. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies’ operational performance.
Bierman noted child day care businesses tend to have really high gross margins, on average around 96%. This might mean it’s easy for business owners to scale and grow their day care operations. On the other hand, it could also mean businesses are lumping expenses together, considering nearly half of expenses are classified as overhead – a category typically used to account for selling, general and administrative expenses that cannot be attributed to the direct cost of providing a service.
“If they are lumping expenses together, it could make it difficult to identify expenses that may be out of line or manage those expenses should they need to be trimmed,” Bierman said.
The number of child care facilities has increased greatly over the last several decades, with U.S. Census Bureau figures showing an increase to 766,401 child care facilities in 2007 from 262,511 facilities in 1987. Demand has been driven by increased numbers of working women, the Census Bureau says. In fact, 61% of mothers with kids under the age of three are working or looking for work, and changes in family structure and the desire to provide young children with educational opportunities have also contributed to demand, according to the government. Nine in 10 child care businesses don’t have employees (other than the owner), and these businesses, many of which are operated in-home, require less financial investment than larger centers and therefore, allow owners to readily enter and exit the market as needed.
Alison T. Jacks, an Enrolled Agent (EA) who specializes in tax-related work for child care providers in the San Francisco Bay area, said many of her clients are “in about as good a position as they’ve been in awhile” financially. “The economy is holding up here in the San Francisco Bay area, and we have some better employment numbers,” she said.
Even so, many child care operators remain on guard for the next “bust” cycle in the economy. “And there just are a lot of pressures, especially if clients have a large child care or a center with employees,” she said.
“I think it is a constant struggle to have a full program and to have enough income to support the situation,” she said of business owners.
She has one client who rented a house near
“There’s a huge need [for services], there’s just always this aspect of the paying for it.”
Jacks works with a lot of sole proprietors who provide child care, and she finds that many of them have strong gross income but have little left after expenses and taxes. “Most of them are in it because it’s something they really enjoy,” she said.
Sageworks, a financial information company, collects and analyzes data on the performance of privately held companies and provides accounting and audit solutions.
