How to conduct feasibility study before starting a preschool

Indalytics - How to conduct feasibility study before starting a preschoolStarting a preschool is considered to be one of the best business opportunities in education. Preschools and unregulated, and require less capital than bigger schools. They can be started even as a sole trade proprietorship, partnership, or a private limited company. They do not require high scalability. And once successful, they open the franchise revenue stream.

However, like any other business, opening up a preschool also requires a bit of research. Here are some of the major things that you should look for, in order to check if it is feasible to open a preschool.

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Decide on the geography

First step is to decide the place where you want to setup your preschool, as rest other factors will be dependent on it. Preschools are always preferred in or near a residential colony, as parents do not want to send their kids to far off preschools. Therefore, it would be better if you can get a place which is in a residential colony or intersection of a residential colony and a main commercial road — where you can also advertise your preschool. You should ideally have a floor space of 2000 square feet — 2500 square feet with open play area. Also, there should be no hazardous business going on nearby.

Understand the demographic profile

For a preschool, the place and the demography go side-by-side. As you have to set up your preschool near your students’ residences, do understand the types of people living in these residential colonies. A nuclear family, where both the parents are working is more likely to send their kids to preschool, than a joint family where the grand parents can teach them the basic gross and fine motor skills.

Next, try to understand the income level of residents — as it will determine you fee structure. The easiest way is to see if the house or flats are high-income or middle income. Also, the types and number of cars that are parked, provide a fair idea of disposable income of the households.

Estimate your client base

Next step is to estimate the potential number of children that can join your preschool. Best way of estimation is to do a sample survey. Hire a market research company, or college students, and ask them to get an objective questionnaire filled. The survey will help you get answers to questions such as the number of students that are ready to join a preschool, willingness of their parents to send them to a preschool, and their expectations regarding fees etc. Do remember to have a big sample base for your survey, with 30 being a minimum number to have a normal distribution.

Estimate your costs

Next step is to estimate your variable costs in operating a preschool. Visit a nearby preschool to understand the teacher to student and staff to student ratio. Ideally, there should not be more than 10 students per one supportive staff and 20 students per one teacher. Do calculate other variable expenses such as electricity, transportation, lease rents etc. to build your income statement. In the end do call other preschool that provide franchisee, and try to tally your cost estimates with them.

Also calculate your fixed costs. These costs will be onetime expenses such as furniture, computers, equipments etc. on which you will charge depreciation over years. You capital investment in opening a small preschool of 20—50 children should be INR7 lakh—INR10 lakh.

Estimate the revenue to get the minimum number of students and margins

One you gave got the costs, do check the margins. Generally, while enquiring the franchisors will tell you that you can recover your investment costs in one year, with ROI of more than 100%. However, there are some assumptions which you need to understand.

What we are going to explain now is a basic exercise, which you need to do for estimating the minimum number of students you require to be profitable, and your margins.

Step 1: Break your costs into fixed and variable, and set a breakeven period, which ideally should be between 1.5 — 2.5 years. In order to explain the calculation, let’s assume that you will be spending INR7 lakh as one time fixed cost, and you will be able to run the preschool in INR4 lakh for a year, which makes it your variable costs. Also, we set a target to break-even our business in 1.5 years. Breakeven is that point where we have absorbed both our fixed and variable costs.

Step 2: Now let’s understand the cost accounting. Find out the annual fees that your competitors are charging to estimate your fees. Since you do not have a brand, your fees will have to be a bit less than the established players. Let’s assume that you decide to charge INR25,000 per student. Take minimum required number of students to be X, and your total revenue for the year is ‘INR25,000X’.

Step 3: Deduct your total variable costs from this total revenue. The result is what you call contribution. In our example, it comes out to be ’25,000X — 4,00,000.’

Step 4: In order to breakeven, we have to absorb all our fixed costs in 1.5 years. This means that till 1.5 years, whatever we earn over and above our variable costs, will be used to cover the fixed expenses that we have incurred. And from the nineteenth month, whatever we earn over and above our variable costs, will be our actual profit.

Now your divide your total fixed costs by you total annual contribution to get your breakeven period in years.

In our example, we already have the breakeven period to be 1.5 years. Therefore we get the following equation: 700,000 — (25,000X — 400,000) = 1.5. This gives us the value of X to be 34.67.

Therefore, we need to have at least 35 students for first 1.5 years to absorb all our costs. And after the breakeven, we will be earning profit of INR475,000 per annum on these 35 students.

Rectify and control

Once you have the minimum number of students and also know your expected profits, do check if they are feasible and desired. If in case you find that the minimum number of students is an unachievable target, then you might have to either find out ways to reduce costs, or compromise on your breakeven period.

Forecast the future

After you are done with your cost and revenue estimates, try forecasting your preschool’s future under different scenarios. Estimate the growth in number of students that you see in future, your expansion strategy, and the impact of your competitors entering your geography.

Do let us know if you want any specific help on the topic, or if we forgot to include any important aspect.

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