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. 

• 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.

Brooks Cowles (JCG Field Representative)

Succession planning for your business really is like a puzzle in many ways.  For one, there are many pieces that have to fit together.  Depending on your view, it can look impossibly confusing or deceptively simple.  The fact is, just the basic elements present in every plan, including valuation, structure and documentation, present many challenges.  Succession planning for funeral home owners has changed a lot over the last several years.  Most established businesses still have excellent prospects to provide the owner and their family with a secure future.  And there are many capable purchasers out there.  Most of their last names are not “Inc.” or “Group” or “International” anymore.  But overly-high values are a thing of the past, and financing is almost always an issue.  Legal skills and local market knowledge have become more important than ever.  Too many owners decide they are ready to transfer and then get a painful and expensive education in reality.  Here are a few tips:

–Understand what your firm is worth and why.  Have realistic expectations, but don’t accept less than you expect without good reason.

–Screen potential purchasers.  Want to sell for all or even part cash?  You need a buyer with investable cash equal to not less than 15% of the total purchase price, at a minimum. 

–Understand the role of real estate.  Real estate value is critical today in structuring and financing a deal.  Consider a lease.

–Ask your attorney or accountant whether industry specific expertise would be helpful.  Many professionals welcome a team member with experience and expertise in funeral home transfers.

–Give yourself adequate time to make good decisions.  Generally, if you are older than 50, you need to at least have an outline of your thoughts and options.  If you are older than 60, you need specific identification of possible successors, which should be communicated to family and advisors.  After that, getting started is up to you. 

–EVERY OWNER SHOULD HAVE A VALUATION CONDUCTED AT LEAST EVERY 5 YEARS.

Jake Johnson was interviewed by Ed Defort in the December 2009 issue of Memorial Business Journal

Given the recent economic gyrations, how can funeral homes and cemeteries best gear up for 2010?

JJ: Funeral homes and cemeteries will need to be sure to budget their income, expenses and capital needs very carefully. There are a lot of business owners that do not seem to budget to begin with, so budgeting at all actually will be important. If you are not monitoring your cash needs, you could find yourself in a need for a line of credit or loan, which may not be obtainable, no matter how good your relationship is with your bank.

When you budget, you should determine your actual cash (EBITDA) and then compare it to your principal and interest payments on debts you have. Banks call it the fixed charge coverage or debt service coverage ratio. If you are below 140 percent of coverage then you need to watch your budget closely. The business can be slow one month and busy the next. All of us funeral professionals understand that, but sympathy from banks right now is very low.

What are the consequences?

JJ: The long-term consequences could be layoffs, reduction in health plans and 401Ks, deferred maintenance and then ultimately customer service. Don’t let this happen to you. Those businesses that watch their expenses through budgeting and good accounting should be well ahead of the curve during these tough times.

OK, what is step one?

JJ: As I mentioned, having a budget and a plan in place for at least one year is the first step. Be sure you have good accounting records in order so you can respond to change quickly when it occurs (even when the change is good). If you end up operating on a very tight budget, you will want to be sure you have good collection policies in place and receivables are being collected on a timely basis. How is your collection policy? If your receivables are more that 30-45 days of business sales, then you may need to adopt some better policies that generate more timely cash flow. Proper scheduling for funerals is a very interesting item we see with the clients we are working with or have worked with. If you are not masterminding your scheduling, you could set yourself up to have poor customer service on some funerals and unnecessary overtime resulting in a risk of volume
and profit to your funeral business.

What are the questions the managers should be asking themselves?

JJ: As we see in our management services, you need to constantly be focusing on Workplace, Marketplace, Customer Service and Financial aspects of your business.

• Is your organizational chart correct?
• Do you have the right people in the right spots doing the right thing?
• Do people know what their job description is?
• Do they have one? Are you price shopping your competition?
• Are you competitive in your market? Why do people choose your business? (You can’t simply say that it is because you offer a good service — they should already be expecting that!)
• Are you surveying your customers and taking those opportunities that are posed through surveying to follow-up with a thank you or correcting an issue the family may have had?

All this being said, if your “house is in order,” you are that much better off during these times when banks are tightening up their potential for credit lines and loans.

How would this affect a funeral home as it approaches time to set up the budget for the next fiscal year?

