Thursday, November 19, 2015

Free lance tutoring as a business - Part 1

The more I understand how to valuate a business as an investor, the more clearly I can see what makes a good company from a bad. I think some of these skills can be applied to myself since you can say I'm also doing a business as a self employed, being a full time tutor for about 10 years. I'm not a business owner in the sense that there is a system where I can hire people without me having to teach, but more like a sole proprietorship. Think of it as a one man business where you're both the boss and the employee. Think of me as a sweat soaked hawker in a wet market stall, holding a wok with a dirty towel slung over my neck, selling education in a paper plate. Want chilli or not?

The top line of a business, or revenue, is the first thing that people will have to look at when they peruse the income statement. In my case, it's the fees that I get paid for doing a service, which is to tutor the students. The things that are worth taking note are listed below:

1. Percentage revenue growth
2. Seasonality effect
3. Concentration risk
4. Multiple streams of revenue

Percentage revenue growth is obvious - it measures how much revenue is increasing as a percentage of the revenue earned last year. Higher is not necessary better, as I realised from experience. The main contributor of earnings comes from the graduating students (JC2, IB yr 6, Sec 4, N lvl) because as the national exams spreads way after school ended, there'll be more lessons needed for extra revision and preparation of exams. If I want to increase the revenue earned this year by multiple times, I will take in more of such graduating students, so I will see a huge increase in percentage revenue. But I know the following year will be worse off, because when the graduating students leave, I'll have to build up my student base again to match my income for the year. It might not always be that smooth sailing. Hence, it's better to smoothen out the difficulty of finding new students by having a mix of graduating and non-graduating students. More is not necessary better.

You can increase your revenue by either increasing your students, increasing the fees charged, or teaching more students together over the same time slot. That's in order of ascending preference. Why? Each day you only have 24 hours. Each student you take will take 2 hours (usually), which means your income is capped, hence you can't keep increasing the number of students you can take. It just couldn't scale up. Increasing fees is okay, but as all economist knows, it'll possibly result in lowering the demand. If you price yourself too far out of the market, you might end up with much lesser students than is worth it. It also depends on your area of operation too, because you just can't sell atas organic chocolate mille crepes priced at $9 per piece in a neighborhood wet market stall. That's more for Bukit Timah, Orchard Road-ish type of area of operations. Mine is in humble Bedok where the world's most delicious carrot cake can be had at $2.50 per plate.

Black or white? I say black, from Song Zhou Lou Bo Gao near Bedok interchange hawker centre (pic taken from ieatandeat)
What's the third option of increasing revenue? It's to have lessons in a group. Charge a cheaper rate but group them together, effectively increasing your income per hour multi-fold. I limit my class size to 4 because there's diminishing returns in students learning from huge class size, and all the students in the group comes from the same class/school. It's not always easy to find such groups, but it's always more fun because of the group dynamics.

Seasonality effect of the revenue comes from the nature of the business itself. Some people think that as a tutor, I'll be very free during June and December period because there's where the school holiday lies. That's not true. Usually these period is the busiest. Think of me as a bus captain. When you're going home from work, I'll be working. During public holidays, I'll be working. During weekends, I'll be working. The general rule of thumb is this: The more free you are, the more busy I am. Vice versa. Understanding the seasonality of my revenue stream allows me to act in a manner that will smoothen my income. The way to do this is to take have multiple streams of income. I'll discuss about this in detail later.

Concentration risk refers to whether you have a huge percentage of your revenue coming from a single subject, or a single student, or a single group of students, or from one tuition centre. For example, if I'm only teaching chemistry as the sole subject and one very unfortunate day, MOE decided to adopt a campaign "Teach nothing and learn something", so they scrapped off chemistry as a subject. If that unlikely event is to happen, my revenue stream will go to straight to zero. Don't say it won't happen. I know of a tuition centre that specialises only in Chinese. In the past 10 yrs, MOE had major changes in the structure and content for Chinese. I can't remember exactly what the announcement was about, but I remembered within a fortnight, the student intake of the student dropped to single digit and they had to close down by the end of the year. That's subject concentration risk.

There's also concentration risk arising from having a single big group of students. It's really good revenue since you spend the same amount of time but earn a lot more per hour, even though each student pays less. Think of it as a leverage on time. If this group of student forms 80% of your income stream and they graduate this year, the following year you'll have to find students to replace them. It's just something that you have to think about. Always the next year and the next year. Nobody will hand you a salary for free, but hey, that's what you signed up for as a free lance tutor.

Multiple streams of revenue is always better than a single stream. I'm not even talking about passive streams like dividends or from book sales, blog advertising etc. Different levels of student have their own unique peculiarity and seasonality. For example, for lower sec 1 students, they will usually not have lessons during the holidays because they had just finished a major exam (PSLE). Parents will be more lax while they concentrated on their primary school siblings, or they just want their kid to have a break before the more 'important' years. Sec 2 you'll see a lot more help during June and Sept holidays because that's the streaming year where students bid for their subjects combination for upper sec. Sec 3 you'll see a lot of activities even during the end of year holidays as they try to gear up for the all important O'lvl years. The different seasonality will help to even out drier non-peak months so that your revenue stream will have lower volatility. This will make sure you don't have to pluck grass from the roadside to eat during the winter months and freeze to death like a ill-prepared grasshopper.

I'll talk more about the profit part in future posts. Look out for it.