February 18, 2014Jake Johnson was interviewed by the Funeral Business Advisor regarding budgeting and cost control. 1. First, what are some of the fixed and variable costs directors have? Assuming Directors means owners, here are my thoughts: Payroll: Unfortunate as it may be in the payroll arena those costs such as health benefits, 401K, employee group life insurance, clothing (suits, dry-cleaning), employee recognition parties, Christmas parties, training, are all of, course, variable BUT in my opinion should be considered fixed when wanting to attract good help at a funeral home, but may not be feasible for all to do. What is interesting is that utilizing outside contractors can introduce a variable expense based on only utilizing those contractors when the need arises (removal services, embalming services, and even directing funerals), however making sure they represent your firm well is important. We typically see the payroll expense section as roughly 25 to 30% of a funeral home's net sales (sales without cash advance income) after removing owner related items and one time anomalies. Facility: At my first thought, those expenses related to facility are there because of the facility, not so much because of how much you use it. Therefore, most of these expenses will be fixed with exception to maybe some slight upticks and down-ticks to electric and gas. Fixed facility expenses would be R&M, Rent, Insurance, Telephone, etc... We typically see the facility expense section as roughly 8 to 10% of a funeral homes net sales (sales without cash advance income) after removing owner related items and one time anomalies as well as removing rent which can vary depending on the area and can typically be rent associated with paying the owner him or herself. Auto: Auto expense is usually pretty fixed with exception to some potentially variable expenses such as removal expense that can sometimes be located here rather than in payroll as well as the limo and coach rental if done so at a firm. Fixed auto expenses would include Gas, Oil, Repairs, Insurance, Licenses, etc... We typically see the auto expense section as roughly 2.4 to 4% of a funeral homes net sales (sales without cash advance income) Advertising: It would be easy to say this is a variable expense, however, if budgeted correctly this should really remain as a fixed expense. What I mean is that usually this is the first expense to be reduced during tough times and really should be the last. In advertising, the percentage of net sales vary, however, typically we see it anywhere between 2% to 6% of net sales after removing owner related items and one time anomalies. Other Funeral Costs/Other Operating G&A: The is the catch all bucket that doesn't fall into the other categories, Bad Debts, Prep Supplies due, Subscriptions, Office Supplies, Meals, Accountant and Legal Expenses, Bank Fees. Most of these items are fixed with the exception of bad debts of, course, as they may rise and fall with sales volume, as well as embalming and prep related supplies that should rise and fall with volume. 2. What are ways to control these costs? One of the BEST ways to control any costs at a funeral home is budgeting! We can't stress enough how businesses that do budget typically do better than businesses that do not. If that is that case, why doesn't everybody budget? By determining what you believe your expenses will be in a year, you can monitor your spending and determine more easily the reason why you are over or under your spend. Budget, it is a critical planning tool that helps focus on the fixed and variable nature of the business so that your outcome at the end of the year is what you want it to be! Sure you can't control case volume per se, but you can control how you operate under those conditions if you do adequate planning. I think another measure for controlling overhead is proper scheduling on services. We all want to be helpful, but sometimes we do our business a disservice when we accommodate so far as to schedule services over one another. This is such an evident occurrence when looking at literally hundreds of funeral home P&L's. Payroll varies and it seems that every owner feels like they must operate at the levels they have. If you take a fresh look and discuss with others, I think you would find as an owner that there are different ways of scheduling that will not affect customer service and maximize the use of the personnel during the day (and therefore the dollars spent). Doing an efficiency study and seamless service survey of your staff and your daily process is a great way to study just how efficient you use your staff. As it relates to Advertising, I see some firms that are spending the appropriate amount, but not on the right things. I believe some firms can get more bang for their buck if they are spending their marketing dollars in the appropriate channels for advertising. Depending on the market, those channels are different. The interesting thing though is that you can choose to keep those extra dollars saved by exposing the firm more in the market for less dollars OR you can take those extra dollars and gain even more exposure through additional channels. I think this is one of the more important areas during annual budgeting for sure!!! 3. What are ways to decrease and/or eliminate certain costs? Planning and discussing with your pears or hiring someone is the best way. A budget needs to be done first though. The high level steps to budgeting are: Taking at least three years of P&L's and Balance sheets and recasting them side by side from earliest year to most recent. Also schedule in the year to date P&L and annualize it for some perspective on the recent year. Then take the last 10 years' case mix and schedule that out to determine the most likely outcome year in and year out. It is important though that you categorize your expenses into meaningful funeral business related categories. Those commonly used categories are revenue (without case advances), costs of good (costs associated with the merchandise sold...casket, vault, urn, etc...), payroll, facility, auto, and other G&A. If you have the benchmarks associated with these categories you are on your way to knowing where you stand AND if you can do anything about it. Quite honestly, if you don't like the end result, then it may be time to consider what your exit strategy is...If you like the result or are not ready to give up yet, then it's time to drill in to each category and find out its need in your day to day operations. You need to look outside the box and really challenge yourself. This is an exhausting process that you can find outside help on but it's worth every penny. 4. Are there innovative solutions to costs incurred in the back office? On the retail end? Efficiency comes in many ways, however, I believe utilizing technology is one of them. Utilizing management software for easy storage of your files (and easy location of them), I believe you can get a lot of bang for your buck in advertising by researching and using internet tools now days as well, such as Facebook, Linked In, Twitter, Emailing services such as constant contact, websites, etc... are inexpensive and go A LONG way. 5. What are some ways a new director can start off on the right foot? New directors need to glean some level of understanding of financial statement review. This is very important as a business owner, yet some still don't understand how to get the most from their financial records and statements. I think joining an association such as NFDA, ICCFA, SIFH (selected independent funeral homes), and some of the various other associations out there is important as they are filled with groups that have discussions, email blogs, and various other communication channels for sharing. Also enlisting the help of any of the various consultants out in the industry can help pick up the pace of accomplishing the improvements desired. I always say, would you rather work ON your business or IN your business. Meaning FD owners are best served being out in the community growing their goodwill and meeting as many people as they can. 6. What other advice might you give to a director who is struggling with overwhelming costs? Budget, budget, budget. You need to determine what your regular costs are in a normal year and decide if you like the answer. If you don't, then it is time to plan now and see what can be done, otherwise....let the struggling continue!!