5 Big Mistakes You Can’t Afford to Make When Starting Your Own Daycare

Original Publication Date: November 3, 2009. Updated and substantially revised.

Starting a daycare business requires much more than creating a welcoming space for children. Avoid five costly mistakes involving licensing, tuition, safety, parent policies and market research that can threaten a new daycare before it has a chance to succeed.

Starting a daycare business can be an appealing opportunity for someone who enjoys working with children and wants to build a business that provides an essential service to families. A home-based daycare can also have lower startup costs than many other businesses, while a larger child care center can grow into a substantial operation with employees, multiple classrooms, and dozens of enrolled children.

But child care is very different from starting an ordinary service business. Parents are entrusting you with their children, regulators expect you to meet specific health and safety requirements, and seemingly small mistakes can have serious consequences. Poor pricing can make the business financially unsustainable. Weak policies can create constant disputes with parents. Safety shortcuts can put children at risk. And opening before you understand licensing requirements can delay or even prevent your daycare from operating legally.

If you are still in the planning stage, start with PowerHomeBiz’s complete guide to how to start a daycare business. Then pay particular attention to these five mistakes, because avoiding them can save you significant money, frustration, and problems after you open.

Key Takeaways

• Research licensing, zoning, background-check, training, insurance, and health requirements before committing money to a daycare location.
• Calculate tuition from the actual cost of providing care rather than simply charging less than competing daycares.
• Never reduce spending on staffing, safety equipment, training, maintenance, or insurance simply to lower operating costs.
• Put payment, pickup, illness, vacation, closure, termination, and other parent policies in writing before enrollment.
• Research the local child care market carefully so you understand demand, competition, pricing, age groups, and unmet needs.
• Treat a daycare as both a child care program and a business. Good intentions alone cannot compensate for weak financial or operational planning.

The Five Mistakes at a Glance

1. Starting Without Understanding Daycare Licensing and Regulations

One of the most expensive mistakes you can make is designing your daycare first and researching the rules afterward. Child care is regulated primarily at the state and territory level, and requirements can differ substantially depending on whether you operate a family child care home, group home, preschool or commercial child care center.

Licensing is not simply paperwork. According to ChildCare.gov, state licensing establishes minimum health and safety requirements for legally operating child care programs. Requirements can cover building safety, sanitation, emergency planning, children’s health, medication, safe sleep, staff qualifications and other areas.

Before you sign a commercial lease, remodel your basement, build a playground or purchase thousands of dollars in equipment, determine exactly what is required where you live. PowerHomeBiz maintains a state-by-state guide to daycare licensing requirements that can help you identify the appropriate state agency, while ChildCare.gov’s information on child care licensing provides another useful starting point.

Depending on your location and program type, you may need to consider:

• State child care licensing or registration
• Local zoning approval
• Fire and building inspections
• Staff-to-child ratios and group-size limits
• Required staff education or training
• Infant and child CPR and first aid
• Criminal background checks
• Child abuse and neglect registry checks
• Safe sleep requirements
• Indoor and outdoor space requirements
• Playground standards
• Emergency preparedness plans
• Food preparation requirements
• Health and sanitation procedures
• Transportation requirements
• Recordkeeping and parent documentation
• Insurance requirements

Staff requirements deserve particular attention. ChildCare.gov explains that licensed programs may be subject to ongoing health and safety training covering areas including CPR and first aid, infectious disease prevention, safe sleep, child abuse recognition and reporting, medication administration, allergies, emergency preparedness, hazardous materials, indoor and outdoor safety, transportation and child development.

Background checks are another area new operators sometimes underestimate. Federal child care requirements can involve FBI fingerprint-based criminal history checks, the National Sex Offender Registry, and searches of state criminal, sex-offender, and child-abuse databases.

If you are having difficulty getting approved, PowerHomeBiz’s guide to daycare licensing requirements and why applications get denied explains several common problems to address before opening.

Licensing can also affect your ability to participate in government-supported child care programs. Do not assume that every state uses the same voucher system or terminology. If you want to accept families receiving child care assistance, check with your state’s child care agency about provider eligibility, enrollment and reimbursement requirements.

The lesson: research first and spend second. It is far cheaper to change a daycare floor plan on paper than to discover after construction that the layout, exits, bathrooms, fencing, or playground do not satisfy licensing requirements.

2. Underpricing Your Daycare Services

New daycare owners are often nervous about charging too much. You may look at competitors, find the lowest tuition rate in the area and decide that matching or beating it will make enrollment easier.

That can be a serious mistake.

The biggest danger of underpricing is not that parents will assume your daycare is low quality. The bigger problem is that you can fill every available space and still fail to make enough money to operate the business sustainably.

A daycare has significant fixed and variable costs. Depending on your operation, your tuition may need to cover:

• Employee wages
• Payroll taxes
• Substitute staff
• Rent or mortgage-related costs
• Utilities
• Liability insurance
• Workers’ compensation
• Licensing fees
• Background checks
• Training and certifications
• Food and snacks
• Toys and learning materials
• Furniture
• Cleaning products
• Diapers or other supplies provided by the daycare
• Technology and parent communication systems
• Accounting and bookkeeping
• Marketing
• Repairs and maintenance
• Playground upkeep
• Taxes
• Paid holidays and closures
• Vacancies and unfilled spaces
• Emergency reserves
• Owner compensation

The U.S. Small Business Administration recommends calculating both one-time startup expenses and recurring monthly expenses and using those figures to understand how much capital a business needs and where its break-even point lies.

