How Much Do You Want to Earn?
Although few family child care providers ask this question of themselves, it is an important one for any person who runs their own business.
I recommend that you set a goal for how much money you want to make in the upcoming year.
Your goal could be to earn what a teacher in a local child care center makes, or 10% more than you made last year, or earn the federal minimum wage ($7.25 per hour as of 2021).Let's say your goal is to earn $9.00 an hour after your business expenses.
Step One: Calculate Your Annual Income Goal
First we need to know how many hours you work in a year. If you have been in business for a full year, look on your last year's IRS Form 8829 Expenses for Business Use of Your Home, line 4. This represents the number of hours you worked last year.
If you have been in business less than one year you may not know this number. If so, use an estimate of eleven hours a day, five days a week. This is the average number of hours child care providers care for children, according to several national studies. This is equal to 2,750 hours (let's allow for one week of vacation and one week of holidays).
Next, add the number of extra hours you work after children are gone. This includes time spent cleaning, activity preparation, meal preparation, record keeping, time on the Internet, and so on. The national average is 13.9 hours a week. If we use 12 hours a week (50 weeks a year) this totals 600 hours.When we add 2,750hours to 600 hours our total is 3,350 hours a year. Multiply this by $9 an hour and we get $30,150. This means our goal is to earn $30,150 after paying for all business expenses.
Step Two: Determine Your Business Expenses
If you have been in business for more than one year, use the number on your last year's IRS Form Schedule C Profit or Loss From Business, line 28. This represents your total business expenses, not counting your house expenses from IRS Form 8829. Because your house expenses don't represent an expense caused by your business, we won't count them.
If you haven’t been in business for a full year it will be much harder to estimate your business expenses. This number varies greatly from one provider to another, depending on where you live and the type of program you operate (school-age, preschool, special services you offer, etc.). We’ll use $18,000 as our estimate.
Add your income goal to your business expenses: $30,150 + $18,000 = $48,150. This represents the amount of money you need to earn to meet your goal.
Step Three: Establish Your Child Care Rates
Now you are ready to determine how much you will need to charge to meet your annual income goal.
First we want to take into consideration income from the Food Program. If you are receiving the lower Tier II rate, and are reimbursed for breakfast, lunch and one snack, you will receive $522 per child in 2013. If you are on Tier I you will receive $1,090 per child. Both numbers are based on working 50 weeks a year.The amount you must charge to meet your goal will vary depending on how many children are in your care. Here’s some examples, assuming you work for 50 weeks. We are reducing your income goal by your Food Program income. The first amount per child for each option assumes you are on Tier II and the second amount assumes you are on Tier I:
Three children: $48,150 – $1,566 (3 x $522) = $46,584 divided by 3 children = $310/$299 per week
Four children: $48,150 – $2,088 (4 x $522) = $46,062 divided by 4 children = $230/$219 per week
Five children: $48,150 – $2,610 (5 x $522) = $45,540 divided by 5 children = $182/$171 per week
Six children: $48,150 – $3,132 (6 x $522) = $45,018 divided by 6 children = $150/$139 per week
These numbers show that to meet your goal of earning $9 per hour you must charge $230 per week, if you care for 4 children, or $150 if you care for 6 children. Both amounts assume you are on Tier II.
Making Adjustments
The above numbers will change for a variety of reasons: your business expenses are different, not all children are enrolled full-time, or some of the children are being subsidized by your state. If your expenses are higher or you have part-time children, you will have to charge more to make your goal.
Let’s say two of your children are subsidized and you are paid $150 per week for each child. That represents $15,000 a year ($150 x 2 x 50 weeks = $15,000). Now you must make $33,150 ($48,150 – $15,000 = $33,150) caring for additional children to meet your income goal. If you care for three additional children you must earn $211 per week for these three children (assuming you are on Tier II).
The numbers in these examples are not meant to represent what you should be doing. They are intended to help you better understand the relationship between your rates, your expenses and your profit.
Here’s a quick way to find out how much you earned per hour last year. Take line 28 from your Schedule C and divide it by line 4 on Form 8829. In other words, you are dividing your profit (not counting house expenses) by the number of hours you worked. Many providers may be surprised to discover that they are making less than minimum wage.
Once you have calculated how much you would have to charge to make minimum wage, you might consider saying this to your day care parents: “Do you think I should be making minimum wage caring for your children? If so, then I’ll need to raise my rates by $___ a week!”
Tom Copeland - www.tomcopelandblog.com
Image credit: http://mybusinessdevelopmentacademy.com/higher-prices
Some of this article was taken from the new second edition of my book Family Child Care Marketing Guide.
