Dealing With Bad Debt In Early Years Settings

OI was recently reading a post from one of the many Early Years Facebook groups I follow. This post was from a nursery owner asking about bad debt. 

The post talked about how a parent had placed their child at the nursery for about 6 weeks and then left the setting having paid nothing during that time. The post didn’t mention funding, but the implication was that she had lost 6 weeks of income and the question to the community was what should she do about it? 

To my surprise, many responded to just put it down to experience and write off the money. A few were indignant and suggested fighting back, either through the courts, and a few more suggested letting local competitors know, so they didn’t fall prey to the same situation. 

The True Cost Of Bad Debt

Before we go any further though with solutions, let’s give some thought to the true cost of this theft. And before anyone says it’s not theft, I’m afraid it is – running a nursery is hard enough as it is without people stealing income, and when you consider that only 50% of nurseries are profitable, this may be enough to push some settings too far. So, let’s call it what it is – it’s theft. 

Secondly, let’s consider what it truly costs. As in my previous articles, let’s make the maths super simple by assuming that the full-time place for a child is £ 1,000. If this child attended for 6 weeks (assuming without funding) then the cost that the parent should have incurred is £1,500. So that’s £ 1,500 of income that has been lost. That’s not great, but I’m afraid it’s only part of the story. 

Let’s assume that the setting in question has a 5% profit margin. To earn that £1,500 with a 5% profit margin you would need to invoice £30,000! This is because with a 5% profit margin, you earn 1/20th of everything you bill (100/5=20). Therefore, if you multiply that £1,500 of bad debt by 20 you get to the earned value. 

Armed with this information, I hope this will have changed the position of many who said simply write off the money and put it down to experience. The fact of the matter is, that you really cannot afford to do this, and I would recommend using one of the low-cost online debt legal firms to issue a “letter-before-action” against this parent. 

Proactive Measures To Safeguard Against Debt

Far more important though, is the need to be proactive about this in the first place. The most successful settings rarely suffer from bad debt. They achieve this by: 

  • Making substantial deposits for fee-paying parents mandatory. This protects the business if the parent leaves without paying. 
  • Having robust terms and conditions that make it clear to parents the processes for payment, what fees are charged for late payment and what will happen if the child leaves the setting without the requisite notice period.  
  • Having clear and explicit Child Exclusion policies.  
  • Having clear and explicit processes for chasing bad debt. 

Implementing these policies and procedures prevents incidents of theft like this we have been discussing, it enables the business to become more sustainable and most importantly, it allows you to invest your earnings in whichever way you choose. 

More tips and tricks for busy childcare providers can be found in Allan Presland’s best selling book, Improving the Business of Childcare 

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