and why you are different from your competition. It helps you to focus your strengths and minimize your weaknesses.
Later we’ll show you how to build on your marketing identity to create your mission statement and to secure financing for your school. We’ll show you how to turn your marketing identity into effective advertising, and how to use it to bring in and sign up new students. You’ll also need a clear picture of your marketing identity to choose the right location for your school. You’ll need it to help you set the right fees for your services. In short, if you don’t have a clear marketing identity before you begin putting the pieces of your business together, you can waste a lot of time and effort. Spend some time putting one together now.
CHAPTER TWO:
FINANCE YOUR NEW SCHOOL
Starting a new business is not cheap. With the privileges of being your own boss, you will also be taking on the financial risks of being your own boss. Small business statistics show that those risks are great. But they can be minimized by careful advance planning.
The tool you use to do this advance planning is called a business plan. Putting together a business plan involves making accurate estimates of income and expenses, profit and loss. It involves setting financial and personal goals for the business. It involves choosing a legal form for your business, setting up a preliminary marketing strategy, assessing your competition, and charting a path for the next several years of your business life. A business plan can help you obtain start-up financing. It can help you see where your own business skills may be lacking. It becomes a framework for future action. But most importantly, it can help you get a realistic picture of the financial risks and rewards inherent in owning your own martial arts school.
Start with Estimates
The first step in putting together a start-up business plan is making estimates. Estimate how much money you will need for start-up costs. Calculate your break-even point. Then make some financial plans for your first two years in business.
Start-Up Capital
Start-up capital is the money you need to set up your business. To put it another way, start-up capital is the money you will need to spend before you can open your doors to do business.
Unfortunately, no simple formula can tell you how much start-up capital you will need. The only way to come up with that figure is to list all your expenses. As a start, consider these costs:
If you’re making these estimates only to satisfy your own curiosity, you can make educated guesses. If, however, you are trying to calculate start-up costs for a loan application, guessing can get you into big trouble. Many lenders, especially those associated with the Small Business Administration (SBA) program expect you to know precisely what you will need to purchase and what it will cost to do so. If you’re building anything at all on these numbers, even if it’s just the assurance that you can make a school work financially, don’t cheat yourself. Do the research. Make estimates you can rely on.
Remember, too, that these expenses are only the ones you can anticipate. Starting a new business usually takes more money than you expect. Allow yourself a buffer for unforeseen expenses.
Break-Even Point
Another crucial step in planning for the financial health of a new business is calculating your break-even point. Your break-even point is how much income you need monthly to pay all of your bills including payroll.
Monthly Break-Even
To calculate your break-even point, begin by adding all your obligatory expenses.
Some expenses, such as FICA and SE taxes, are annual expenses. Others, such as insurance premiums, may need to be paid semiannually or quarterly. If an expense comes due annually, divide that annual expense by twelve to calculate monthly break-even. If an expense comes due quarterly, divide by three. In other words, calculate expenses on a per-month basis.
Some people like to add their own monthly salary into this equation. Others figure it separately. If, just to stay afloat, you must get some money out of the business for yourself, add a minimum salary into your calculations. If, at least at first, you have other sources of income to meet your personal needs, calculate your salary separately.
Always estimate expenses a little on the high side if you want to avoid unpleasant surprises. The sum of your expenses is the minimum amount of money you will need to take in each month. It is your “break-even point.”
Number of Students Needed to Break Even
Another way to keep track of your break-even point is to think of it in terms of how many students you need to pay the bills. That number, of course, depends on how much you expect each student to spend. Besides tuition, several other expenses come into play in this calculation. How many seminars or tournaments will each student be participating in? After expenses, what could you expect to earn per student on these events? Will you have a formal ranking or certification program? If so will you charge for each promotion? How much do you expect to earn from promotion fees? Do you plan to have a retail area? If so, how much can you expect each student to spend on uniforms and gear each year? How much of that income can you keep as profit?
Add each of these additional sources of income to your yearly tuition to get your annual per student income. Then subtract any per-student expenses you might have. For example, you may get $200 per student in testing and promotion fees each year, but spend $50 of that on certificates, registration with the state or national organization, or emblems-of-rank belts, patches, or a plaque on your school wall. Subtract these annual per-student expenses from your annual income. Then divide the remainder by twelve to get your monthly per-student income.
To calculate the number of students you will need to break even, divide your total monthly expenses (your break-even point) by your monthly per-student income. For example, let’s say you need $3,000 each month to break even. Your monthly per-student income is $100. You need thirty students just to break even. Those first thirty students pay the bills. Every student beyond thirty (your break-even number) adds to your profit.
If you eventually also want to make a salary for yourself, you’ll need to figure that into your calculations, as well. Divide the monthly salary you would like to be making by your monthly per-student income, and that will tell you how many more students you will need to pay yourself. Add the two numbers to get your target enrollment number.
Be aware, however, that “target enrollment” is not the number of students you will need to sign up. Target enrollment is the number of paying students you need every month to pay your bills and yourself. To keep your school at its target enrollment, you’ll need to sign up not only enough students to pay the bills; you’ll also need to sign up new students to compensate for those who drop out. Remember, too, that we’re talking about paying students, not training students. If they don’t pay, they aren’t a part of your target enrollment.
A word about the future: While you’re figuring out expenses, also look at “optional” expenses. For example, you may eventually want to be able to hire an employee. You may want to expand your school.
