There are different schools of thought about having students pay in full (PIF) for their classes versus monthly billing. 

Let’s establish the fundamental difference between PIFs and monthly billing. When someone PIFs a program, you owe them the unused portion of their program. If he gave you $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 $700. 

That $700 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. 

So, in order to protect yourself, it’s important to handle PIFs 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 PIF 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 PIF to build value in a business. Usually, because of their liability, PIFs diminish value in a business. Who would want to buy a school 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 PIFs may be a good strategy for you. Be warned, though, PIFs can have a long-term effect on your school’s growth. 

Each month, we have enrollments and renewals. Enrollments and renewals are what we drag back to the hut to feed our family.  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 PIF bargain. This is why you must resist the temptation of spending the PIFs 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 series of checks coming from your billing company, EFT bank, or in-house collections 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 PIF some people out next month to meet your obligations. You have to know what’s coming in. 

Then, if on top of that, you have some PIFS, that’s great. But it can  be dangerous to put your school in a vulnerable position financially for the short-term gain.

PIFS can be an example of short-term gain for long-term pain. When you have a school populated by people who paid you off a long time ago demanding that their classes be taught each month, and you spent their PIF on rent eight months ago, you are in a precarious position. However, if you can keep a steady stream of new students coming in and not spend the PIF money as it comes in, there is nothing wrong with this strategy. These are two very critical “Ifs” though.

On the other hand, the short-term pain of not getting that PIF versus the long-term gain of building a huge monthly check can be the recipe for financial stability and growth. Especially if you are not yet attracting a steady stream of students and your ability to manage cash is still in need of some discipline.

PIFS are dangerous to the degree that you:

1.Spend the money before you’ve earned it. 

Remember, open the special account we described and let it build to offset the liability of the lessons you owe. Your liability account should never drop below the amount of outstanding lessons you still owe. That’s always a good rule of thumb in financial planning. Never take on debts you do not have the assets to offset.

 2.Have inconsistencies in your enrollments.

If you have months where you enroll 20 people followed by months of enrolling just five, then you cannot rely on PIFS. Obviously, in the months you enroll just five people, your income is going to take a huge hit. Your other PIF students are no longer sources of real income. You’re totally dependent on new PIFS coming in and if they don’t, you end up scrambling to meet your obligations. 

Low enrollment months hit you like a one-two punch combination. The month of low enrollments creates a chain reaction of low retail and miniscule renewals. For a PIF school, this is disaster. For a school with a healthy check coming in from the monthly tuition each month, it is simply a bad month in which income will drop slightly.

In the final analysis, PIFs are part of our business. But they must be taken seriously and handled with discipline. In combination with a growing base of students on monthly tuition, PIFS can contribute to the bottom line without risking the school’s balance sheet. But if you rely on them as the sole source of your tuition income, PIFS can spell disaster.