Doug Root and Jake Johnson on Taxes
February 28, 2010
Doug Root of Alexander, Offenberger & Root, Inc. (In partnership with Johnson Consulting Group to offer Tax Services to Johnson Consulting Group clients)
We recently asked Doug to share his thoughts about the current and future tax laws in the area of Capital Gains. Here is what he said: “…The current maximum capital gains rate of 15% is set to go back to 20% in 2011 but we had previously heard that even higher rate proposals were possible…However, We’ve heard no mention of the capital gains rate for months….Our guess is the current maximum rate of 15% will sunset back to the old rate of 20% in 2011”
Example: What this means for Funeral Business Owners interested in selling is that they will experience a 5% increase in tax rates on the gains they receive when they sell their business. [This is a 33% increase from the current capital gains tax level] Consequently, if all other things were equal, a business sale in 2010 would yield more cash to the seller than a business sale in 2011. We do not propose this as fact, but it is an eye opening scenario if this does in fact come true. It goes without saying that if you are considering selling and this tax increase is of concern, you should consider planning now. (Be sure to confer with your tax professional to be certain this applies to you) You may also want to check out our business valuation services at http://www.johnsonconsulting.com/valuation-services
Along the lines of Estate Taxes and it’s affects on the funeral business, the NFDA conducted the following study on September 9, 2008. I have pasted some of the comments in that study that I found interesting to estate taxes and the funeral business:
National Estate Tax Study, September 9, 2008, Deana Gillespie, Research Manager
Purpose
The purpose of this study was to measure how the national Estate Tax is affecting funeral directors’ businesses and financial plans.
Executive Summary
- Under the current Federal Estate Tax laws, one-third (36%) of members would have to sell all or part of their business if the current owner died and 33% said that they would have to borrow money to pay the Federal Estate Tax.
- If the owner of their firm died, most members (62%) stated that they would be forced to eliminate between one to four jobs under the current Estate Tax laws.
- If they did not have to set aside money to account for the Federal Estate Tax, most funeral homes (over 60%) would be able to create between one and four additional new jobs.
- Most respondents (58%) felt that the best solution to the current Federal Estate Tax law would be to increase the current exclusion from $3 million to $5 million and to reduce the current rate above the exclusion from current levels to the capital gains rate of 15%.
- Half of the members surveyed work for a Subchapter S Corporation.
Key Findings
- Over one-third (36%) of respondents stated that all or part of their business would have to be sold if the current owner died and 33% said that they would have to borrow money to pay the Federal Estate Tax if the owner died.
| What Would Happen if the Owner of Your Firm Died? | Percent |
| Expansion of the business would be delayed | 13% |
| Expansion of the business would be substantially curtailed | 11% |
| Expansion of the business would be abandoned all together | 7% |
| Money would have to be borrowed to pay the Federal Estate Tax | 33% |
| All or part of the business would have to be sold | 36% |
- Half of the respondents (50.0%) worked for firms that were Subchapter S Corporations and 42.6% worked for C Corporations.
Additional Verbatim Comments
- We have purchased Life insurance to pay the taxes.
- As of right now there would not be any federal estate tax.
- The tax is blatantly double taxation since the accumulated net worth has already been taxed.
Technology will make web based Funeral Home Accounting the new standard in the industry…
September 14, 2009
By Bill Bischoff
My 35 years working the funeral service industry has been quite an experience and very rewarding. During all those good times, I have met 1,000’s of funeral directors and their families and have visited 100’s of funeral homes. There is no better industry or better people than those dedicating their lives and careers to serving the needs of others at a very difficult time in their life. In my experiences, there is no better profession than the funeral profession.
My travels and times that I visited funeral homes were by far the most enjoyable, rewarding and always educational. I learned a lot more than I ever taught. For those who have shared my good fortunes, we know there are many stories to share, some more memorable than others.
In this article, I want to share with you how I first learned the non academic principles of funeral home accounting. I was traveling in southern Indiana in the late seventies with an associate from my company. We called on a funeral home in a medium size community that had four independent funeral homes. Our goal was to convince the owner to use our products and replace the competition. We did our homework and had a presentation prepared explaining how our products and services would increase his ROI and overall profitability.