JJ: Again, when it comes time to do a budget, you should not just think about “normalizing” just the revenue versus the expenses, but you also need to figure out what your net cash will be from those results after you pay debt and then be sure to budget money for capital needs that would probably go to your balance sheet and not be seen on the P&L. If you don’t like the result after you do this or if it is too close on an annual or even a monthly basis, then you need to make some adjustments — if you can!

With the way the credit market is going, you may need to perform an interest rate stress test. How high can the interest rate go before you are negative? For some, this answer could be a scary one. Lastly, all of this being said, interest rates are at their lowest rates in years. Starting the process now to test the waters for re-amortizing your loan and getting a better interest rate should be done if you feel you fixed charge coverage is low. All they can say is no. Through our loan sourcing services, we can even prepare the presentation of those loans in the best light to increase the chances for success even in a financial market as it is today. Remember, with good planning and careful control and accounting of your business, you should be able to tackle these times and come out of it that much stronger in the end.

Johnson Consulting highly recommends that you survey your families that you have served. It is a gold mine of valuable information that will help you formulate your marketing plans and strategies….

2010 – THE BIG QUESTION – “DO WE REALLY KNOW WHAT IS GOING ON?” Todd Van Beck

This is a powerhouse of a question for funeral service and cemetery work. Do we really know what is going on out in the world? Of course we do, certainly we keep tabs on how the community is changing, we keep our fingers on the pulse of the funeral/cemetery environment; of course we do, been doing it for years.

These responses are predictable and totally natural and understandable. However they do not answer the question – do we know, really know what is going on out there? It might be that we don’t know precisely the details, and the realities, and nay the unpleasant news that might be, could be, and is most probably is floating around our communities about you and me.

Here is an example. I once had occasion to perform a focus group for a particular funeral home. Most everything was changing for this particular funeral home and unfortunately the owners were in psychological denial. In other words they truly and honestly “thought” they knew what was happening but in reality there were many gaps in their “knowledge” base. So they asked for a focus group.

A focus group as most know is simply an elaborate survey of the attitudes and opinions of the community concerning a funeral home/cemetery operation. They are extremely valuable, but not used very much in this line of work – for a variety of reasons.

Before the focus group started the owner took me to dinner and with great confidence proclaimed that in “my town, my name is synonymous with funerals.” I sat quietly sipping my drink.

Family surveys, community focus groups, in fact any type of truly inside information that we a glean about our operations is today terribly important, in fact I can’t remember a time in funeral service when this importance was not greater.

Years ago most funeral homes had their clientele. That was it. The Catholics went here, the Protestants went there, the Jews went here, the rich went there and the poor went here, the Masons when there, the American Legion went here, and so on. It was indeed what the marketing guru’s call a “niche” market. Not so today.

The culture is and has been homogenizing itself for years, and make no mistake this social movement which units many different cultures, traditions, beliefs, mores, and folkways has had a tremendous effect upon funeral service. Because of the tremendous effect, focus groups and family surveys have emerged as the most economical, safest, and more accurate method for any operation to gauge just what is actually going on in their world instead of depending on speculation after speculation, random opinions, and finally idealized hopes and dreams which are not based in reality.

Here is a case in point. I have a good friend who is a manager of a large Jewish funeral home on the East coast. This firm has over a 100 year history of being the Jewish funeral home and is known throughout the United States. I took my friend to dinner in Manhattan one evening. In the course of conversation the issue of Jewish funerals came up, and my friend quickly shared this experience of reality which was happening in his very funeral home. He told the group that the greatest challenge to the future of Jewish funeral service was of all things inter-marriage between Jew and Gentile, and these unions in the next generation basically eliminated the firm connection that generations of Jewish families had towards this historically Jewish funeral home.

I asked my friend where he got this information from and he simply replied family surveys and random focus groups.

The information which is taken from such outside sources is indispensible for obtaining a true and realistic portrait of what is the state of the state of any funeral/cemetery operation. In fact the longer the survey the more accurate the information, and remember my friends when a negative survey comes in it means that 25 other people thought and/or experienced the same thing and said nothing – except to all their friends.

Surveys work. Focus groups work. Mystery shoppers work.

In tough economic times the two main expenses which are usually cut are advertising and training and education. While this is common business practice, the commonality of it does not equate into the practice being right or wise.

