Nurseries must fill six in 10 places to cover costs amid tightening funding gap
New money.co.uk business loans department research found typical private group nurseries in England make just £933.66 profit per child each year after operating costs — equivalent to around £78 per month, highlighting how little financial headroom providers have.
The cost of childcare
One of the biggest financial pressures facing nurseries is staffing. The analysis shows that staff wages account for around three-quarters (74–75%) of a nursery’s total costs, reflecting the strict government-mandated staff-to-child ratios that providers must maintain regardless of rising employment costs.
The ratios, which vary by children’s age and staff qualifications, are intended to safeguard children’s safety and ensure they receive appropriate care and attention.
Rent or mortgage payments account for a further 9% of operating costs, followed by food (4%), materials (3%), business rates (2%) and energy bills (2%).
The funding gap
The research also highlights the growing gap between government funding and the true cost of providing childcare. On average, nurseries receive £6.42 per hour through the government’s funded hours scheme for three and four-year-olds – £2.25 less than the average cost of delivering that place.
Assuming a child receives their full entitlement of 30 funded hours each week during term time, providers face a funding shortfall of up to £2,565 per child every year.
Funding rates also vary significantly across England. While funding for two-year-olds generally exceeds average provider rates, funding for three and four-year-olds falls below the average hourly rate charged in every region. The largest gap is in London, where the difference exceeds £2 per hour.
Case study
Morgan Ridley, owner of Morgan’s Childcare based in Sawbridgeworth Hertfordshire said: “There are so many costs involved in being a childminder that people don’t always see. Everyday essentials like nappies, wipes and food all add up, and with rising prices there’s very little room for unexpected expenses.
My priority has always been to provide a safe, nurturing, high-quality environment for the children in my care while keeping my services as affordable as possible for families. Like many childminders, I’m always looking for ways to work more efficiently without ever compromising on the quality of care.
Occupancy is one of the biggest factors in keeping my business sustainable. It’s not about maximising profits – it’s about making sure I can cover my mortgage, bills and other running costs so I can continue supporting local families for years to come.
I also wish more parents understood how childcare funding works. The funding rates vary depending on a child’s age, and for three-year-olds the amount I receive is actually lower than my usual fee, meaning I lose money on funded places.
Any surplus I do make is reinvested back into my setting. Whether it’s introducing new experiences like Hartbeeps sessions, buying new toys and learning resources, or improving the environment for the children, I’m always investing back into the quality of care because giving children the best possible experiences is what matters most.”
Matt Browning, money.co.uk business loans expert said: “Nurseries play a vital role in supporting families and enabling parents to work, but they are also businesses facing many of the same financial pressures as companies across the wider economy.”
“Our analysis shows that providers need to maintain high occupancy levels simply to cover their day-to-day operating costs. As staffing accounts for around three quarters of expenditure, and government funding often falls short of the true cost of delivering childcare, there is very little room for unexpected costs or periods of lower occupancy.”
“Many providers face a difficult balancing act – investing in facilities, maintaining quality, and managing rising costs while ensuring childcare remains affordable. Access to flexible finance such as a business loan can help businesses spread the cost of improvements, purchase equipment or create additional childcare places without placing unnecessary strain on cashflow.”
Five ways childcare providers can reduce costs without compromising quality
Matt Browning, money.co.uk business loans expert, provides his top tips below:
1. Invest in energy efficiency
Replacing lighting with LEDs, improving insulation or installing solar panels (where appropriate) can reduce long-term energy bills while making settings more environmentally sustainable.
2. Review food procurement
Buying seasonal produce, reducing food waste and planning nutritious vegetarian meals a few times a week can help manage catering costs without compromising children’s nutrition.
3. Maximise occupancy
Even small improvements in occupancy can have a significant impact on financial sustainability. Building relationships with local employers and schools can help maintain consistent demand throughout the year.
4. Invest in equipment that lasts
Higher-quality furniture, outdoor play equipment and learning resources often cost more upfront but typically require replacing less frequently, reducing costs over time.
5. Plan capital investment carefully
Whether upgrading outdoor spaces, improving accessibility or investing in energy-saving measures, spreading the cost through business finance such as business credit cards or business loans can help providers make improvements while protecting day-to-day cash flow.