After a nice introduction and tour of the funeral home, I remember sitting in the owner’s office making our presentation. We had profile charts, best selling products in the area, wholesale casket averages, and a tracking system to show the progress made toward achieving our mutually established goals. The owner, I recall, was very nice and seemed to listen to what we had to say. He didn’t ask many questions, but allowed us to go through our entire presentation.
When we were finished, I remember the owner, paused, and then with a gentle voice responded. I will paraphrase his response:
I am a second generation funeral director…I remember him saying…”Our funeral home has been in business for 62 years. My father taught me funeral home accounting and how we make the money. We have been using this system all these years. See this desk where I am sitting. This is our accounting system. Here in the right drawer is where I put all the monthly checks and cash we receive. In my left drawer, I put all the billings and the employees’ time sheets. At the end of the month, I count the money from the right drawer and I add up the bills from the left drawer. If we have money left over, we had a good month. That is the way we have run our business since my father started the business.
This, I found, was a rather common practice in those days with funeral homes especially in small town settings. There was obviously more to it than he described, but all of the transactions were entered into the ledger book by hand and the numbers were added up on a desk calculator printed on a roll of paper.
Needless to say, we did not impress him with our charts and graphics or tracking systems. But he was kind enough to buy a few caskets from us.
As I was writing this article, I looked up the funeral home name in the “Yellow Book” to see if that funeral home was still in business. It was not listed. What happened I do not know, but my guess is the left hand drawer outperformed the right hand drawer. The fact is there are many funeral home businesses today that do not have an up to date accounting or financial system to help guide them to make timely decisions and mange their business.
In times like these, when we are experiencing a slow down in our economy, an accounting system that is tailored and customized to the funeral home’s business can be vital to maintaining the heath and prosperity of the business. Detailed budgets, chart of accountings specifically for a funeral home’s operations, and a tracking system to record and compare the various types of service and product offerings are becoming a must have instead of a nice to have system.
Here’s a checklist of the features and advantages of a web based accounting system that is designed specifically for a funeral home operation:
- A 24/7 web based system
- Have immediate access from anywhere in the world at any time
- Chart of accounts are set up in funeral home operation terms
- Budgeting and forecasting are part of the accounting package
- Requires less accounting and administration staff
- All locations are broken out separately and then consolidated
- Reports are all paperless viewed on a computer screen and can easily be printed out
- Month end reports are received within 15 days of previous month’s closing
- Historical trends are part of the system
- Experienced funeral home operators interpret the data and provide an analysis and recommendations
- Highlighted areas to focus on and improve
- Benchmarking results by peer groups and industry standards
- All valuable information is on one summary report, avoids paging through multi reports
Things to consider when choosing a computerized and web based accounting system:
- Be sure it is encrypted transmission
- Be able to print reports from an offsite system
- Easy and cost effective to upgrade
- All training can be done on line
Today we are in the midst of a technology explosion. The speed at which information is transferred is amazing. E-mails have now been replaced by text messaging and Twitter. Google can put one in touch with anyone in the world and find information on any subject within seconds. The I-phone has made just a simple cell phone a complete entertainment center. E-Bay allows you to sell or buy items worth a dollar to millions of dollars. And then there is YouTube and Face Book. The list will build and the options will continue to grow. A website for your business is a must have. Webcasting a funeral all over the world will become standard in all progressive funeral homes. Audio visual programs are now a part of the funeral service.
Why will the funeral home employ many of the technologies available today? For one simple reason: The most influential person in funeral service today is the Consumer. They live and function in a world of high technology and expect it as a standard part of the funeral service. So a web based accounting system would seem to be fit very well in the mix…
My experience today talking with funeral home owners about their accounting systems has been very interesting and enlightening. The accounting procedures and systems fall into 3 basic categories:
- All accounting is done in house
- Local CPA firm
- Industry Accounting firm
These categories make up the majority of the independent funeral homes. When asked how satisfied they were with the results, the responses were more to the middle to the lower range of the scale.
