The U.S. child care services industry is comprised of about 54,000 commercial facilities that generate $25 billion annually. On top of that are another 21,000 nonprofit-run facilities that garner an annual revenue of about $13 billion, according to a report published this year by Dun & Bradstreet's First Research. As a day care center owner, your initial investment will be the start-up costs, which Entrepreneur estimates will range from $10,000 to $50,000, just to get your small business off the ground. Determining your profit margin and understanding what influences your profit margin is crucial to evaluate how well that investment is paying off.

What Is a Profit Margin?

Revenue shows how much your day care facility has earned and profits show how much money it has made in absolute terms. But a profit margin tells you how much in funds you're actually keeping after you've subtracted your expenses from revenue captured through tuition and other generators like sales of products or other services. For example, if your facility generated $600,000 in revenue last year and accrued $500,000 in expenses, the difference of $100,000 would equate a net profit margin of 16 percent.

Why It's Important 

Your profit margin is helpful in determining how financially stable your child care center is and whether your tuition rates adequately reflect the total costs required to provide care for each child. It's also useful in outlining where your resources and your staff's time may be better spent. Should you continue to pay that pricey music instructor to give lessons once a week to a dwindling number of pupils? Or, would those funds be better directed toward quarterly field trips to a musical instrument museum or to a family friendly matinee musical that parents have been buzzing about?

The Impact of Growth

When your center is just starting out, your profit margin could likely be at its largest, because of a small staff and low overhead. But as word-of-mouth spreads, thanks to happy parents, success typically leads to higher enrollment, a larger space, more and new equipment, and an increase in staff to keep the student-to-instructor ratios low. All of these factors contribute to a declining margin, despite an increase in your student population.

Tuition Rates

The average cost of center-based daycare in this country is $11,666 per year, or $972 a month, according to a report by Child Care Aware of America. But, cost greatly depends on where you live. For example, in Arizona, annual childcare for one infant costs $10,412. For an infant and his 4-year-old sibling, it jumps to $18,687. Take a good look at what you're charging and compare it to others. At the same time, make sure your tuition rates adequately cover every dollar required to care for and educate each student. After evaluating these variables, you may ponder raising your rates, which will help increase your profit margin. Resist the temptation to offer the lowest rates around, as this is not a sustainable model and it would make it difficult for you to raise your tuition if you needed to do so.

Other Factors

Child care has become a necessity for working parents, with more than 11 million children younger than age five in some form of child care in the United States, according to a 2017 report by Child Care Aware of America. Increases in the number of women in the workforce, number of single-parent families, reduced poverty and improved health services have contributed to the increased demand for child care services and early childhood education. Boosts in per-capita disposable income and government funding are additional factors that will fuel steady growth through 2021, when the industry is projected to generate $52.5 billion, with the majority of revenue still coming from private pay, according to the market research firm IBISWorld. Tending to your profit margins and making the appropriate adjustments along the way, will help your day care center thrive in this competitive and increasingly in-demand industry.

Tip

Need to improve your day care's profit margin? Consider implementing one or more of these measures.

Shore up your virtual presence: Many websites offer free listings dedicated to this service, as well as state-run sites, complete with reviews to make the job less overwhelming for parents. Try to avail yourself of as many of these options as possible.

Budget friendly options: Provide flexible hours while maintaining the same rates to accommodate parents keeping an extra close eye on their bottom lines, who have lost a job or had their work hours reduced. Payment arrangements to families who need it may also encourage struggling families to stay.

Early education over child care: Most centers have pretty much transitioned to early education hubs where toddlers experience early learning in a semi-structured environment. If your facility hasn't moved to this model, it would behoove you to do so sooner than later, so that you remain competitive.

Drop-in child care: This trend is popular, especially with centers known for their high-quality, safe, affordable care options. The focus is on fun activities and often include mealtimes and special theme events to provide parents with a worry-free evening or time away from kids. If doable, consider offering a Parents Night Out or something similar to draw that audience.

Communication: A monthly newsletter is no longer enough. Posting monthly menus, day-by-day activities and even Breaking Campus News-type updates keep your connection with the parents strong. Offering them an option to view behavioral reports privately can also help.

Variety: Ponder having some activities on an additional fee basis, such as ballet, karate or soccer, that kids can participate in while they're in your care. If enough parents are game, have the instructor come to you and give it a try.