Training of the staff is essential to prepare for dealing with the future – they go hand in hand. Training of the staff improves what Dr. Deming called “invisible numbers.” You know things like being self-directed, autonomous, excited, dedicated, goal-oriented, practical common sense improvements. In bad economic times any business needs and should want this to happen instead of the opposite which actually can destroy morale, destroy loyalty, destroy commitment, destroy quality service, destroy, destroy, and destroy. Do we even need to give examples of this in recent United States business experience and history?

Training creates a new environment, an escape from the day to day. Training allows the staff to express deep feelings which are just as valuable to the future of the business as is any family survey and/or focus group. Training can be fun and entertaining.

In fact just last week, for the first time in my training career, I had an owner ask for a “fun” seminar. No doom and gloom, no end of the world FTC or OSGA stuff, no feat mongering, none of that old standard seminar stuff. This one was just light and fun. In fact I personally almost did not know how to begin because for 35 years most of the seminars I have presented appeared to be in the realm of funeral crisis management, when in reality the funeral profession chugged ahead in a mighty fine way with or without my deadly serious seminars.

The fun one however elicited laughter, giggling, shoulder poking, smiles, applause and a variety of real nice emails after the seminar was completed.

Training is basically the connection to the people, the vital people who make up the organization and in whose very breath the future of the organization rests upon. Possibly a funeral home/cemetery might survive without the umpteen thousand dollar Yellow Page ad very well, but without training – I personally would not take the risk. It is time and money well spent, for it all goes to people – our people.

Johnson Consulting does not provide tax advice, but relies solely on the experience and expertise of:

Tax Services

As the year end approaches, now is the time to start planning for your 2009 income taxes. Conventional tax planning calls for deferring income into 2010 and accelerating tax deductions into 2009. However, these are anything but conventional economic times. With large federal deficits and an expanding federal debt, we see increased tax rates in the future. The only question is how high and when will these tax increases take effect. Much will depend on how the economy performs in 2010. If the economy continues to struggle in 2010, we feel that the tax cuts scheduled to expire at the end of 2010 will simply be allowed to expire. However, if the economy improves during 2010, we think that we could see increases as early as 2010.

Most taxpayers have thus far experienced lower taxable incomes in 2009. Many taxpayers have large capital losses generated in 2008 that are being carried over to 2009. Investment income in 2009 will most likely be lower. This means that for many taxpayers, their marginal tax rates will be lower in 2009 than they expect to have in 2010. Therefore, it may make sense this year to accelerate income into 2009 and defer deductions into 2010. When looking at any tax strategy, the alternative minimum tax should be considered.

On the estate tax front, the estate transfer tax is scheduled to expire at the end of 2009. We do not feel that Congress will allow this to occur. We think that the $3.5 million estate tax exemption and 45% tax rate in effect for 2009 will continue into 2010.

Taxpayers should remember to take advantage of the annual gift tax exclusion. The annual exclusion for 2009 and 2010 is $13,000 per donee. The exclusion applies to each donee. In addition, unlimited medical and educational gifts can be made on behalf of a donee provided the gift is paid directly to the medical provider or educational institution. Care should be taken when considering gifts made late in the calendar year. Time should be allowed for checks to clear the bank so that two years worth of gifts are not deemed to have been made in the same calendar year.

The one wild-card in the tax arena is health care overhaul legislation. Various health care plans have been proposed. We feel that some type of health care bill will be passed in 2009 or early 2010. It is still too early to determine how any new health care plan will be paid for and how this will impact tax rates.

If you have further questions, we would be glad to get you the answers…. Just give us a call

A definition would be a good place to start. For the purpose of this discussion let us define “Management” as “The Administration of Success in Business”. And, of course, this applies to the successful Management of a Funeral Business.

It may seem a little picky, but I also want to make sure the reader understands that the sole scope of this discussion is in the area of managing the financial sector of your funeral business for a good profit in a consistent way year in and year out.

Let us further clarify. There are, of course, multiple areas of Management including People/Staff, Time, Public Relations, Service, Client Family Satisfaction, Recruitment, Training, Continuing Education and others that are a very integral part of a successful funeral business. Each of those individual areas is all-important, and a funeral business that ignores any of them will never reach its true potential. However, I have observed several hundred funeral homes be successful otherwise, but most will fall very short ever reaching the profit levels of which their business both deserves and of which it is capable.

