Resource Guide - Planning Phase

Studies show that the need for increasing the capacity of child care in communities across the U.S. is tremendous. In planning to acquire, build, or expand a child care facility it is extremely important, however, to understand the difference between a given community’s need and demand for child care because to access the market feasibility of the development project, it is the demand for the services, not the need, that must be determined.   

Demand is established by finding out if there are enough families who not only need child care services, but also have the capacity and willingness to pay fees at rates sufficient to generate the income stream (cash flow) necessary to satisfy the centers operating budget. Consequently, the existence of need does not necessarily always mean that there is sufficient demand in the community. It is also important to consider though that in low-income communities demand can be measured by the availability of government contracts to provide subsidized care or the ability of parents to obtain child care vouchers.  

In order to establish whether or not there is a demand for your projected services the following steps need to be taken: 

1. Estimate the number of families demanding services in your area that have the ability to pay for services at the rate to be charged. Note: this is not an estimate of those just need services, but of those who can pay your rates or use vouchers.  Contact the HRC Child Care Resources and Referral, and the Amador or Calaveras Child Care Planning Council (See Resources Section) to find out about the existing supply and the highest need for care in your area, as well as information about the existing supply of child care services.

Conducting a thorough market feasibility analysis is essential to help identify  whether revenues will be able to cover the costs of the child care business.   

Depending on the scale and type of a project, it may be beneficial to hire an expert to prepare a market feasibility study. However, in the early stages of planning any facilities development project, the development team should always conduct a preliminary market feasibility study that identifies the geographic boundaries.  This information helps justify the soundness of he project concept and provides critical information to potential funders.  

A“Supply & Demand Exercise” is provided (Appendix A) which can assist in a preliminary analysis of the area to be served by your project. 

To know more about market feasibility analysis or to obtain the Facilities Needs  Assessment for Amador and Calaveras County’s contact Constructing Connections at (209) 257-5303. 

2. Decide whether your services will target low-income, middle-income, affluent families/or a mixed grouping. This decision will affect both the rated you charge and your eligibility for subsidy programs.

3. Decide what age group(s) the program will cater to. This affects an assessment of local supply and demand. Keep in mind that different age groups have different requirements for both staff and room size, which impacts both the business’ operational budget and site selection.

4. Assess whether or not the rates you intend to charge will generate enough revenues to meet the costs of operating expenses and the debt incurred by the facilities development project.

5. Begin to write a business plan that addresses these issues.  See Business Plan Outline for Child Care Centers (Appendix B).  For assistance with business planning contact Small Business Development Center - San Joaquin Delta College at  (209) 954-5089 to find out what resources are available to you.

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Financial Feasibility

The development team must consider the organization’s fiscal capability to support a facilities development project.  Because this step will differ for pre-existing programs and start-up programs, this section tries to specify which components of the financial feasibility assessment pertain to which type of project.  In general, the development team will need to take the following steps to assess the financial feasibility of a facilities development project.   

1. Estimate the overall start-up or capital cost of the facility development process and divide into: 

   1.  “Soft costs”  (design, permits, legal and financing fees)

   2.   “Hard costs” (acquisition, construction, equipment)

   3.  “Hidden costs” (staff and board time and attention)

   4.  “Contingency costs” (a portion of construction costs set aside to cover unexpected “hard” costs) 

   5. A contractor can typically help in the process of estimating these overall. 

   6. See Low Income Investment Fund (http://www.liifund.org/programs/childcare/abcd/abcd_resources.htm) for a template of a generic development proforma.  A Copy of this template is included as Appendix E.

2. Design an operating budget for the child care business if it is a new program; or, it is an expanding program, make necessary changes to the project operating budget.  Note that in identifying expected revenues (incoming money from parent fees, vouchers, state subsidies, etc.) it is important not to project that the program will ever be more that 90% full because it usually takes, a minimum, six months to reach capacity for a new program; and even fro an existing program.  It is quite common for enrollments to fluctuate throughout the year.   

3. Identify the financing necessary to cover the start-up and operating budgets.  Budget projections may need to be adjusted as more specific details about incoming revenues become clear. 

4.  Analyze the organization’s capability to apply for financing (i.e. loans) by determining debt capacity, or debt service coverage. 

5. Assess the projected costs, operating budget and financing streams to determine whether or not the new facility, or facility expansion, will generate enough income to pay operating expenses, service existing debt (as well as debt incurred as a result of the development project), pay an appropriate share of the organization’s overhead, and generate operating reserves.   

6. Ensure that the business will have enough working capital (cash available to fill in the gap between revenue and expenses) at the end of the facility development process to cover at minimum three months operating expenses as revenues take time to come in since the program will be building up its enrollment.  It is best have even larger cash reserves, if possible, in order to prepare for any cash flow problems that may occur, especially if the program is just starting-up. 

