RSM Australia

Set your child care centre up for success by managing cash flow

One of the most common questions that an accountant is asked from the child care sector  is, 'So I made $150,000 last year; why don't I have another $150,000 in my bank account?'

The answer is negative cash flow... 

Did you know you can make a profit but also have negative cash flow?
This means that your child care businesses may be heading towards business failure despite what the profit numbers say.

It is important to understand that cash flow is not just a function of sales or profit. In this article, we are underscoring the importance of understanding what drives your cash flow, and here we provide insights to help you to improve your cash management. 

How can my child care centre have no cash if I am making profits?

Some items that you pay for aren't reflected in the profit and loss statement prepared by your accountant - they are recorded on your balance sheet.

Take this example: 

Profit per P&L $150,000
Less: Cost of new equipment ($50,000)
Less: Income tax payments ($45,000)
Less: Bank debt repayments ($20,000)
Less: Owner's drawings ($100,000)
Negative cash flow for the period ($65,000)

If you have significant cash in the bank at the beginning of the year, this might not be such a bad position; however, if this pattern continues for several years, the outcome may be disastrous and lead to the eventual demise of your business.

Remember - cash is king in your child care centre!
Once your cash is gone, or you start struggling to pay your bills on time, this financial stress can easily start to affect other parts of your business and your life. 

What strategies can you implement to improve cash flow in your business? 

  • Switch to reporting GS4T each month 

This is an easy fix. Monthly lodgements of business activity statements will result in you receiving the benefit of your GST refunds earlier, as opposed to waiting for the end of the quarter to roll around. With the current generation of cloud-based accounting solutions, you will not have to dedicate significant time or resources to preparing your BAS each month for your child care centre.

This also has the added benefit of ensuring that your financial records are up to date, allowing you to make financial business decisions with confidence. 

  • Budgeting for tax liabilities

Many businesses spend or reinvest all of their pre-tax profits without considering their tax liabilities and the timing of when they will fall due. During the last quarter of the financial year, it is crucial to review your financial results for the year with your adviser, estimate how much tax you will be liable to pay and when it will fall due, and discuss ways to optimise your tax liability.

  • Clearly understand your bank obligations

Although debt is cheap to maintain at the moment, be wary about leveraging your business with too much debt. If you are considering taking on more bank debt, plan carefully to ensure that you will be able to afford the repayments should (and when) interest rates rise again in the future. 

  • Review you debtor collection policy

Don't fall into the trap of not chasing up non-payment by your customers, and make sure that you have a strong policy in place for collecting fees. Better yet, change your policy to collect fees up-front from parents. Each year or semester, you have a chance to set a new agenda for your business, so don't be taken advantage of by customers who don't pay. 

After tightening up your debt collection policy, ensure that you have a strong policy of bond management. Bonds are there to protect your business. You have two weeks to act with parents who are in arrears. Be up-front with new parents and advise them that child care will be ceased if the fees are not paid within two weeks.

If your child care centre has a waiting list, you have the luxury of not needing to place yourself at risk with troublesome payers. If you have capacity in your centre, you should not put yourself in a position where you are employing additional casual staff to cater for people who owe you money. 

  • Taking advantage of rebates

There are a multitude of rebates available that you should be taking advantage of in the child care sector:

  • One example is the Jobs Action Plan, a New South Wales payroll tax rebate scheme whereby employers who are paying payroll tax in New South Wales can receive a rebate of up to $6000 for new employees hired in the state. 
  • If you don't know payroll tax, then there is a similar scheme known as the Small Business Grant. This is a one-off grant of $2000 paid for new employees hired in New South Wales, payable after they have been employed by you for one year. For employers in South Australia, a similar incentive has recently been introduced by RevenueSA. 
  • There are also rebates and incentives available for employing apprentices and trainees. These vary based on the job position, but some incentives can be up to $4000. 


  • Push payment of your creditors out until they are due

Be organised with making payment of your bills. Push this out until just before the due date. 

Take care with superannuation payments; you are legally required to ensure that all employee superannuation contributions have been received by the super funds by the 28th day of the month following each quarter end. Be sure to leave a couple of days for processing time to ensure that you are complying with your obligations, and you will receive a tax deduction for your superannuation payments. 

Are you in the Child Care sector and are looking to review your cash flow, structure or operations? 

RSM can assist by reviewing a centres operations, including income and expenses and assessing them against industry standards. We can also rate a business's profitability indicators (often revealing disproportionate employee benefits and rent costs) and prepare a business enhancement approach for these areas.

Please contact your local RSM adviser for more information.