Margin DiagnosticMargin Diagnostic for an Owner-Operated Nursery Group
Audience: Operators£412,000
ANNUAL EBITDA IMPROVEMENT IDENTIFIED
£127,000
FUNDED HOUR DEFICIT UNCOVERED
6.8% to 3.1%
AGENCY SPEND REDUCED
3 weeks
DIAGNOSTIC ACROSS THE FULL ESTATE
The Situation
An owner-operated nursery group with more than ten settings across two counties was seeing margin compression despite stable occupancy and growing revenue. Headline occupancy was 82% across the estate. Workforce cost had crept above 72% of revenue. Fees had not been reviewed for two years. The group was profitable, but the owners knew the margin should be better and could not see where the leakage was.
The management accounts gave a group-level P&L with limited visibility at setting level. Funded hour economics had never been calculated in enough detail to know whether each funding stream was cost-neutral or loss-making. The fee structure was inherited from the group’s earliest settings and had been applied to later acquisitions without adjustment for local market conditions.
What Litus Did
A three-week diagnostic across the five areas, every setting.
01
Funded Hour Economics
The cost per funded hour was calculated for each local authority using the four-layer method, direct staff cost at ratio, room overhead, setting overhead and central overhead allocation. Funded hours were loss-making in two of the four authorities the group operated in, by £0.85 an hour in one and £1.20 in the other. At the volume delivered, that was an annual margin drag of around £127,000, cross-subsidised by fee-paying provision without the management team knowing.
02
Fee Architecture
Most settings were priced below the local market median while delivering above-average quality, every one rated Good or Outstanding. Fee increases over the previous two years had averaged 2.8% against cost inflation of 5.4%, a compounding real-terms erosion of around £94,000 a year. Consumables charges for food, nappies and sun cream were set four years earlier and were running at a negative margin against current input costs.
03
Occupancy and Ratios
The headline 82% masked wide variation. Morning sessions ran at 91%, afternoons at 68%. Three settings had baby rooms staffed above statutory ratio by an average of 0.3 staff per session, £62,000 a year in unnecessary cost. Two pre-school rooms ran at 55% afternoon occupancy, capacity that was not being marketed.
04
Workforce Cost
Agency spend was 6.8% of total workforce cost, more than double the benchmark. Sickness absence was 4.2%, driven by two settings. Staff turnover at 24% was above the 20% benchmark, and the cost of recruitment was not being tracked.
05
Central Overhead
Central overhead was 14.1% of revenue against a benchmark of 8% to 12% for a group of this size. The area management structure had been built for a smaller group and never restructured as settings were added. Professional fees had accumulated without review.
The Outcome
The diagnostic identified £412,000 of annual EBITDA improvement across the five areas. The sequenced plan put fee architecture and funded hour economics first, highest impact and fastest to implement, then workforce cost and occupancy.
-
Within six months, fees were restructured across every setting, with increases of 4% to 8% depending on local market position, and consumables repriced to cover cost plus margin. The funded hour deficit in two authorities was addressed through direct representation to the authority and operational changes to cut the cost of delivery in those settings.
Agency spend fell from 6.8% to 3.1% through a targeted recruitment campaign and better retention. Central overhead was reduced by consolidating the area management structure and renegotiating professional service contracts.
Key InsightHeadline occupancy and a group-level P&L can hide six figures of annual margin leakage. Setting-level analysis across all five areas is the only way to see it.
DeliverableBoard-ready diagnostic report with a £412,000 improvement plan.
Engagement durationThree weeks, then implementation support.