Managing cashflow and financial planning in early years settings
Budgeting for sustainability
A well-structured budget is critical for ensuring your nursery’s financial stability. Your budget should include:
- Income: Fees from parents, government funding, and any additional revenue streams.
- Expenditure: Staff wages, rent/mortgage costs, food, equipment, utilities, and other overheads.
- Contingency funds: Allocating reserves for unexpected expenses such as repairs, redundancies, or changes in funding.
Breakeven analysis and occupancy rates
To remain viable, nurseries must calculate their breakeven occupancy—the minimum number of children needed to cover costs. For example:
- If annual expenditure is £50,160 and the nursery operates for 38 weeks, the weekly cost is £1,320.
- If operating for 5 days a week with 24 registered places, total available hours per week = 360.
- Assuming 80% occupancy, the breakeven hourly rate would be £4.58 per hour.
- If fewer than 20 children per day attend, the nursery will operate at a loss.
Nurseries should regularly review fees and occupancy rates to ensure sustainability.
Cashflow forecasting tools
Maintaining a clear view of your income and expenditure is essential. Digital tools such as Xero, Dext, and Futrli can automate financial tracking, making cashflow forecasting more efficient. By anticipating periods of lower income or higher expenses, providers can take proactive measures to avoid financial strain.
Room planning and cost efficiency in nursery settings
Key financial ratios to monitor
Effective room planning ensures that a nursery operates at maximum efficiency while maintaining quality care. Key financial benchmarks include:
- Staff costs: Should not exceed 55% of fee income to ensure financial viability.
- Lease or mortgage costs: Ideally kept between 10-15% of fee income.
- Food costs: Should be limited to around 3% of fee income to minimise waste.
- Equipment budgeting: Plan for regular replacement due to wear and tear.
Room ratios and staff deployment
The correct staff-to-child ratio is essential both for compliance and financial sustainability:
- Under 2 years: 1 staff member per 3 children
- 2 years: 1 staff per 4 children (1:5 from September 2024, but most providers remain at 1:4)
- 3 years and over: 1 staff per 8 children, or 1:13 if a qualified early years teacher is present
Providers should minimise reliance on agency staff and build a network of reliable employees to cover absences.
Tax reliefs and employment allowance for the early years childcare sector
Employer NICs and employment allowance
Employer National Insurance Contributions (NICs) represent a major cost for nurseries. The Employment Allowance, which increases to £10,500 from April 2025, helps small businesses reduce their NIC liability. Many early years providers will qualify, as nurseries generally do not perform “public nature” functions under HMRC rules.
For more information, check Employment Allowance: Check if you're eligible - GOV.UK or contact a member of our team for help.
Funding challenges and opportunities
Expansion of free childcare hours
The government’s free childcare expansion is rolling out between 2024-2025:
- April 2024: 15 free hours for working parents of 2-year-olds
- September 2024: 15 free hours for working parents of children aged 9 months to 2 years
- September 2025: 30 free hours for working parents of children aged 9 months to 3 years
While this expansion increases demand for nursery places, providers warn that hourly funding rates often fail to cover real costs. Many settings charge additional fees for food, materials, and extracurricular activities to balance their finances.
The role of AI in business processes for early years settings
Automating administration and finance
AI-powered tools can streamline various aspects of nursery management, as mentioned earlier in this blog:
- Bookkeeping automation: Xero and Dext can automate invoice processing and expense tracking.
- Predictive analytics: Futrli offers AI-driven financial insights to improve cashflow management.
- Staff scheduling: AI-based workforce planning tools can optimise staff deployment to meet ratio requirements efficiently.
By maximising AI, nurseries can reduce administrative burdens and focus more on delivering high-quality childcare.
Take a look at our Cloud Accounting and AI Integration resources on our website to learn more.
If you own or manage an early years, childcare or nursery setting, seek specialist accountancy advice
At LWA, our team includes accountants and tax advisors that have a great deal of experience working with individual early years settings, as well as providers that we’ve helped expand into numerous settings.
If you are an owner or manager of a nursery / preschool setting, and would like bespoke advice, please contact our Audit & Accounts Manager, and inhouse innovation expert, Matt Jones, or for specific tax advice, you can speak to Nickie Antley-Slater. You can reach the team in our our Manchester office on 0161 905 1801 or in our Warrington office on 01925 830 830, or email us to mail@lwaltd.com.
We also regularly write blogs with tax saving tips and employer advice so please visit our website or sign up to our monthly newsletters.