Funding follows the child and the national standard for early learning and childcare providers: guidance on criteria 7 - business sustainability
This guidance will support implementation of the business sustainability criteria of the national standard.
Section 5: Evidence For Private and Third Sector Providers
5.1: Initial Evidence for Private and Third Sector Providers
42. Table 4 presents the evidence identified as the most appropriate, objective and reasonable indicators that local authorities can use to assess whether private of third sector providers meet the Business Sustainability criteria. Whilst this is not exhaustive, it outlines a mix of evidence that is likely to provide local authorities with consistent assurance of business sustainability, in line with the National Standard criteria.
Table 4: Types and review of evidence in private and third sector providers
| Type of Evidence |
What this is |
How it will be reviewed |
|---|---|---|
| Accounts |
A term used to refer to financial statements, that is, the income statement and balance sheet, and often the cash flow statement. |
An assessment of cash balances / cash flows and identification of material negative trends may take place to determine the risk of funding. Another method for reviewing this information would be to request information in relation to specific ratios. For example, the local authority could review:
A local authority may ask its own finance department, or an external body, to review accounts or undertake financial ratio analysis, to assess the financial viability of the organisation. Profitability alone may not provide evidence of business sustainability for organisations as re-investment and organisational set-up (e.g. registered charity) may lead to low levels of profitability. Accounts alone should not be used to determine the business sustainability of a provider / setting. |
| Credit Reference |
A reference from a credit agency gives insight into a provider’s financial stability, based on analysis of a business's credit information. |
A credit reference assists in determining an organisation’s financial status and risk. It is conducted by an independent third party (a credit reference agency). A local authority may set a minimum score or grading that needs to be met. If an organisation does not meet the minimum score or grade, additional information may be sought. Any minimum score or grade must be clearly set out to private and third sector providers. |
| Occupancy |
The percentage (%) of registered places that are regularly attended at each setting. |
Occupancy provides insight into the demand for a setting locally and provides assurance that the setting has a steady cash flow through children attending. A low occupancy for the setting as a whole may indicate limited demand in the area or insufficient cash flow to remain sustainable in the long term. Lower occupancy rates may also be related to geographical factors. For example, in remote or rural areas, the occupancy figure may be lower and, therefore, a local decision needs to be taken as to what an appropriate / sustainable occupancy figure would be. The forecasted change in occupancy as a result of a private or third sector provider’s funded status should also be considered. |
| Continuity Plan |
A continuity plan contains information as to how the setting will respond in the event of an emergency or closure of the service. This should be prepared for each setting. |
A continuity plan that aligns with Care Inspectorate requirements for ‘Contingency Plans’ (see Annex C) should be requested. A local authority may also request information on disaster recovery plans (for example, where the building / location is no longer available for use) and tenure at current location (for example, mortgage or lease period remaining). |
43. Local authorities should reduce the administrative burden as much as possible on private and third sector providers by requesting a mix of evidence that provides adequate assurance that the setting is financially viable and balances available resources to review the evidence.
5.2: Additional Evidence for Private and Third Sector Providers
44. Additional evidence may be requested when a private or third sector provider has been identified as presenting a higher risk against the business sustainability criteria, for example, regarding their long-term sustainability either due to financial or service issues. It is likely that local authorities will need to access specialist advice from relevant colleagues to assess this information and come to a fair, transparent and clear decision about business sustainability in these cases.
45. The evidence in Table 5 should only be requested if additional assurance is sought about a potential funded provider’s sustainability because it has been identified as higher risk.
Table 5: Types and review of additional evidence for private and third sector providers
| Type of Evidence |
What this is |
How it will be reviewed |
|---|---|---|
| Financial Budgets / Forecasts |
A term used to refer to a financial and / or quantitative statement that is prepared and agreed for a specific future period. |
A financial budget / forecast demonstrates that the provider has considered future investment in the service (for example, for the next 12 months) and that it has appropriate capital or revenue streams to support this. A local authority may review this information to assure themselves that the provider can continue to sustain the service, including maintaining staffing requirements / development and premises. |
| Operational Forecasts |
Forecasts show the number of children that a service expects to provide care for over a given period. |
Forecasts may be reviewed to assure the local authority that the provider has considered sources of income and the type of service provision that it intends to deliver. A local authority may review this information to understand the providers planned sources of income. For example, confirmation of the number of eligible children from previous years and projection for next year. |
| Management Accounts |
Accounts prepared to an internal standard for the purpose of management (which may or may not be the same as financial accounts). |
Management accounts provide a current view of the provider’s business and often provide current and future financial information. An assessment of cash balances / cash flows and identification of material negative trends may take place to determine the risk of funding. These may be compared to previous accounts (i.e. management accounts over a different time period or financial accounts) to inform the local authority’s understanding of the provider’s financial stability and business activity (i.e. expansion, change in service provided etc). Profitability alone may not provide evidence of business sustainability for organisations as reinvestment and organisational set-up (e.g. registered charity) may lead to low levels of profitability. |
Contact
Email: euan.carmichael@gov.scot
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