I've used several options over the years and each has its plus and minuses.
Single hand towel (when I first started):
Plus is, of course, less washing!
Minus is that, with more kids, it can get quite soggy/dirty. Then the towel per child ruling came out so I had to rethink.
I would add that, at the time my son was attending a preschool where all the children washed their hands in the same bowl of water containing a weak solution of washing up liquid and dried their hands on the same towel. All 20-odd of them!
Colour-coded/named facecloths:
Perfect, I thought when I introduced this idea. Pluses were that we met OFSTED's requirement, the kids learned their colours, less cross contamination - everyone happy!
Minus is the amount of washing, some colours end up being used more often and, unless you have lots of the same colour, you have to have them washed and dried very quickly for the next time they're used. At first, it can be muddling for them to use their own colours but I did find they quickly caught on. The storage was rather difficult, too. I had a tiny bathroom that didn't really have room for all those hooks and it looked very cluttered.
So, I moved on to a pile of facecloths, free for all:
Pluses: less stressing over using the right colour, and more hygienic because they'd use each one once. It was also less room to have them in a pile.
Minuses: more washing! That neat and tidy pile at the beginning of the day ended strewn all over the bathroom unless I was very vigilant.
I gave up on the cloths and invested in a paper towel dispenser (didn't think of the kitchen roll idea, so can't comment on that, but it sounds much cheaper!).
Pluses: No washing at all! Yippee! Hygienic because they're used once. Looked quite tidy once I'd found a place for it. I picked up a smaller size at my local hardware store.
Minuses: Blocked loo! Some of the kids found it difficult to understand the difference between toilet paper and paper towels and, instead of putting them in the bin, kept trying to flush them down the toilet. I also had two occasions when they ran out of loo paper and used the towels instead.
They did work out expensive as I kept having to buy the towels and the initial dispenser was an expense, too. I don't think they dried the kids' hands as well as the cloth towels. And, if you're interested in that kind of thing, very environmentally unfriendly with all that waste paper.
So there we are. I can't say I'm 100% happy with any of the solutions I've tried but I hope it'll help someone to decide which method they're going to try for themselves.
And if anyone has any other ideas, I'm all eyes!!! 