Are Daycare Centers Profitable?

With over 750,000 daycare centers in the United States and more opening every year, daycare centers sound like a lucrative business to get into. The need for these facilities, also known as early learning centers, isn’t going away anytime soon and more entrepreneurs are considering investing their money to open the doors of their own daycare. Before you start stocking up on grapes and juice boxes, let’s find out if it’s worth it.

Are daycare centers profitable? Owners of daycare centers profit an average of $37,000 per year. While some owners of daycare centers report earning over $60,000 profit per year, the other side of the spectrum reported hauling in less than $20,000 profit.

There are several factors that lead to these numbers including location, size, and demand. Getting the business started isn’t easy and maintaining it is no walk in the park either. However, as is the case with most ventures, there is the potential to make a higher profit margin than the average owner. Here we will dive into some of the things that make daycare centers profitable.

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Factors That Determine Profit

Of course, not every daycare center is going to generate the same revenue. There is an endless list of things that create more revenue or cut into your profits. Being that it’s a field that has so many moving parts, the owner is able to customize most aspects of the business – from the structure of the facility to the snacks given in the afternoon, each of these decisions affects the bottom line. Here are the most important ones that will make (or cost) owners money.

Type of Daycare Center

There are two main types of daycare centers: home-based and a physical building outside of the home where the daycare is run. This is the largest factor in determining the growth of the business, but not necessarily profits. When looking at profit margin, home-based centers may be the victors.

Home-Based

Many daycare owners start their early childhood caregiving careers at their own homes. It’s by far the easiest way to get up and running with very little overhead costs. These types of centers are often fairly profitable attesting to the low running costs and not having the need for additional staff.

However, with simplicity comes an earnings ceiling. There is a fairly small limit to the number of children that can be at a residence supervised by one or two people. With time, the business will likely grow and the home will no longer be equipped to handle the extra children. When that happens and the daycare center moves into an actual physical structure is when that earnings ceiling raises much higher.

Daycare Facilities Outside of the Home

These are the typical early learning centers that come to mind when parents use the term “preschool”. This is an actual structure where owners and their staff watch the children. They normally have multiple rooms including lunchrooms, indoor play areas, and a fenced outdoor area where a playground can be constructed. They are normally much more physically appealing to the eye for parents and better suited for children.

Although not being in a residence and having an actual facility largely increases the number of children that can be cared for, it also increases the cost. Note that additional staff, maintenance, supplies, and possibly transportation will be needed to help with the greater volume of children. Initially, small daycare centers that have grown to this point will see lower profits as they adjust to the larger daycare facility. Successful owners ensure that they don’t outgrow themselves. To be profitable, it’s important to fill your business with children while maintaining expenses.

Where are the Most Profitable Daycare Centers?

It’s no secret that in order to make money in the daycare field, you must have customers that need and are willing to bring their children to one of these early learning centers. With that being said, the ideal location for a daycare center is somewhere that is heavily populated. Customers aren’t going to travel a long distance every day to take their children to daycare. The facilities in dense neighborhoods and near large schools will have the most success in getting customers, therefore creating the potential to turn a profit.

So That Means…

Daycare centers in rural areas where schools and neighborhoods are scattered with miles in-between each other don’t create as much of a profit. It’s clear that facilities in these types of areas really have a cap on their earnings and profits. Not only does it mean fewer children available to attend, it means higher costs of advertising and getting new customers. Most customers are brought into the daycare center for the first time by word of mouth or a referral from a friend. When there are fewer people around there will be less of these scenarios.

Daycare Centers that Charge the Most

Other than initially getting customers, the most effective way daycare centers earn the most profits is by charging more for their services. The cost of facilities is largely determined by the cost of living in the area. Daycare centers that are in areas with a higher cost of living fittingly charge their customers more. Parents in these areas expect to pay a little bit more for childcare and are more willing to accept the higher rates. Of course, there are higher standards in these types of areas but maintaining them will be rewarding.

Obstacles that Jeopardize Profits

Owners of daycare facilities have a plethora of things that can create cracks in the road to constant revenue. When prioritizing profits high on the list, there is no time for gaps in revenue. The money coming in should always be consistent or growing.

