So we've been talking about reasons why dojo owners fail...

Earlier this week I wrote to you about attitude and ego, and how those two factors can absolutely kill a school owner right out of the gate.

Yesterday, I also briefly discussed overhead, and how high overhead can bog your school's growth down and make it incredibly difficult to grow your school.

Today I'd like to expand on that topic, to help you understand why it's so important to keep your overhead extremely low when you start your school.

Understanding Business Overhead and Expenses

First, understand that you are going to have three types of expenses in your business:

These costs can include:

• Rent
  
• Insurance
  
• Office expenses
  
• Owner salaries

Basically, any monthly expense that is necessary to the running of your business and that does not fluctuate over time is a fixed expense.

Variable Expenses

Variable overhead costs are expenses that fluctuate based on your business volume and other factors. 

For example, if you run a restaurant, the more business you do the more your food costs will be. And if you run a clothing store, your inventory costs will fluctuate based on the time of year, because you have to buy more inventory each season.

However, in our industry we don't deal much with inventory costs or costs of goods sold. Unless you're doing a load of Pro Shop sales or you have a juice bar in your school (seriously?), your inventory costs and costs of goods sold aren't going to fluctuate much from month-to-month.

That being said, there are other expenses that can fluctuate, namely payroll as your school grows. As your enrollment increases and you are forced to hire staff, your employee payroll can quickly match or even outdistance your rent as the number one highest expense you have to pay monthly.

And, your marketing expenses will fluctuate based on current marketing trends and the time of year. Most schools get this wrong, but your marketing budget should actually INCREASE during traditionally slow times of the year, to make up for the lack of ambient market interest in your programs. 

Also, marketing expenses will increase (or decrease) when marketing channels evolve. We've seen this with digital marketing over the last few years. It used to be cheap to market online, because it was easy to get traction in the search engines and social media. Now, you have to run ads to get the same results.

Unforeseen Expenses

This is the fly in the ointment that bites many small business owners in the rear. Your camp van breaks down and you need expensive repairs. Your school floods in a freak storm and you didn't have contents insurance to cover flooding. You get sued for a slip and fall incident.

When unforeseen expenses occur, generally they are costly enough to create a crisis situation for the unprepared school owner. Best case scenario is that the school owner has to dip into their savings or take on more debt to see it through.

And the worst case scenario? Well, I think you can guess what that would be.

Why Keeping Your Overhead Low Matters

The thing is, fixed expenses are easy to plan and budget for, but variable expenses and unforeseen expenses are not. When variable expenses go up, it can cut into your profit margins considerably, and often you won't see a return on your investment in additional staff or more marketing for weeks or even months.

And when unforeseen expenses crop up, often a school owner won't have the money in their budget to cover it... so they have to dip into their savings (if they have any) or rack up charges on their credit cards. That debt later becomes a liability that further reduces their profit margins until it's paid off.

These little (or big) hiccups can serve to drive a growing business into the ground. The number one reason failed small business owners give why their businesses went under is under-capitalization. 

In other words, cash flow... or a lack of it.

This is why you need to keep your fixed expenses down when you're starting a dojo. The higher those expenses are, the greater the risk you take that when variable or unforeseen expenses increase, it's going to throw a wrench in the gears that you can't afford to fix.

So, keep your expenses down when you're starting out. Resist the urge to get a huge school and a ton of equipment. Start with only what you need, and you'll be in a much better position to weather any financial storms that come your way.