There are those on the other end of the spectrum, who want to plan ahead, but have no idea where to start. Maybe you’ve tried, but you didn’t have enough information, or your numbers weren’t adding up in the end.
Both groups, whether you see the value or not, need to determine what your normal operating expenses are in a normal year. Do you like the answer? Wouldn’t you like to see some improvement?
All funeral home and cemetery business owners, no matter the size, will benefit greatly from doing an annual operating budget. Let’s first determine why it’s necessary.
Why Even Have a Budget?
In our professional experience, businesses that invest in due diligence and develop a budget ahead of time, are more successful than those that don’t. Although you can’t predict everything that is going to happen in a year, it can help you determine what your next move will be, and where to spend your dollars appropriately when certain unforeseen situations arise.
By determining what 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 expense budget. An annual operating budget is a tool to forecast income and expenditures (and thereby profitability) to provide a guide for future decision-making. It is a plan to reduce and/or keep a business out of debt, something you can consistently reference throughout the year to keep your business expenses in check and hold yourself accountable in areas where you are overspending. It’s all about doing your research, making sure you have relevant information and being certain no details are left out in order to make accurate predictions.
Certainly, this process is easier said than done, and there are many challenges that you can potentially run into while preparing your annual budget. Here are some examples of common mistakes made by funeral business owners and practical steps you can take to avoid them.
Common Issues with Budget Preparation
1. Ignoring Marketplace Trends
When developing an annual operational budget, it’s important to understand the state of your market conditions. What is the mix of your business (percentage of cremation and burial families served)? This requires owners to educate themselves and do a little research. When you don’t do research, you only capture your own data, when what is happening in the marketplace could be entirely different.
Taking into consideration the trends in your marketplace will help you more accurately forecast where you need to be spending your money. There are numerous resources available to determine your market trends, such as state vital statistic reports, market share tracking and Cremation Association of North America regional cremation rate reports.
2. Unrealistic Growth Projections
Another crucial mistake made while preparing a budget is not setting a realistic growth percentage. To avoid this, be sure to ask yourself these two questions:
• Am I taking into consideration the past five years regarding my call volume? Be sure you aren’t just taking into consideration the last year of your call volume. Gathering the past five years allows you to accurately evaluate existing trends.
• Am I taking into consideration any new competitors that impact my market share? When business owners neglect these two key factors, they almost always overestimate or significantly underestimate their annual revenue.
3. Excluding Key Staff Members
The best business leaders involve key team members in decision-making processes. In your funeral business, nothing is more valuable than your dedicated staff; after all, they are the ones who are seeing the trends play out day after day. When you only include yourself in the budgeting process, it results in a narrow perspective or essentially a budget that has been developed in a vacuum without the collaboration of your team.
Carefully handpick a team that you know will weigh in with valuable insights and will challenge you. Reaching out to third-party experts for guidance and coaching to facilitate this conversation will also result in the best possible outcome for planning your annual budget.
How to Get Started
Now that you are aware of some common mistakes made and how to avoid them, it’s time to start outlining your annual budget. When organizing and projecting gross revenue, make sure you account for historical performance and market conditions. Don’t just consider the past successful year you’ve had, because you may overstate the projected volume and corresponding revenues. Remember, changes in the competitive landscape will impact your market share, as well as burial and cremation trends – so it’s important to do your research.
Keeping all of that in mind, follow these simple steps to start your annual budget.
1. Take three years of profit and loss and balance sheets and place them next to each other in chronological order.
2. Schedule in the year-to-date profit and loss and annualize it for some perspective on the recent year.
3. Take the last five years’ case mix and schedule out to determine the most likely outcome for the upcoming year.
4. Focus on individual categories and organize all of your expenses into funeral/cemetery related business categories such as:
- Revenue (without cash advances)
- Costs of goods (costs associated with the merchandise sold … casket, vault, urn, all vendor agreements, etc.)
g. Any other general and administrative expenses
Helpful tip: Compare your expense category percentage of revenue to industry benchmarks to see where you stand. This process is all about challenging yourself to improve your business. Although it’s a tedious and long process, it’s worth the time and effort. When it becomes overwhelming, it might be time to step outside and look for other resources to assist in the planning process.