Improvements desired out of their accounting function. The following are the top five:
- Better budgeting
- More timely month end reports
- Access to the reports online
- Better interpretation of the data
- Standards and benchmarking for performance comparisons
The next obvious question, why the resistance to change:
- We have always done it that way
- Bookkeeper does not want to change
- It will be too disruptive
- Too much to learn with a new system
- Breaking the ties
- Too costly
- Learning a new system
The funeral industry has come a long way from the days of the right drawer, left drawer methods of accounting. We all live in a world of instant messaging, information and communications. The experience curve of how to operate a successful business has steepened. The need for immediate financial up to date information to make more timely decisions is becoming a “must have’ no longer a “nice to have” function of all size businesses. And the cost savings over the current systems is getting better everyday …
Bill Bischoff
Let’s Do an “Accounting Quiz” It’s all About The Why – The How – The What – The Who
September 8, 2009
BY DALE ESPICH
In my 40-plus years in working with funeral directors as a Management Consultant, I have seen just about every description and methods of “Accounting” used to try to keep track of income, expense and profit/loss.
Let me throw out a series of questions to get your thought juices flowing and then we can tackle some of the answers (that I feel are appropriate).
–Why do you need “Accounting”?
–What is your definition of “Accounting”?
–How do you do YOUR “Accounting”?
–What do you expect from your “Accounting”?
–What SHOULD you get from your “Accounting”—or your “Accountant”?
–How do you choose an “Accountant”?
The Why
There are other questions we could ask, but let’s start with the basics of “Why”. We begin with three very good and basic reasons for good, clean and accurate accounting:
- Provides information needed for tax preparation.
- Banker will require reliable accounting records when in need of financing or establishing a line of credit.
- Provide a balance sheet that shows favorable ratios on net worth, liquidity, etc.
It would be my advice, from experience, that a business should have a line of credit established with its bank. In order for the bank to provide any credit, they are going to want solid evidence of your financial stability. There are other considerations as well, but this is usually where the bank will start.
At the present time, we are not experiencing the same climate with bankers as we have in the past under “normal” economic times. Although this article only connects more or less indirectly with the subject of credit, what I have said above about reliable information with and for your banker is basic regardless of today’s extremely tight credit and capital markets.
The How
Another value most funeral owners would give for “Accounting” is “to see how we are doing” both as the year goes along, and how the year ended, whether it is up or down—whether it is with profit or with loss. Another way of stating it would be to view the ‘history’ of the business. The problem with history is that it is already finished. It’s done—over—past. There is no way to go back and undo what happened last month or last year.
The real value, however, is how to use your “Accounting” to accurately plan and balance your income and expense in order to have a satisfactory profit year after year.
The What
One of the great benefits of accurate history, of course, is that we can learn from it. So, what do you learn about your business by an examination of your financials? Moreover, what do you do with your financials to use them as planning tools for your future business?
This brings into focus some very basic facts about your business—and “Accounting.” What does your accounting teach you about your business, and what do you learn from your accounting about income and expenses? It may seem redundant and a needless statement, but, just to make sure we are on the same page, it is, after all, the balance of more money coming in than there are expenses going out in order for a firm to have a profitable business.
Now, I want to offer up some key and important questions:
- Is the information you get from your accounting source such that it provides all the necessary information needed to accurately plan for a satisfactory profit year after year?
- Do you sit down at least 60 days before your new year begins, to analyze your current and past years, and plan for the up-coming year to ensure that your business will be adequately profitable?
- Does your accountant understand your funeral business in such a way to (1) provide you with the necessary specialized funeral accounting, and (2) assist you in planning your profitability (before the year starts) so that income and expenses provide the needed balance?
The Who
It is not the intention of this article to provide the answers to the above questions. This is where I believe many funeral home owners miss out on a very valuable and vital part of the accounting process. Because an accounting system that is designed specifically for a funeral home operation, with the proper chart of accounts, along with experienced staff that can interpret the data and make insightful recommendations to strengthen the financials, provides a wealth of opportunity. Unless you have lived it, you cannot totally understand it. The monthly information from your accountant must be organized and presented in a timely way to take the necessary corrective action to get you where you deserve to be. If that is not your current situation, consider making a change. You owe it to yourself and all the stakeholders in your business.
The profit climate in funeral service may seem to be rapidly declining. After all, every June for the past 29 years, the decline in funeral margins have been announced in glaring headlines. In 1980, the announced margins were about 14%, and have come down steadily to less than 6% in June, 2009.