That same discipline should guide daycare pricing. PowerHomeBiz’s guide to pricing business services explains why overhead and operating expenses need to be incorporated into your rates rather than looking only at what competitors charge.

For a daycare, you should also calculate revenue according to licensed capacity, not theoretical capacity. If you are licensed for eight children, you cannot solve a pricing problem by simply enrolling ten. Staff-to-child ratios may also require an additional employee when enrollment reaches a particular threshold, which can dramatically change the economics of adding one more child.

For example:

A daycare that appears to generate $8,000 per month may therefore have much less actual owner income once realistic enrollment and expenses are considered.

Research competitor pricing, but do not blindly copy it. Another provider may own their building, have lower staffing costs, serve different age groups or operate under an entirely different financial model. Your rates need to work for your business.

You should also investigate programs that can legitimately reduce certain operating costs. For example, the USDA’s Child and Adult Care Food Program provides meal and snack reimbursements to eligible participating child care centers and day care homes.

The lesson: do not compete yourself into unprofitability. Families need affordable care, but your daycare also needs enough revenue to pay employees fairly, maintain safe facilities, replace equipment and remain open.

3. Cutting Corners on Safety to Save Money

Every small business owner needs to control expenses, but some daycare expenses should never be treated as optional. Child safety is one of them.

A worn-out toy, broken gate, recalled crib, inadequate playground surface or poorly trained employee may look like an expense that can be dealt with “later.” In a child care environment, however, delaying a safety repair can create a genuine hazard. It may also create licensing problems, insurance issues and significant legal exposure if a child is injured.

ChildCare.gov notes that licensed programs can be subject to requirements covering building safety, playground areas, emergency planning, sanitation, safe sleep, children’s health and other protections.

The U.S. Consumer Product Safety Commission also specifically recommends checking child care centers for safe playground surfaces, sharp edges, entrapment hazards, window-covering cords, safe cribs and recalled children’s products. Its public playground safety checklist includes recommendations regarding protective surfacing, fall zones, dangerous hardware, entrapment openings, sharp edges, tripping hazards, guardrails and regular equipment inspection.

Safety spending should include more than physical equipment. Staffing and training are equally important. A beautiful daycare facility is not safe if there are too few adults supervising children or employees do not know how to respond to an allergic reaction, injury, evacuation or other emergency.

Your safety system should include routine checks such as:

Health practices also belong in your safety plan. The CDC recommends everyday infection-prevention strategies for early care and education programs such as frequent handwashing, cleaning and disinfection, improving ventilation and having procedures for children or staff who become sick.

If your program cares for infants, pay special attention to sleep equipment and procedures. CPSC guidance emphasizes using products designed for safe sleep and keeping soft bedding out of infant sleep environments.

For a more complete look at everyday procedures once your doors are open, see PowerHomeBiz’s guide to operating a daycare business, including safety, meals, staffing and daily routines.

Finally, talk with an insurance professional who understands child care businesses. A standard homeowners policy should not automatically be assumed to provide adequate protection for a home-based daycare. Ask specifically about liability, property coverage, employees, vehicles or transportation, abuse and molestation coverage, and any other exposures relevant to your operation.

The lesson: save money through smarter purchasing, better scheduling and tighter financial management, not by weakening safeguards for children.

4. Allowing Parents to Ignore Your Policies

Daycare is a caring business, and that can make boundary-setting uncomfortable. You develop relationships with families. You know when a parent is having a difficult week. You may want to accommodate occasional problems.

Flexibility can be good customer service. Constantly allowing people to disregard your policies is not.

Suppose your daycare closes at 6 p.m. One parent begins arriving at 6:10. Then it becomes 6:20, and eventually 6:45. If there is no consequence, that parent has effectively extended your operating hours without paying for the additional labor and inconvenience.

The same problem can occur with:

• Late tuition payments
• Repeated late pickups
• Early drop-offs
• Requests for unpaid “extra” days
• Failure to provide required supplies
• Bringing sick children despite the illness policy
• Last-minute scheduling changes
• Repeated bounced payments
• Ignoring vacation or holiday policies
• Disputes about payment during absences
• Unauthorized people attempting pickup

These conflicts are much easier to manage when expectations are established before enrollment.

Your parent handbook and agreement should clearly explain your policies for tuition, deposits, payment dates, late fees, operating hours, late pickup charges, holidays, vacations, absences, illness, medication, authorized pickup, emergency closures, termination and any notice required when leaving the program.

A good policy protects both sides. Parents know exactly what they are agreeing to, and you have a consistent standard you can apply to every family. PowerHomeBiz’s broader guide to starting and running a successful service business similarly emphasizes written agreements because they clarify payment terms, responsibilities and expectations.

