One of the critical blunders we see time-and-again with start-ups is that fact that founders haven't developed a detailed enough strategic business plan from pre-formation to operation over a five to seven year timeline to adequately determine whether: (1). The school is feasible in that particular market based on its program/operation/finance benchmarks; and (2) They've adequate capital to cover the initial cash-flow shortfall in the first two to three years of operation until they reach their break-even point.
Our rule of thumb when establishing a school is: it needs to break-even within 24-30 months; it should be able to pay down its debt within eight to ten years, and IRR (depending on location) should range upwards to 25 to 35%.
Nevertheless, the fact is that schools don't break even right away. There's just too much overhead that extends costs before you reach an enrollment point whereby you break even. However, when you reach that point, then it's clear sailing, along as you ensure that you continue to deliver on the program quality you committed to the at the beginning. You can't cut corners here!
For those schools, be it established or new, that do not adequately prepare a strategic financial plan and budget, they end up in a cash crunch, and in most cases, start cutting back on program resources and staffing and/or dip into next year's tuition to cover this year's shortfall. This is a slippery slope to get on and it becomes more a matter of "when" not "if" the school shuts down. I've seen it too many times now.
There can be fine balance between delivering on program quality and achieving your mission and being financially responsible. But that's what planning is about. Measure twice...cut once.
But who is the driver of ensuring you achieve your strategic priorities? Who drives the decision making for your school? Is it the accounting office, Head of School, or the Board? Is it the 'bean counter' or the educational CEO of your school's vision. Don't get me wrong, there has to be financial accountability, but who ultimately makes the decision on the bottom line? And what's your bottom line and how do you measure it?
In today's eNewsletter I want to talk more about who drives your school's decisions regarding short- and long-term strategic priorities and how to align your school's planning to ensure your institution is sustainable and directed towards your goals within a financially responsible process. In simple terms, this is what strategic planning is about, and something no successful school (be it for-profit or non-profit, new or established) can do without in today's every changing world.
I read an article (Monday Morning Memo) a few months back that shared a story about a cafe owner who was famous for their soup, who was told by their accountant they could improve profits considerably if they added 5% more water to their recipe. The accountant was right. Water was added and no one noticed. Months later, the cafe added 5% more water and still no one noticed. Later, more water was added. And then a little more, but never more than 5% since they'd demonstrated that customers couldn't detect just 5% more water was added.
As you guessed, the cafe owner didn't lose customers incrementally, but all-at-once. "The soup here just isn't as good as it used to be." It proves that operators have a blind spot to the all-at-once backlash that comes from watering down the soup. Businesses expect to see incremental declines when they're incrementally abusive, but that's not how it works. When clients pack up to leave, they take their business (your students) with them and leave all at once.
The key principle for cost-cutters is that profits go up when costs are lowered. On paper, this makes sense since a cost-cutter's forecast doesn't project a decline in business.
In the short-term, cost-cutters look brilliant.
Later, when clients quit buying soup (enrolling students at your school) and the business begins to crumble, the cost-cutter becomes an even bigger champion: "See, I told you? If I hadn't cut expenses, we'd really be in trouble now. But with our new, lower overhead, we're still profitable. I've saved the school."
Don't shake your head. I've watched it happen at many schools and it makes me want to scream.
My question is, who determines your school's priorities, and do you develop a short- and long-term plan to enable you to responsibly align your resources to achieve your goals, allowing you to ride out the dips in start-up and operations?
I'm not implying that all accountants are meddling. Someone has to ensure you live within your means. In fact, it's easier to raise revenues than slash costs.
However, when you're a new school, you cannot shrink your way to profitability (and sustainability). You need to ensure that you've the capital in place beforehand to cover your initial short-fall; not "cut" your way through it.
In fact, in during your initial start-up years, you should develop an accountable business plan that allows you to grow your school's program quality rather than shrink it.
I'll finish off with one more pearl from the article to drive home the concept that you can't 'shrink' or shrivel' your school to success...
A cost-cutter buys grapes and makes raisins.
An entrepreneur buys grapes and makes wine.
You'll never see a person arrive to a celebration
carrying a box of raisins.
If you would like to find out more about strategic planning or school formation services, or advise on the review and implementation of your current plan, please contact HEG to find out more by sending an email to email@example.com or calling directly at +1-604-868-0002.