In my career of over 40 happy years serving the funeral profession, I have performed Business Valuations for over 250 funeral firms. There are many elements that will determine the value of a funeral home, but almost nothing will trump a good profit history. It is very simple. If I buy a funeral business and finance the transaction, both the amount I am willing to pay, and the amount I can finance will be determined by the ability of the business to handle debt service with a comfortable ratio. If I pay cash, then it is a matter of what kind of a return on my investment (ROI, remember?) upon which I am able to count based upon the history of the business.

So, among other things there are two very important messages for the reader. The first message is that when your business is adequately profitable, in at least 90% of the time, your staff will be a lot happier because of what you can pay them in salary and benefits, and your client families will be better satisfied because of the great service your happy staff will provide. Greater profits can also give you (not necessarily guaranteed) a better Quality of Life.

The second message is that when you are ready to hang up your trocar and pass the business on to a family member, third party, or competitor, etc. your business will be of a much higher value with good profits than if you slug along at the current level, according to what we see published, to which profits have dropped—more than 50% in the last 20-30 years.

Managing your funeral business for a profit, while not rocket science, does have several pitfalls. If this were not true, funeral profits would be significantly higher than they are. Each June, since 1983, the amount of profits of funeral service for the previous year has been announced in a leading funeral publication. For the purpose of clarification, 1983 was the last year National Funeral Directors Association commissioned Vanderlyn Pine to survey NFDA’s members for financial information on income, costs and profits.

Since 1983 the source of knowledge about funeral profits has been from a national accounting firm that specializes in consulting and accounting for funeral directors. According to these sources funeral margins that were 14% in 1980 have fallen to 6% in 2008.

The Management Profit this article will discuss is about achieving margins of a minimum of ten percent, with close to 15% a desirable target. It may seem to be a statement of the obvious, but profit is achieved when income is at a level well above the total of cost of goods and operating expenses.

I know exactly what is on most funeral director’s mind as this is being read. How in the world can I make a consistent profit year in and year out when the number of families I serve varies with the ups and downs of the death rate in my market area? My 300 call funeral business may go from 275 in a down year and 325 in an “up” year. This may appear to be a valid point, but there is a very good answer.

No one can predict how many families your 300 call business will serve in any given year. What we DO know, however, is that you will serve 1500 families over five years. There is only one element you cannot control in any given year, but if you completely understand how your business truly operates, you CAN control every single element of your profitability except volume. The key to consistent profitability is to know, understand and identify every single Profit Center in your funeral business.

(See Sidebar “A” for five year average case volume recovery schematic-in which we use a 400 call firm with a 62% ration of adult casket, service and vault)

The crux of the above statement is “completely understand and identify”. In order for this to happen, you must be able to treat your funeral business exactly the way a physician treats a patient. In med school, each medical student dissects a human body. By the time med school is completed, the future doctor knows every muscle, tendon, ligament and organ. Now he understands the way the body functions, as opposed to just seeing the body from the exterior.

It is the same thing with an auto or airplane mechanic. The mechanic must be able to take an engine completely apart with all the components, and then put it back together again. Otherwise, the only thing he would know about the engine is what he sees on the outside.

Have you done the same with your funeral business? What do you work with when you put your business plan-or budget together for the coming year? What do you use? When do you do it? If you are using what comes from your accountant-whether in-house or externally-then you are only looking at the bare surface of your business.

OK, Dale, what in the world are you talking about? The answer is not that I am saying your accountant is giving you bad information. What I am saying is that you are getting FINANCIAL INFORMATION from your accountant. What you need is MANAGEMENT INFORMATION.

Slow down and think about it. The FINANCIAL information from your accountant gives you data in the form of hundreds of thousands or millions of dollars of income and expense. That is NOT how your business comes through your door.

Your Funeral Business comes to you ONE FUNERAL AT A TIME!

(See Sidebar “B” for a “simple” diagram of funeral pricing. Refer to explanation that accompanies this schematic.)

If you are going to be able to control the elements of your business for next year, you must have complete knowledge and understanding of each single component of your business on a PER-FUNERAL BASIS. In order to accomplish that, it requires much, much more than what comes from an accounting set of data-That is, unless, you are dealing with an accountant that understands all the income and cost components of your business on a PER-FUNERAL BASIS.

