Be Careful with Cash Outs
There are different schools of thought about having students “cash-out” or paid-in-full (PIF) for their classes versus monthly billing. Let’s establish the fundamental difference between cash-out and monthly billing.
When someone cashes out a program, you owe that student the unused portion of their program. If you were given $1,200 for a 12-month program, that equates to $100 per month. If he is in his third month, he has used $300 of the program. At that point, you still owe him the balance of $900 in lessons.
That $900 is a liability on your books. It’s like a loan or a mortgage that you pay each month with lessons. The money is not completely yours until the student uses up all the lessons. If he has a medical situation arise or gets transferred, he may justifiably request a refund.
It’s important to handle cash-outs carefully.
You must have a clear, signed agreement outlining the arrangement and what the grounds for a refund would be.
A smart owner will take the money and put it into a special account designated for this purpose.
Each month, you can withdraw the equivalent of one month’s tuition for each student in the account. This money becomes an emergency fund and, in a good mutual fund, can grow over time. This is one way of using a cash-out to build value in a business.
Usually, because of their liability, cash-outs diminish the value of a business. Who would want to buy a school or loan you money against a business where all the students have already paid and the money has been spent?
If you can discipline yourself to follow this system with a special account, selling cash-outs may be a good strategy for you. Be warned, though, cash-outs can have a long-term negative effect on your school’s growth.
Each month, we have enrollments and renewals. Our daily job is to create and keep students. The danger is if we PIF too many people, we are vulnerable to a downturn in the market.
If you have a school full of people and no tuition coming in because they all paid in full months ago, you are faced with a financial crisis if the phone stops ringing for a period of time. You still have to pay rent, staff, and all the other expenses regardless of your income. The students are still owed the lessons, so you have to perform or you face a possible class-action suit if you fail to live up to your part of the bargain.
This is why you must resist the temptation of spending the money you receive when you get them. If you can’t maintain that cash flow discipline, then your focus
has to be on building your monthly tuition amount. Monthly tuition gives you consistent cash flow throughout the year. By having a large and growing amount of tuition coming in from your billing company, each month, you’ll avoid the sharp spikes and drops in income each month.
As you sit down to make your projections and goals for each quarter, you have to be able to depend on a certain level of income. You have bills to pay and wealth to build. You can’t be dependent on the hope you can cash out some people next month to meet your obligations. You have to know what’s coming in.
Then, if on top of that, you have some cash-outs that’s great. But it can be dangerous to put your school in a vulnerable position financially for the short-term gain.
Action Steps: What to do now
1. Calculate all of your monthly expenses plus the addition monthly amounts you’d like to have to reinvest in the business, put away for retirement, etc.
2. Compare this number to your current net monthly tuition income (excluding any cash-outs). If you’re not meeting or exceeding this number, then set a goal to enroll enough paying monthly members to hit your goal.
3. If you are achieving the amount of desired net monthly tuition and offer cash- outs, deposit the money in a separate interest-bearing account and each month move over only one month’s worth of tuition into your main account for expenses.