These announced margins are not the same margins I have seen during the past 29 years with firms who have had funeral planning information properly presented and understood with both their accountant and the accounting format that is used. Most of the well-managed firms with whom I am familiar have consistently enjoyed profit margins (as a percentage of revenue) of at least ten to 15 percent and above.
My Candid Recommendation
So, in answer to the first question—”The ‘Why”–, my response is that accounting is certainly important for tax and banking use. However, the most basic use, the absolutely most important use, is to PLAN in an accurate and timely manner for the right combination of income and expenses to provide adequate profits year in and year out. One more thing: If you cannot use what you get or produce (internally) for profit planning from your accounting, then you need to search further until you find it. Do it now.
A concise answer to “definition” of accounting is not only that the accounting system, format and chart of accounts must be correct, but also that your Accountant must have the knowledge and expertise to provide you with the guidance for profitability in your funeral business.
For “HOW do you do your accounting?” this is, hopefully, a jab in the ribs for you. Over the years I have presented dozens of Profit-Planning workshops for funeral directors, and have lectured to groups on both a regional and national basis. Almost always I start by asking the question of, “How many funeral home owners in this audience have calculated their cost of conducting a funeral?” (which most funeral directors use the word “Overhead”) I cannot remember ever getting a show of hands of more than 20% of the audience.
So, the rhetorical question then becomes, how in the world can you accurately plan your pricing to be profitable when all you know about your costs is the casket and vault invoice? This still is about SERVICE, is it not?
Let’s wind this up with a few simple statements about what you need to have in the way of accounting.
When you get your financials as the year progresses, you must not only get the answer to what has already happened, but WHY your bottom line is up or down. Example: If you have a 300 call business, and at the six month point you have served 165 families, you already know your profit is going to be UP! But that is not the point—this is obvious. Does your statement identify exactly how much profit comes from those added 15 families? But does it also measure for you if your service charge is recovering the planned amount? Is your casket average where you planned, and if not, what is the dollar effect? Same with cremation average….same with vault average?
Too often when volume is up, other profit centers are under performing, and because they are operating in the shadow of an up-volume year, no one ever realizes that part of the deserved profit is going up the chimney—never to be seen again.
I said at the beginning this is not about taxes. That belongs with the tax expert. But let us be clear about priorities when the same firm that does your taxes is also doing your accounting. I know tax season is very busy and stressful. But it does not mean—it absolutely cannot mean— that your accounting is delayed while taxes are done, and you are operating in the dark about what is happening both top and bottom line, receivables and cash flow. You cannot afford to operate one single day with your only financial knowledge being the balance in your check book.
Finally, does the accountant or advisor you presently retain know and understand all the dynamics of funeral service planning backwards and forwards and, with his help, you also have a pricing and expense PLAN in place when your New Year begins.
If you get “Management Advice and Planning” four to five months after the year starts, what good is it?
Yes, I know the question you are probably asking. How in the world can I plan profit when my 200 call business is 180 one year and 220 another? Those of us, who are experts in the Planning for Funeral Profits area, know and understand the answer and are more than willing to share it with friends and clients alike.
Today, most of us use a GPS—Global Positioning System—to help in travel as we drive around in unfamiliar territory. With a GPS you know exactly where you are. Moreover, you know exactly where and when to turn a corner, turn left or turn right.
Let me offer an example that all should understand—especially in a time in which most of us fly quite frequently. Which of the two airlines would you select when going from New York to California?
Airline number one takes off and “heads west”. Airline number two has a flight plan and navigation systems –GPS—that tells them in advance exactly where and at what altitude they need to be the entire 2500 miles.
The answer is obvious……….Airline Number Two.
There is no guess work with Airline Number Two. Why should you also guess about the profits your pricing will produce? Would you not want GPS accuracy in determining the profits in your business? And, after all, it is primarily the profitability of your business that determines the VALUE of your business when you are ready to sell or pass it along to a family member.
Do you run your business like Airline Number One? Are you winging it? Are you “heading west”?
Or are you running your business with the precision of a GPS?
It is your bottom line and Quality of Life that we are talking about. It is the Value of Your Business that is ultimately determined by the way you manage. Is it going to be with precision? Or is it going to be by chance?
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