Consistency is especially important. If one family is routinely allowed to ignore a policy while everyone else must follow it, resentment can develop. Employees may also become unsure about what rules they are expected to enforce.

That does not mean every problem requires an immediate penalty. You can use discretion when a parent encounters a genuine emergency. The goal is to distinguish between an occasional exception and a recurring pattern.

For example, your late pickup process might be:

1. Document the late pickup.
2. Remind the parent of the written policy.
3. Apply the stated late fee.
4. Discuss repeated violations with the parent.
5. If the problem continues, determine whether the family’s schedule is compatible with your daycare.
6. Follow your written termination procedure when necessary.

This approach is much more professional than becoming increasingly frustrated while saying nothing and then suddenly terminating the relationship.

The lesson: being compassionate and running a business are not mutually exclusive. Clear boundaries make the relationship easier for the daycare owner, employees and parents.

5. Failing to Research the Daycare Market Before Opening

You can meet every licensing requirement, create a beautiful child care space and still struggle if there is not enough demand for the particular program you decided to open.

That is why market research should happen before you commit substantial money to the business.

The SBA explains that market research can help a business understand potential customers, while competitive analysis helps an entrepreneur identify ways to differentiate the business. PowerHomeBiz’s guide to starting your own daycare business likewise recommends identifying the specific child care gap in your community instead of automatically opening a generic daycare.

Look beyond the question, “Are there children in my area?” You want to understand what kind of care parents actually need.

Research questions can include:

• Is infant care difficult to find locally?
• Are existing centers maintaining waiting lists?
• Is there demand for toddler or preschool care?
• Are parents looking for before- and after-school programs?
• Is extended-hour care scarce?
• Are many parents commuting and looking for care near particular routes or employment centers?
• Is there demand for bilingual care?
• Do families want smaller home-based programs?
• What tuition rates are competing providers charging?
• Which competitors accept subsidies?
• What are competitors emphasizing in their reviews?
• How long are their waiting lists?
• What hours do they operate?
• What do parents complain about?
• Are nearby employers expanding or reducing their workforce?
• Are new housing developments bringing young families into the area?

Your research may reveal an opportunity that is different from the business you originally envisioned. For example, there may already be plenty of preschool openings but a shortage of infant care. Or traditional weekday care may be competitive while nurses, first responders, hospitality employees and other shift workers struggle to find early-morning, evening or weekend care.

Research should also shape your marketing strategy. Once you know the families you are best suited to serve, PowerHomeBiz’s guide on how to market a daycare business and attract parents covers local SEO, Google Business Profile, reviews, referrals, community partnerships, open houses and other trust-building enrollment strategies.

Do not overlook the financial side of research either. Compare commercial rents, wages, insurance rates, food costs, local tuition, capacity limits and staffing requirements before deciding that a location or daycare model will be profitable.

For home-based operators, taxes are another area worth researching early. IRS Publication 587, Business Use of Your Home contains special provisions for qualified daycare providers, including rules that may allow a home daycare to calculate business-use deductions even when qualifying space is not used exclusively for business. The IRS publication also addresses food expenses for family daycare providers.

That does not mean you should make tax decisions based solely on an article or online calculator. Keep good records and consider working with a tax professional familiar with family child care businesses.

The lesson: research reduces expensive surprises. The more you understand your local market, regulatory environment and cost structure before opening, the better decisions you can make about your program, location, pricing and marketing.

Before You Open: A Daycare Reality Check

Before enrolling your first child, ask yourself whether you can confidently answer the following questions:

If several of these questions do not yet have answers, that is a sign to keep planning before opening.

Building a Daycare Business That Parents Can Trust

A successful daycare is built on trust, but that trust rests on solid business systems. Parents need to know that you will care for their children safely and reliably. Employees need clear procedures. Regulators need to see that requirements are being followed. And you need a financial model that compensates you fairly while allowing the business to maintain quality.

Avoiding these five mistakes will not guarantee that starting a daycare will be easy. Child care is demanding work. But careful licensing research, realistic pricing, uncompromising safety, clear parent policies and strong market research can eliminate many of the problems that undermine new daycare businesses.

If you are building your daycare plan now, continue with PowerHomeBiz’s guides to starting a daycare business, daycare licensing requirements, operating a daycare business and marketing a daycare to parents. Together, these resources can help you move from the initial idea to a daycare that is compliant, financially sustainable and attractive to families.

Articles in the Starting a Daycare Business Series:

• How to Start Your Own Daycare Business
• What Do You Need to Open a Daycare Business?
• Why You Cannot Get a Daycare License
• Starting a Day Care Business on a Shoestring Budget
• Operating a Daycare Center
• Caring for the Children
• Income Potential of a Daycare Business
• Managing Your Daycare Business
• Complementary Businesses for Additional Income
• Marketing Your Day Care or Childcare Business
• 5 Big Mistakes You Can’t Afford to Make When Starting Your Own Daycare
• Licensing Requirements of Starting a Daycare: Alabama to Louisiana
• Licensing Requirements of Starting a Daycare: Maine to Wyoming

Frequently Asked Questions About Starting a Daycare Business