I want to make sure what I am about to state is not misunderstood. This is not to demean accountants or good accounting. Some of my best friends are CPA’s. However, in 40 years of successful management consulting in funeral service, I can count on one hand the number of accountants that fully understand what the bowels of a funeral business actually look like down in the belly of the beast.

If you doubt this, just ask your accountant to calculate, in a form which you can use for profitable pricing, how much it costs to conduct a funeral in your business (this is what you may have referred to as “Overhead”). Along with that, one of you must know how much your service charge recovers on an adult casketed service, as well as how much on a graveside service, how much on cremations with full services, and on and on.

The same is true with the way you price caskets, vaults, urns, etc. You have up to a dozen profit centers in your funeral business, and you must know how much you can expect from each, and then monitor each on a monthly basis to understand what each is doing to contribute to your profits—or to rob you of what the profit should be from each.

Does this sound silly? The object of putting together a budget or business plan-call it what you will-is to set a specific profit target with every single component of pricing based upon your firm achieving its average number of calls, with the mix of caskets, cremations, vaults, etc. which you have calculated by a very careful detailed study of your past five years history. You need to accurately calculate what your casket margins will be as a combination of a specific mark-up on a clearly identified wholesale casket cost. Still sound silly?

This is the way I have been preparing client business plans since the 1970’s, with client profits remaining around 13-15%. This process takes the combination of accurate accounting information along with management information in the form of a complete breakdown of each funeral with service charge, casket and vault retail, casket and vault wholesale, other revenue such as extra transportation, clothing, urns, cash advance and sales tax.

This system—yes, it is a real bone fide SYSTEM-that literally takes your business apart, service by service, part by part, analyzes exactly how all these components come together in conjunction with accounting information, and then put the PLAN together, ready to go, on the First Day of the Up-coming Business Year.

You start this in October, calculating payroll and every single operating expense on a line-by-line basis. And, of course, you MUST know what your costs are on a PER-FUNERAL BASIS. Remember that unless you can accurately identify your costs, how in the world can you accurately set your revenue components?

Let’s stop and analyze exactly what we are discussing. You must know your cost of operation BY THE FUNERAL. If you do not know your cost of providing service, then your entire pricing structure is done with only cost of casket and vault invoice.

We still are in the SERVICE BUSINESS, are we not? If you do not understand how much your service cost is, then you are still pricing the way funeral directors did 30-40 years ago.

This discussion is not a “How-To” exercise. It takes a seven hour work-shop to address all the variables of the process, but you start by dissecting your business with an analysis of your entire business funeral by funeral. Go back at least five years. Not only do you count the number of services for each year, but, on a line-by-line basis, you list each service charge, each casket and vault retail, and the wholesale-invoice face value (not including discounts), other revenues such as extra transportation, clothing, flowers (sold), cash advances, sales tax. You can put these into an excel spreadsheet. What you will end up with will be the calculation of the number each year of casketed services full funeral, casketed service with partial, cremations with service, those that are direct and some in between. (very different revenue levels)

What information are you looking for? Every little smidgen that helps you identify how your business profile is likely to develop for next year. Example: Your service charge total for a full funeral on your GPL is $4,400. It may be that amount when it is totaled, or you may have a “package” service price. In either case you must compare what you actually recovered for all your full service compared to what you “quote”.

These are just the beginnings of the process of “dissecting” your business, but certainly are what you MUST do for a complete and full understanding of how you set profit targets, pricing, and then track them through the year. There is much more to the process, but I can guarantee you that just completing this exercise will help you understand your business much better than what you have in the past. And, it can start you on the path to improved profitability in your funeral business.

Sidebar “B”. It is very simple. If you want to accurately calculate a profit, accurate cost knowledge is an absolute must. The cost of the casket and vault comes from an invoice. The cost of providing Service comes from accurately using statistical information of costs, ratios, volume trends, etc., along with correctly identifying the differences in “Cost of Goods” and “Operating Expenses”. (If these two are incorrectly mingled, the number you end up with is garbage.)

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

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?

