| Background
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When the Milton Keynes Development Corporation
earmarked a plot for development into a children’s day nursery,
several childcare organisations submitted bids for the
land. Among them was Green Admiral Childcare PLC,
trading as Stepping Stones.
The total cost of the Stepping Stones project
(purchase of land and construction of a day nursery) was
£575,000, of which only £130,000 could be funded
directly. The rest had to be borrowed.
The Text Wizard wrote a business plan for Green
Admiral Childcare which was presented to NatWest. It was
a success. On the strength of the business plan, NatWest
was prepared to fund the missing £445,000.
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| RISK
FACTORS AND RETURNS |
| Occupancy
Levels |
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A
nursery should not be viewed as a production centre that
becomes more profitable as output increases. The
building size is fixed and the number of children for
which it is registered is also fixed. The nursery either
runs at capacity or it doesn’t. In the financial
models used in this business plan, we have put the
occupancy level at 95%. In practice, all nurseries have
waiting lists and places can be filled almost as soon as
they become vacant. This invariably applies to cheaper
nurseries, but not necessarily to a more expensive one.
We will limit the chances of having vacant places by
requiring four weeks notice for departing children. We
will vigorously keep our waiting lists up-to-date and
ask for deposits to ensure that only serious customers
put themselves on it. Filling vacancies in advance will
be a priority task.
In practice, we believe we can achieve, and improve
upon, 95% occupancy. For comparison, we have made
projections on 90% and 85% occupancy.
At 90% occupancy, profitability falls to 3.6% in year
two and 8.0% in year three with costs recovered during
year eleven. The maximum overdraft requirement increases
to £103,000.
At 85% occupancy there is a continuing loss in year
two, followed by a profit of only 1.7% in year three. It
takes fifteen years for the investment to be recovered
and the overdraft increases to £133,000.
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| Speed
of Take-up of Places |
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The
rate at which nurseries fill is often slower than
expected. Parents are reluctant to risk their child in
an unknown environment and change is upsetting for the
child. The models assume that we will open with ten
children and then build up to 95% occupancy in the ten
months following opening. We will pre-sell places as
hard as we can in advance of opening, exploiting the
media value of the tender win. As the building rises out
of the ground we would expect to receive a steady stream
of enquiries.
We have modelled a much worse case with the nursery
taking eighteen months to reach capacity. This results
in an overdraft of £195,000, a loss of £51,000 in year
two, followed by 10.4% profit in year three. Break-even
is achieved during year ten.
One strategy for countering slow take-up would be to
decrease fees. An example has been modelled with fees
reduced by 10%. This leads to a continuing loss in year
two and a profit level of 2.3% in year three. The
overdraft requirement is £130,000 and the investment is
not recouped until year fifteen. |
| Employer
participation in Capital Costs |
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We would like to encourage employers to commit
themselves at an early stage to places in the nursery
– and maybe persuade them to cover some of the
capital costs. A simple scheme would be to sell ‘partnership’
places in lots of £5,000. Each £5,000 contributed
reserves one place for six years at a discount of
£1,000 each year. Credits to the full value of unused
places can be rolled up, but the place itself can only
be kept vacant if the sponsor pays the full cost,
otherwise it will be sold to someone else. The sponsor
does, however, stay at the top of the waiting list for
other places as they become vacant. If no places were
taken at any time, sponsors could take credits of
£1,000 each year and cash them in at the end of year
five. As long as a place is taken up at some time, the
full six-year benefit will accrue with credits for
unused years offset against charges for other years.
When fully used over six years, the scheme is equivalent
to a loan at 6% interest.
Two partnership places have already been booked. We
have modelled the financial results of a total of twenty
partnership places. The effect is to reduce our bank
borrowing by £90,000. Profitability remains at roughly
the same level initially – 8.6% in year two and
13.9% in year three – but increases after year
six to 19.9% and remains at this high level throughout
the fifteen years. Break-even is achieved after eight
years and the overdraft reduces to £50,000. |
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