Understanding Profit & Loss Statements for Child Care and Preschool Businesses
By Kym Pomares
Are your eyes already glazing over, is your anxiety level rising? You are not alone.
Many business owners feel the same way but in order to understand the health of your business it’s necessary to bite the bullet and learn at least the basics.
To begin with, the Profit & Loss Statement (P&L) gives you financial information about your business over a specified period of time, usually monthly, quarterly, or annually, but can be reviewed for any specific period you choose.
It is a good idea to review it on a regular basis so that you don’t encounter any serious surprises at year’s end.
A Profit & Loss Statement provides summaries of the business revenues, expenses, and net gain (or net loss) for the business during the specified period.
It does this by breaking down the business finances into three categories:
This is typically at the top of the P&L and includes any sources of income the business has. In child care this can be tuition, subsidy income, additional services offered (dance class, art class, birthday parties, etc.)
Expenses are anything the business must spend money on to operate. This includes salaries, wages, rent or mortgage, utilities, marketing expenses, supplies, etc.
These are usually found in the middle of the P&L statement. (Sometimes you may see expenses referred to as COGS or Cost of Goods Sold, but this term is not as relevant to schools because no supplies or products are purchased in order to create another product).
Net income is what is left after expenses are deducted from revenue. The goal of course is to have a net income and not a net loss.
So, now what?
In order for your P & L to be useful to growing your business you need to do some analysis of each section. Compare to a previous P & L, month over month, or year over year.
How is it trending?
Is it trending up or down?
If it’s trending up, is it because you have increased tuition?
Or have you increased enrollment?
Have you added extra-curricular classes?
From this you can determine what is working for you. If revenue is trending down, why is it?
Have you lost students?
Is tuition being collected or is your accounts receivables growing? Why?
What is creating the problems?
Determine what the problems are and work to correct them.
Are expenses increasing or decreasing over time?
Is payroll growing out of control?
Is staff clocking in and out correctly?
Is the staff not being diligent about cost-saving measures?
The desire is to keep expenses to a minimum but they may also decrease because you have fewer students and fewer staff which is not a financially healthy way to reduce expenses.
Review your expenses carefully. Are there any that can be reduced or eliminated?
Sometimes we sign up for services that eventually are no longer used but we neglect to cancel them and therefore are spending money unnecessarily.
After subtracting the expenses from the revenue, you are left with the net income (or if revenue is too low and expenses too high) a net loss.
In either scenario it is necessary to scrutinize the revenue and the expenses carefully to determine what changes need to be made.
Further, even if the business ends up with a profit, it is necessary to compare to previous P&Ls to determine if the net income trend is going up or down.
The goal is to see the net income increasing consistently over time. This can be ensured by making the necessary changes to the various categories.
Do you need to increase tuition?
Do you need to spend more time and money on marketing to ensure your school is full?
Do you need to add extra-curricular classes?
Do you need to go through your expenses with a fine-tooth comb to eliminate wasteful spending?
The P&L is your personal business tool to help you make your school as profitable as possible. After all, you deserve to earn a good living for all the hard work you do!