]]> http://www.johnsonconsulting.com/accounting-quiz-the-why-the-how-the-what-the-who/feed/ 0 http://www.johnsonconsulting.com/when-the-right-improvements-are-made-the-worst-of-times-can-become-the-best-of-times/ http://www.johnsonconsulting.com/when-the-right-improvements-are-made-the-worst-of-times-can-become-the-best-of-times/#comments Thu, 27 Aug 2009 13:07:11 +0000 JCGAdmin http://www.johnsonconsulting.com/?p=392 Johnson Consulting Group | Funeral Home Cemetery Consultants of Scottsdale, Arizona: information regarding When the right Improvements are made… the Worst of times can become the Best of times…

Please select which of the following applies to you:

Funeral Home Owner Funeral Home Manager Funeral Home Employee 61 18 7 71% 21% 8% 2. Has the death rate in your market area…. Increased Decreased About the same 14 26 46 16% 30% 53% 3. Do you see the current decline in the national death rate as a blip or a trend? Blip Trend 70 15 82% 18% 4. Have you had to lay-off employees? Yes No 15 71 17% 83% 5. Has your receivables increased? Yes No 25 61 29% 71% 6. Are traditional families choosing cremation or spending down on merchandise and services because of the current economic conditions? Yes No Not sure 61 17 9 70% 20% 10% 7. Are Green Burials becoming a part of your service offerings? Yes No 25 61 29% 71% 9. Do you see Chinese caskets growing or declining in the USA? Growing Declining 68 18 79% 21% 10. Do you see Costco growing or getting out of the casket business? Growing Getting out 19 66 22% 74% 11. Will other Big Box discounts enter the casket business? Yes No 22 63 26% 74% 12. Has your preneed sales suffered in this economy? Yes No 48 39 55% 45% 13. How do your preneed fulfillments compare to your current at need sales? Higher Same Lower 13 34 39 15% 40% 45% 14. Where do you see your revenues in the next 5 years? Stable Growing Declining 36 29 22 41% 33% 25% 15. Does your firm have a succession plan in place Yes No 46 40 53% 47%

What is the greatest challenge to your business?

Accounts Receivable

• The present economy has made it very difficult to get paid for the service
• Volume is good, receivables are way up
• Need help in training staff to get payment commitment at time of service

Traditional Services/Operations

• Creating new services that have more appeal
• Having to do more with less staff
• Treading away from traditional to cremation
• Families are only looking at costs
• Showing Value for what we do
• People want less calling hours, more chapel viewing and cemetery viewing
• In a traditional market, my cremation could go to 60% this year
• Where and when to start to improve overall operations
• Need to grow or sell

Staff Recruitment and Development

• Motivating the staff to deliver superior services
• Keeping good staff from leaving the industry
• Breaking old and bad habits
• How to recruit good and productive employees
• Paying a competitive wage with benefits
• Dealing with burn out, apathy and bad attitudes
• Hiring a good manager

Marketing

• Looking for new ways to generate revenues
• Staying ahead of competition
• Choosing a funeral solely on price
• Need to increase volume
• How to increase prices and stay competitive
• Pricing alternative services
• Communicating the value of the funeral to the community
• Merchandising services instead of caskets and vaults
• How the community perceives my services

Finances

• Refinancing my loans at today’s rates
• Increasing my profits by being more efficient
• Increasing my cash flow
• Getting financing to expand

Competition

• Hospice
• Low price providers
• Third party casket providers
• Community buildings and churches used for visitation
• Competitors using Chinese caskets
• Former staff opening a new funeral home in the community

Preneed

• Trusting any preneed provider
• Guarantee the future price
• Dealing with large shortfalls
• Generating leads
• Lower preneed sales compared to at need
• Keeping good counselors

What new products or services have you introduced this year that have achieved success?

Products and Services

• Offering more cremation packages
• Put in a viewing room for cremations
• Using cremation pallbearers for burials in cemetery
• Using “Life Stories” to celebrate a life
• Pet burials and cremation
• Green Burial Packages
• Did a market study of my community
• Graphic designed brochures
• In house tributes and slide shows
• On line videos
• Put in a new accounting system
• Kiosk in selection room to show more caskets
• Changed showroom to Chinese caskets
• Webcasting
• Memory portraits
• Aftercare services and using a survey to get feedback on services
• Personalized head panels
• Using a sales tracking system
• Paying incentives to arrangers
• Added a reception center
• Added a new collection program with good results