Nurseries need six in ten places filled to break even as funding gap rockets
Research finds private group nurseries retain less than £80 per child each month after operating costs, with staffing taking close to three-quarters of spending.
The average nursery in England must fill 31 childcare places before it covers its operating costs, according to research from the business loans team at money.co.uk.
That figure represents about 60% of the registered capacity of a typical private group nursery. Once wages, premises, food, materials, business rates and energy bills are paid, providers retain an estimated £933.66 for each child per year, or close to £78 a month.
The findings point to narrow margins across the childcare sector, where occupancy levels can determine if a setting covers its bills.
Staff wages account for between 74% and 75% of nursery expenditure, the research found. Providers must maintain statutory staff-to-child ratios based on each child’s age and the qualifications held by staff.
Those rules are intended to protect children and provide the level of supervision required in early-years settings. They leave providers exposed to higher wage and employment costs, since staffing levels cannot be reduced below the legal ratios.
Premises costs, including rent or mortgage payments, account for about 9% of spending. Food represents 4%, materials 3%, business rates 2% and energy bills 2%.
The report found a gap between government payments for funded childcare and the average cost charged by providers. Nurseries receive an average of £6.42 an hour for funded places for three and four-year-olds, which is £2.25 below the average delivery cost of £8.67 an hour.
A child using 30 funded hours a week across the 38-week term could leave a provider with a shortfall of up to £2,565 a year.
Rates differ across England. Payments for two-year-olds often sit above average provider charges, while payments for three and four-year-olds fall below the average hourly nursery rate in every region. London records the widest difference, at more than £2 an hour.
Morgan Ridley, owner of Morgan’s Childcare in Sawbridgeworth, Hertfordshire, said families often do not see the full cost of running a childcare setting. Nappies, wipes, meals, property costs and learning materials all place demands on the business, leaving little space for unplanned bills.
Ridley said occupancy is central to keeping the setting open and meeting mortgage, utility and operating payments. She said the aim is not higher profit, rather continued support for local families.
She said funding for three-year-olds is below her standard fee, leaving the setting to absorb a loss on funded places. Any surplus is put back into activities, toys, learning materials and improvements to the setting.
Matt Browning, a business loans expert at money.co.uk, said nurseries support working families while facing the same cost pressures found across many small businesses.
He said high occupancy is needed to meet routine costs, with wage spending and the funding shortfall leaving little capacity for unexpected expenses or quieter periods.
Browning said providers must balance investment in facilities and equipment with rising costs and the need to keep fees affordable. Business borrowing can spread the cost of property work, equipment purchases or extra childcare places, he said, reducing pressure on daily cash flow.
The money.co.uk report set out five areas where providers could cut expenditure while maintaining standards.
Energy use was identified as one area for savings. LED lighting, insulation work and solar panels could lower bills over time where the property and budget permit.
Food purchasing offers another route. Seasonal ingredients, less waste and planned meat-free meals can reduce spending without lowering nutritional standards.
Occupancy remains one of the main financial measures. Links with nearby employers and schools can help providers maintain demand across the year.
The report said furniture, outdoor equipment and learning materials with a longer working life can reduce replacement costs, even where the purchase price is higher.
It said larger property or equipment projects should be planned around cash flow. Credit cards or business loans can spread payments for outdoor work, access changes or energy-saving measures, rather than drawing the full amount from operating funds at once.