Child Care Business Turnarounds – Key Reasons Turnarounds Fail

Since 1995, I have worked with countless childcare business owners to turn their childcare business around – going from losing money to making money. It is always such a great feeling of accomplishment for everyone involved to turn a childcare business around – particularly when the turnaround means keeping the doors open and continuing to provide the care and education that children, parents, and the community need.

Unfortunately, some of these consulting projects were not successful, and the childcare business was closed or sold for far less than it could have been worth. Although business turnarounds are complex and many factors must be considered, I want to share some key reasons why some childcare business turnarounds fail to achieve the level of success possible.

Not facing reality soon enough. The number one reason childcare business turnarounds fail is that the owner often waits too long before reaching out for help or taking steps to turn the business around. To be successful, entrepreneurs must be risk takers, optimistic, and always have a mindset of “I am going to make this work.” This same positive, never-quit attitude plays a significant role in the success of most entrepreneurs and their childcare businesses. However, it can also lead the childcare business owner to procrastinate, fail to stop and take a serious look at the financial problems in their business, fail to reach out for help, fail to create a plan, and fail to start taking action soon enough to turn their childcare business around. We have all heard the saying, “Hope Is Not A Strategy.” This is so true when it comes to a business turnaround.

At some point, there is no “turnaround”. Over 80% of businesses – across all industries, including childcare businesses – close due to a lack of financial resources. For every day that a childcare business owner waits, puts off the hard decisions, procrastinates, takes the wrong actions, or takes no action at all, more of the business’s financial resources are lost. At some point, the childcare business owners have waited so long that they have not only used all their business financial resources but often their personal and family financial resources, trying to keep their childcare business afloat. And bankers and investors rarely provide funding to failing businesses.

Childcare business turnarounds, like all business turnarounds, take time and money. When all the money is gone, there are often very few quick changes that can be made to provide enough financial improvement to generate the money needed to continue working to turn the childcare business around.

As a childcare business owner, the most important thing you can do is always know your childcare business’s financial condition. Review your financial information at least once a week, if not daily. Manage your childcare business by following a well-designed budget and key financial metrics or benchmarks. When your business performance deviates even slightly from the budget or benchmarks, take corrective action to get things back in line – do not wait until the problem worsens – business financial problems do not solve themselves. Delaying action only compounds the problem, wastes resources, and lengthens the time needed to turn things around.

Not accurately identifying the “root cause” of the financial problems. When things are not going well, it is easy to blame third parties or things outside the business – revenues are down because subsidies are too low, the public school system took more of our enrollment last month, etc. These and many other things may be part of the problem, but often, other core business operational things are a larger part of the problem and need to be addressed instead of just laying blame on others. Clearly identifying the problems leading to financial losses and instability is one of the most critical aspects of creating a turnaround plan that addresses and corrects them.

Lack of laser focus. A successful turnaround in a childcare business requires extreme focus over an often lengthy period. Instead of “putting their blinders on” and focusing solely on turning their business around, they get distracted. Although they might start out focusing, when they do not see improvement, frustration takes over, and their focus is lost. Or they start to see minor improvements and think things are back on track, and lose their focus. Or, because turnarounds are difficult and stressful, they engage in activities that have nothing to do with the turnaround strategy as distractions to lessen their stress. Focus, Focus, Focus. And do not stop focusing on the business turnaround until it is complete!

Nibbling around the edges. Childcare business turnarounds require quick, decisive decisions and often tough actions. When faced with what is the most common financial problem in childcare – lack of profits or often substantial financial losses due to charging too low a tuition to cover the true cost of care, or labor costs that far exceed normal operating benchmarks, childcare business owners often avoid making the hard decisions and taking the corrective action necessary to fix the problem. They engage in what I like to refer to as “nibbling around the edges”. For example, as a childcare turnaround specialist, our advice was to reduce unnecessary administrative labor costs, rearrange classroom and staffing assignments, increase tuition rates to cover the actual cost of care, eliminate some programs with large financial losses, and eliminate significant, unnecessary program expenses. Instead of taking these actions, the owner procrastinates and, months later, finally makes small decreases in the hours of one administrative employee, cuts out a few small program expenditures – ones that will have minimal impact – and decides not to increase tuition rates – preferring to wait and see if things get better.

Activity does not equate with accomplishment. Childcare owners engage in “nibbling around the edges” because they do not want to do the hard things – let some employees go, decrease staffing hours, rearrange staffing assignments, and have difficult discussions with parents about why tuition rate increases are necessary. So, they take small steps (actions) like buying less expensive classroom supplies or reducing staffing by a few hours, because even taking small actions makes them feel they are doing something to address the problems. Unfortunately, their inability to face reality, make difficult decisions, and take the necessary action means the business continues to decline. I have never seen “nibbling around the edges” lead to a successful turnaround in a childcare business. Substantial actions not taken today will only prolong and worsen the problem. Most owners run out of money while “nibbling around the edges.”

Lack of clear communication with employees. A financially failing childcare business impacts more than just the owner. It impacts the employees, children, and parents. Childcare business owners are hesitant to let employees know there are financial problems in the business. And, I understand their concerns about what information should be shared. Should you provide detailed financial information to your employees – nope, really not necessary. But business turnarounds take more than just the childcare owner’s efforts. Clear communication with employees is essential. Telling them that the business is experiencing financial constraints and that you will need their assistance in turning things around is essential. You need every employee to be a “team player” and do their part to help cut expenses, keep parents happy, accept a temporary classroom change, or whatever you, as the owner, may need them to do. In most situations, I have found childcare employees to be resilient and willing to do their part. But there is always one or two who do not want to cooperate, will not accept even a temporary change, and, in general, impede the turnaround process. As a childcare owner, you must let those employees go, no matter how difficult it is. Successful childcare business turnarounds take everyone working together and “pulling in the same direction.’

Growing the business out of trouble. Increasing gross revenue alone rarely results in a complete business turnaround. Before trying to solve business financial problems by simply increasing gross revenue, it is crucial to clearly identify all the key reasons the childcare business is struggling financially. More revenue may not be the answer. Often, the childcare business revenue is ok – excess labor costs, facilities costs, and unnecessary operational costs are the problem. But it is easier to create a flyer, hang a “free registration” banner, or hold an open house than to analyze all financial expenditures, make difficult decisions, and take the necessary actions to reduce unnecessary expenses.

Childcare business turnarounds are neither quick nor easy. Most business owners, including childcare business owners, rarely have the financial and business acumen needed to turn a business around. One of the best decisions a childcare business owner can make is to hire a childcare business turnaround specialist to develop a turnaround strategy tailored to their childcare business. Then, implement the plan! Don’t second-guess, procrastinate, or hope for the best. A business turnaround takes far more time and resources than most childcare business owners realize. Getting help as soon as even a small financial problem arises, and committing to the process and time needed for a successful turnaround, is imperative.

If your childcare business is struggling financially, reach out to us at ChildCareOwner. All conversations are confidential, and there is no obligation. We’ve helped others, and we can help you!