Working capital management for operators in the day nursery sector primarily consists of achieving the right balance between accounts payable (such as key supplier payments) and accounts receivable (collection of outstanding fees). If these areas are managed effectively, it could be a key source of liquidity for your business.
Some businesses may be tempted to use short-term fixes in order to improve their working capital position. Common examples might be temporarily delaying payments to key suppliers, or imposing tighter payment terms on parents. While this may improve your cash position in the short term, the long-term effects could be damaging for your business. Continued delay of payments could lead suppliers to revise their prices upwards, while parents may consider moving their child to another setting where the payment terms meet their own needs more effectively.
It is also worth remembering that drivers of working capital performance are often more operational than financial. For example, if a setting is experiencing difficulties with collecting its nursery fees on time, the problem could be more than just the accounts receivable team not working effectively. It could be that a particular nursery manager introduced extended payment terms to new joiners in order to improve occupancy, but didn't communicate this to the accounts receivable team. Certain parents may also be withholding payments as a result of being dissatisfied with the service provided.
With this in mind, companies that are able to demonstrate strong control over working capital tend to exhibit the following characteristics:
- Clear policies around payment terms which are understood by all staff, not just those in the finance department
- A workforce which is adequately trained and rewarded for its contribution towards working capital performance
- Processes which have been developed to take account of the impact on the entire organisation. Where possible, these processes are automated in order to improve efficiency and reduce costs.
