Kevin Lin presented the paper ‘Actuary Entrepreneur’ at the 2016 Financial Services Forum. His experience in developing a child care business was used as a case study and this article highlights a couple of situations where actuarial techniques were key in making decisions.
I was delighted to present my paper, Actuary Entrepreneur, at the 2016 Financial Services Forum (Melbourne). The paper encourages actuaries to apply their actuarial skills beyond the confines of their careers. It discussed how actuarial skills can be a competitive advantage in setting up a business and how the entrepreneurial experience provides accelerated opportunities for actuaries to develop beyond being technical experts to being more practical, innovative and well-rounded professionals.
The Actuarial Advantage in Finding the Optimum Location
Developing a child care centre was capital intensive and therefore one of the first challenges was to find the optimum location to maximise the chance of success. Actuarial techniques were decisive in helping to achieve this.
A financial model was built using data gathered from various sources. The model showed that the centre needed to have more than 56 places to have the scale to meet our profitability criteria and it also revealed the suburbs where child care fees provided the greatest return compared to property prices.
Further demographic studies were conducted in these suburbs. In addition to data from the Australian Bureau of Statistics, the local councils were contacted to obtain the details of residential development applications and approvals. This data was used to project the extra number of households for a specific area and the future demand for child care places. The projected demand was compared to the existing child care services in the area to work out whether a new child care centre was needed.
By now we had narrowed the search area down to specific areas of a few selected suburbs. After seven months of searching, we found and purchased a site we considered ideal. It was situated across the road from a primary school, and about 300 metres down the road from a major shopping centre and transportation hub.
Decision to Continue After Catastrophe: Applying the Control Cycle
After we secured the property, we engaged an architect to design the centre, got the necessary development approvals and engaged our first builder. Unfortunately, more than two years later, the builder stopped working on our partially completed and defective building and they subsequently went into liquidation. Reeling from this catastrophe, we decided to take time off to recapitalise and reassess the situation at a later date.
When we returned to the project, we had several offers from other child care operators to buy the property and we used the Control Cycle to reassess the feasibility of the project. We updated the financial model and the results showed that the project was still very feasible because interest rates had halved, child care fees had doubled, and the population growth increased as we projected. Although there were now other centres being built nearby, we had come in first and secured the best site in the area.
This was a pivotal moment and using actuarial techniques helped us to assess the situation rationally rather than emotionally. And so we decided to continue with the project rather than sell to one of the tempting offers.
How are we doing today?
We subsequently engaged another builder and, using the numerous lessons we learnt, we completed the project the second time round with no major issues. Overall, it was an eight year struggle but we finally made it in the end.
The child care business has been in operation for over a year, the cash flow is positive and the business fundamentals are sound. However, there continues to be challenges, setbacks, learning experiences, and adjusting our approaches to make the business work.
Upon reflection, I learnt that this was the core of the entrepreneurial experience and the actuarial approach played a decisive role in overcoming a number of these challenges.
The full paper can be found here.
The presentation can be found here.
A video of my presentation can be found here.
The child care centre’s website can be found here.
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