Successful owners anticipate events that can potentially harm their business and plan ahead to minimize the hit on their bottom line. Foresight and problem solving are key to avoiding potential revenue loss. Owners need to always be thinking ahead. Let’s name a few big potential problems and how they can be avoided.

Customer Turnover – Children don’t stay in daycare forever, most of the time only a year or two. That means there is a constant need to secure new customers. The more children attending, the greater the chances of higher profits. Successful daycare centers always advertise and work to keep their capacity near full. Often daycare centers advertise in the media, at local gyms, and at grocery stores. Basically places where working parents will come across the advertisement and have a need for early childcare services.
Staff Turnover – A necessary evil of the field. Employees aren’t compensated well in a daycare center. Often, the only benefit they have is sick time. Often, there is no health insurance or retirement provided. Due to the low pay, employees normally don’t stay for an extended period. Smart owners utilize young adults that are attending school or working to get in the field of childcare. Those types of employees are working for the experience and their passion.
Maintaining Standards – Childcare and early learning facilities are monitored by the state they are in. Owners need to keep their daycare centers up to code in order to continue conducting business. These standards are updated and change from time to time which means profitable daycare owners need to be diligent in maintaining the standard. If a facility is found to be in violation of a code, the business will be closed until it has been corrected. There will be absolutely no chance of being profitable with the doors closed and locked.
Getting Customers to Pay – yes, this is still (and will always be) an issue. Daycare is a large expense for any family, no matter what the rate is. Most families will spend between 10% and 15% annually on childcare. Most daycares charge by the week or month. That means that very often, someone is tasked with collecting payments.

*About 90% of daycare owners describe this as the most difficult aspect of the business.* Likely, this is one of the more stressful parts of the gig. At times owners will make arrangements with parents to pay at a later time and that doesn’t always work out well for the investment. Furthermore, daycare facilities in lower-income parts of town experience the problem tenfold – much more than daycares in higher-income areas.

On the Rise!

In recent years, the field is on the rise. Daycare centers have seen a steady increase in the number of children attending. The spike in customers can be attributed to more families in which both parents need to work to provide income. Additionally, the amount of money facility owners charge for their services has increased. Simply put: there are and will be more children that need daycare and if the trend continues, the cost will continue to increase.

States That Pay the Most

Similar to how the cost of living in the area affects the cost of childcare services, the trend can also be seen by looking at cost by state. Though not a state, parents in Washington D.C. pay the highest rates to daycare centers followed by California, Oregon, and New York. The states charging the lowest rates for at daycare centers are North Dakota, Utah, and Delaware. Most potential owners aren’t necessarily looking to relocate to a different state to open their business but it’s definitely something to be considered if chasing profits.

Where Does a Profitable Daycare Start?

The estimated cost to start up a daycare facility is between $10,000 and $50,000. Though a fairly low business to get off the ground, a smart investor must calculate how much time it will take to make the capital investment back. The larger the investment, the longer it will take to replace your investing power. For investors looking to open their first early learning center, most states offer incentives and grants that cover a portion of the startup costs. Don’t leave money on the table by not taking advantage of these programs.

Don’t Forget…

To be successful and profitable, owners need to keep an eye on the money and everything that encompasses it. Rates should be constantly be evaluated to ensure it’s in line with the competition. Expenses need to be tracked and managed so money isn’t wasted. Look into supply prices often, the daycare needs the best deals to make the highest profit. With rates and costs changing every day, managing the business isn’t something to be taken lightly.

Dollars, Cents, and Passion

We’re talking a lot of business and numbers here – excellent information for anyone thinking of starting their own early learning center. However, it should be stated that most people get into the profession for their passion. If children and developing youth isn’t in your bag of interests, scratch that, one of your greatest passions, you should consider another field to invest in.

Money is typically not the #1 driving force that brings people into the business. On the other hand, having the passion and getting satisfaction out of caring for children will give any ambitious investor the edge when developing a profitable daycare center.