The Nursery Funding Gap Explained

The Nursery Funding Gap: Why “Full” Doesn’t Always Mean Profitable

On paper, funded childcare hours look simple.

In reality, many UK nurseries find that 15 and 30 funded hours quietly reduce profitability, even when rooms are full.

If your setting feels busy but margins remain tight, the funding gap is likely part of the picture.

This article explains the nursery funding gap, why it occurs, and what practical steps can reduce financial risk.

What Is the Nursery Funding Gap?

The funding gap is the difference between:

• What it actually costs you to deliver a funded place
• What your Local Authority reimburses per hour

Local Authorities publish their funding rates for early years entitlements under the government’s childcare funding scheme (see the official overview on GOV.UK here).

What they don’t publish is your cost base.

If your real cost per hour exceeds the Local Authority rate, the difference comes out of your margin. Multiply that across multiple funded children, and it becomes structural rather than incidental.

Why 15 & 30 Funded Hours Don’t Automatically Equal Sustainability

The 15 and 30-hour entitlements sit within the wider early education funding framework published by the Department for Education.

The policy intent is clear.
The financial mechanics are less forgiving.

1. Funding Rates Often Sit Below Real Delivery Cost

Your actual hourly cost includes:

• Staff wages (your highest variable cost)
• Employer National Insurance
• Pension contributions
• Premises and rent
• Utilities and energy
• Insurance
• Consumables
• Administration time

If your Local Authority rate is £5–£7 per hour but your true cost is higher, you are subsidising the gap.

The government sets the national funding framework, but Local Authority pass-through rates vary and rarely keep pace with rising wage costs.

2. Staffing Ratios Don’t Flex With Funding

Early years staff-to-child ratios are defined in the statutory EYFS framework, also published on GOV.UK.

If a room requires two staff for eight children, it requires two staff, regardless of whether those hours are privately paid or funded.

That rigidity means your cost base does not reduce simply because a child is funded.

3. Funding Timing Creates Cash Flow Pressure

Even where headline rates appear manageable, cash flow can add strain.

Local Authority payments may:

• Be paid in arrears
• Be adjusted after headcount reconciliation
• Change mid-year

The entitlement may be nationally defined, but local administrative processes differ — and that timing gap can create avoidable financial stress.

“Full” Does Not Mean Profitable

One of the most common traps looks like this:

High occupancy → Higher staffing → Higher wage bill → Flat margins

If a significant proportion of your places are funded below your true cost, you can operate at capacity and still struggle to build surplus.

Busy does not automatically mean sustainable.

Why the Funding Gap Is Becoming Harder to Manage

Several pressures are intensifying the issue:

• Increases to the National Living Wage
• Rising pension contributions
• Energy and premises volatility
• Growing compliance and safeguarding expectations
• Administrative requirements attached to funded entitlements

While funding frameworks evolve, cost inflation tends to outpace reimbursement.

A Quick Funding Reality Check

Before assuming your model works long term, ask:

• Do you know your true cost per child per hour, by room and age band?
• What percentage of your total income is funded vs private?
• Are funded places cross-subsidised by younger children?
• How sensitive is your margin to a small change in funding rate?
• Can you forecast cash flow under different occupancy scenarios?

If the answers rely on broad estimates rather than structured data, forecasting becomes reactive rather than strategic.

Why Many Nurseries Underestimate the Gap

The funding gap often hides because:

• Rooms look busy
• Bank balances fluctuate, but don’t collapse
• Fee reviews feel politically difficult
• Reporting is high-level rather than room-specific

Without granular visibility into room performance, age band mix, funding proportions, and staffing requirements, margin erosion can continue quietly in the background.

Moving from Reactive to Proactive

You cannot control national childcare policy.

You can control:

• How clearly you understand your cost base
• How funded hours are allocated across rooms
• How early you model potential shortfalls
• How accurately you forecast income against staffing levels

Nurseries that proactively model funding scenarios make more informed decisions about fees, staffing, and occupancy strategies.

What Better Funding Visibility Looks Like in Practice

Strong financial control typically includes:

• Clear separation between funded and private income
• Room-level profitability insight
• Forecasting that accounts for staffing ratios
• Scenario modelling for funding rate changes
• Simple reports linking occupancy directly to margin

When funding, staffing, and occupancy data sit in one system, financial pressure becomes measurable rather than anecdotal.

Final Thought

Funded hours are not inherently unworkable.

Lack of visibility is.

The nurseries that remain financially stable are not necessarily those with the highest occupancy, but those that clearly understand their funding mix, and plan around it.

P.S. Forecasting & Funding Reports

If understanding your funding mix, room-level margins, and cash flow impact feels harder than it should, it may be worth reviewing how your current systems handle forecasting and funding reporting.

Clearer visibility doesn’t increase funding rates but it does improve decision-making.

For further information, or to find out more, please contact us.