Break-even analysis is an important calculation used in business ventures like running a preschool. Break even analysis of a preschool is reached when its revenues equal the sum of all the expenses. At the break even point there is zero profit, but it also means that the business is no longer running losses and from here on it would begin to incur profits. A break-even calculation makes a lot of sense for the preschool owner because it helps to calculate the level of child enrolment that is necessary to avoid operating in a loss. However, break even breakdown is more of an indicator rather than a science of exact calculations.
For example, the childcare provider could choose not to add more children to reach the break-even point. Instead, the fee for new enrolments could be raised or the staff/child ratios could be altered. Thus, this analysis is indicative of how the preschool business set-up is operating in terms of finances and the changes it needs to make. Revenue projections can also go awry if there is a high rate of children dropping out of the preschool, right in between the semester. Preschools could solve this problem by making the parents sign a payment agreement. The agreement could be prepared in such a manner that the parents have to either give a two-week notice before taking out their child or pay one week of tuition fee in advance.
In order to effectively control and budget the cost, expenditures, etc. the preschool management should have a good understanding of the various kinds of costs that are incurred when running the business. The break even analysis of a preschool factor in various kinds of costs likes,
• Fixed costs have a near-negligible tendency to change over a period of time. These costs do no undergo any kind of variation irrespective of the total number of teachers employed or the number of children enrolled. These include costs incurred in the form of land rent, insurance payments, etc.
• Variable costs tend to alter over a short or longer period of time. For example, costs incurred due to the money spent on food provided to the children would alter in proportion to the number of children enrolled.
• Step-variable costs are those costs that do change with a factor like the number of children enrolled but tend grow to a larger extent than the cost of preschooling calculated on a per child basis. A common example of a step-variable cost is teacher salaries.
Break even analysis of a preschool also need to factor in
• Average revenue per child.
• Margin created per child.
• Personal expenses debited from the preschool’s business account.