7. Identify donor relationships and look into new ones for development grants and especially for donations for toys, equipment, furniture, dress-up clothes, building supplies, etc.  Also try to identify potential partnerships with other community organizations like churches, hospitals, and schools that might be able to collaborate with your business to provide certain services and share some expenses. 

8. Determine the program’s legal status as nonprofit or profit child care business if it is a new program.  This will directly affect the program’s approach to obtaining financing.  To become a nonprofit you will need to establish a board of directors, form a nonprofit corporation (501)(c)(3), and file for your tax-exempt status with the IRS. To become a for profit you will need to decide if you want to be a sole proprietor, a corporation, or a partnership.   

Certain financial statements must be developed in order to complete the steps listed above.

 These statements include: 

• A detailed operating budget for the entire organization;

• A detailed operating budget for the new site, or the existing site after renovation or expansion;

• An annual cash flow statement that includes details of the organization’s monthly income and expenses, and

• A monthly income and expense projection that provides information on the organization’s ability to carry debt over a certain period of time. 

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Organizational Capacity

Analyzing a business’ capacity to take on a development project should occur early in the planning process.  The facility development process is best managed by a development team.  This team consists of a group of individuals that meet regularly and possess the technical skills necessary to cover all aspects of the process.  Members of a development team can be drawn from multiple sources, including a business’ own staff, its Board of Directors, parents using the services of the child care program, community members, local technical assistance resources, and others.  Board members and volunteers can be great assets to the development process if they have the appropriate technical expertise.  However, it is important to be sure they are committed to seeing the development process through its entirety.

The volunteer, pro-bono or in-kind human resources discussed above should be thoroughly explored before seeking paid consultants to help with the project. Nevertheless, typically the development team cannot be solely made up of volunteers from within the organization or community; therefore, the development team must hire consultants.  In hiring a consultant, it is important to enter into a mutually agreed-upon written contract that clearly defines the terms, scope of work, fee for service and payment schedule for each consultant.

The following is a list of roles that should be covered by a development team:

·        Project manager

·        Legal advisor

·        Financial officer

·        Real estate agent/broker (sales and/or leasing expert)

·        Marketing consultant

·        Child care coordinator

·        Developer/contractor

·        Architect/design consultant

·        Capital campaign consultant

·        Child care licensing expert

Once these experts, and the staff members assigned to the project, become members of the development team, it is time to begin assigning tasks to the team members, drafting a realistic timetable of activities, and developing a project concept consistent with the organization’s mission and program philosophy.  Some issues to consider when developing a project concept include: 

• Population being served (infant, toddler, preschooler, school-aged, and-or children with special needs);

• Type of care (traditional hours, non-traditional hours, 24-hour care, and/or drop-in), and

• Availability of labor pool (consultants, construction team, teachers). 

Once the project concept is clear and there is consensus within the development team, the organization must determine the feasibility of providing the new services within the community.  Primarily this involves an assessment of the market demand for services.  In the planning phase it is important to establish support beyond just the early care and education field, and to make sure that the community understands what your program has to offer. 

After identifying the demand for the proposed project, the development team needs to assess the financial feasibility of the organization to take on such a project.  An initial way to do this is to identify red and green flags that respectively indicate whether or not a business is in the position to move forward with the proposed project. 

The following steps will assist you in developing your organizations ability to carry out a facilities development project: 

1. Establish a development team of individuals to lead the facilities development project.  Explore volunteer, pro bono, or in-kind assistance options before seeking paid consultants.

2. Ensure that the staff, the board, and the leader(s) share a commitment to take this process in the same direction.  Also, assess whether you have the staff/skills needed for the long term process of facilities development.

3. Evaluate your financial readiness as an organization by identifying red and green flags.  

4. Identify local support.  Know your community and the demand for services; have relationships beyond just the early care and education field; and make sure the community knows what you have to offer. 

Financial Readiness Assessment

Red Flags –    Factors that may inhibit you from obtaining needed funding, meeting commitments, repaying loans.

Green Flags – Factors that suggest project success. 

Financial Readiness Red Flags: 

• Difficulty meeting payroll or taxes;
• Borrowing from officers/directors;
• Unable to pay bills promptly;
• Large amount of uncollected receivables;
• Deficits in recent years;
• Leader does not understand financial position;
• Leader can not explain audit;
• There is no cushion or cash reserve.

Financial Readiness Green Flags 

• Services are constrained by lack of space;
• Provider is financially strong and growing;
• Provider has shown success identifying and obtaining new funding sources each year;
• Financial systems are strong and in place;
• Leadership understands and guides financial position.

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