The Iron Triangle: Revenues Cover Per-Child Cost

by | Oct 6, 2016

This is the final in a series of blog posts First Five Nebraska is publishing on the Iron Triangle, a model developed by Louise Stoney (Alliance for Early Childhood Finance and Opportunities Exchange) and Libbie Poppick (Opportunities Exchange) that helps calculate the cost of providing the level of quality child care known to reduce the achievement gap. The three metrics of the triangle are Full Enrollment, Full Fee Collection and Revenues Cover Per-Child Cost. Read our first blog post on Full Enrollment and the second blog post on Full Fee Collection.

Providing higher-quality early care and education environments known to close the achievement gap for Nebraska’s youngest children can be costly, and as care providers work to meet quality standards in Step Up to Quality, our state’s quality rating and improvement system, it's important for ECE providers to ensure their businesses are on a solid financial footing.

Louise Stoney of the Alliance for Early Childhood Finance developed a formula for providers that focuses on three important metrics that make ECE programs financially viable:

1.     Ensure full enrollment, every day in every classroom.
2.     Collect tuition and fees, in full and on time.
3.     Revenues cover per-child cost.

These metrics, which Stoney refers to as the Iron Triangle, are interrelated. While Stoney’s research shows that it’s often very difficult to meet all three metrics 100 percent of the time, providers should think of them as a sliding scale—as one moves, another must move to counterbalance it.

Revenues Cover Per-Child Cost
The concept of setting tuition to meet child care costs seems simple, but complex factors often must be taken into account, including things that EC programs cannot control, such as funding from state and/or local governments and scholarship programs that assist EC programs. Says Stoney: “Determining the actual cost per child, comparing this cost to the price charged, and when fees cannot cover the full cost, identifying third party funding to fill the gap, is essential to sound fiscal management.” Stoney says the bottom line is “parent fees + third-party payments must = per-child cost.”

As EC providers know, the cost per child increases when parent fees are not collected or the program does not have full enrollment. There are ways to lower the per-child cost without full fee collection, usually by increasing enrollment.

However, if economic times are tough and families’ income is falling and third-party funders are cutting budgets, ECE programs face a serious challenge keeping revenue up to cover costs. Stoney says programs usually have two options: lower fees to boost cash flow or maintain or increase fees. Keeping fees high in tough economic times can seriously jeopardize low vacancy rates in a program. Either way, this creates a tough situation for a provider.

The Iron Triangle was developed to create a path through a complex issue. If care providers follow it, it can help them create a more stable program and assist in easing tough decisions in difficult economic times. A program that stays on top of fee collection, is fully enrolled and has a steady revenue stream is practicing sound fiscal management that can help the business maintain profitability.

The Policy Piece
Policymakers can assist early care and education providers by implementing the following:

  • Develop or consult an existing cost model to explore funding strategies, identify gaps and adopt changes that would assist providers in joining and moving through Step Up to Quality, Nebraska’s quality rating and improvement system.
  • Use the cost model to develop child care subsidy rates instead of using market prices.
  • Remember early childhood and care providers during tough economic years. When considering budget cuts, keep in mind that quality care and education leads to healthy development during a child’s early years. Without it, many children are already behind when they start kindergarten—a setback that can persist throughout a lifetime.

For more information, including steps to calculate cost per child in center- and home-based care, see Using Metrics to Drive Quality and Sustainability in Early Care and Education Programs.

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