Learning from your mistakes… Charting a new course (part 2).

In September, I posted part 1 of our Odyssey in turning around our business and the context in which we found ourselves.

Before we started to turn our ship around, we all began to recognize that we were facing problems late last summer. Oddly, it was all presaged by a slight jump in enrollments that emboldened us to try to recruit new staff to ease the burden on the existing teachers, and to start to build out the business as one where the partners managed as well as produced.

However, the slight jump in enrollments was followed by student departures from classes that the new teachers taught, as well as students leaving the program, in general. In fact, we tried to open new classes last summer, but we hadn’t generated enough publicity at the time. The result was that as we entered the beginning of our fourth long S L O W summer, student enrollments began dropping, until we were down 20% from our high, and way beyond our original average for the past two years. It was quite clear we were facing problems. Unfortunately, summers have been quite slow for a few years, so it was only when August became September that we all began to realize the problems we were facing. I’ll describe the basic set of problems in two parts. Part 2 is below. These weren’t the only problems we faced, but they were symptomatic of a business facing considerable challenges to its survival.

Out of the original list we committed 8 of the sins of business mistakes…

Overexpansion: New Teachers > New Problems
During the early half of 2007, we attempted to hire new staff members and this is I think where our problems began: we were hiring to fill places in the roster, not hiring because the candidates were any good. In fact, we hired three teachers in three months. While the teachers themselves didn’t have a great deal of experience, the challenge of teaching our curriculum meant that they needed to deploy skills and understanding that young teachers just don’t have.

The results led to frustrated students and frustrated teachers. In several core classes (young students with a good few years ahead of them in our school, usually), student turnover started to increase as students began to leave. With class numbers as small as ours, we didn’t notice until two or three students had left in one particular class because the parents often cited other reasons.

Looking back, it was quite clear now that we simply didn’t have the internal controls in place to handle induction, training, and oversight of the teachers themselves. This led to new teachers not really knowing what was expected of themselves, how they had to prepare for classes, and what they were supposed to do in class.

Poor execution and internal controls: Good in parts.
Our partners set out seven years ago to create a school that they wanted to learn in and would have felt comfortable sending their own children, too. So, over the past seven years, execution has been particularly good on a number of fronts regarding the actual ‘mechanics of teaching’. We’ve been blessed by pleasant students, understanding parents, and cooperative teachers.

But because of familiarity with each other, and a long standing relationship to the school, little need was felt to establish internal controls. In fact, some of the partners aren’t detailed oriented when it comes to management issues. Internal controls in finances, management, teaching and marketing were (and still are) largely absent from the organisation. This is perhaps one of our ongoing weaknesses. And one that makes recruitment a real issue.

Overspending: Not in so many ways.
In 2006, we did face overspending issues more critically than at any time except for the first six months of operation. We were however less well prepared for the overspending in 2006. Why? Simply because as our gross margins came under pressure, our expenses started rising sharply. We had had quite a few good years with good gross margins. But in 2006, that had slipped. It hadn’t slipped significantly enough for it to be a problem, but the downward trend had been duly noted. So when income started drying up, we need to cut costs quickly and effectively.

And we cut our budget sharply: we eliminated smaller benefits that had been given to employees, including free meals (that budget had grown out of control); cut materials costs, labor costs and a number of other items which had all risen (and were threatening to get out of control). Eventually, the cost structure came to a head in that we were spending as much as we were earning.

Staffing costs were the last big ticket item that had to be tackled, and indeed they were the BIGGEST item in the list. Partners in the business had to have their salaries ‘economized’ by about 25% or more, eventually two part-time members of staff left the school (oddly, though, their departure wasn’t for saving money). We eventually brought our budget down by about 20%. Unfortunately, it still wasn’t enough.

Lack of reserve funds: Didn’t prepare.
In 2003, SARS hit Asia in a big way. There was a direct impact on our school for about 2 months, as income fell. Normally busy periods dried up. In fact, we even contemplated closing the school for one month at the time. This didn’t happen. But we did have contingency plans in place.

However, we didn’t lay aside adequate reserves after that period at all. We moved location in 2004 and spent a huge amount on the new place; worse, our margin started to fall, and laying away extra money was difficult. So, last summer when the crisis started to unfold before our eyes, we were all concerned that we didn’t have enough money to weather the storm. We even didn’t know how long the storm would last. Even now, after remedying our budget, we still have no real emergency funds set aside. It is now our top priority.

In part three, I’ll look at the next four on the list of problems we faced and discuss why they were critical as well. These included bad business location for our business, an inadequate business plan, ineffective marketing and self-promotion, and to some extent underestimating the competition.

All businesses have a sign that reads “Business Under Construction” as markets change, costs increase, and the business goes through its ‘life-cycle’. Ours is permanently stamped on our hats… But, for some people, these wrenching changes come across as ‘unfair’ or ‘you didn’t tell me’ or ‘how was I supposed to know’… Perhaps in Part four, I’ll look at some of the things we are doing right, to give a balanced perspective. But wait until next month for Part 3…. And in Part five, I’ll describe some of the changes we have made, and how they seem to be working.

One thing is sure: running a business isn’t easy!

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