The Director – December 2009
by Dale Espich (JCG Field Representative)
A funeral home owner needs to know much more than just “how we’re doing” at the end of the year.
In my 40-plus years of working with funeral directors as a management consultant, I have seen just about every description and method of “Accounting” used to try to keep track of a firm’s income, expenses and profit/loss. But accounting should be more than that. It should accomplish a much larger goal for the funeral business owner for it to be of ultimate value to him or her.
Many – maybe even most – funeral home owners should say simply that the value of accounting is “to see how we’re doing,” both as the year goes along and then to see how the year ended – up or down, with profit or with loss. Another way of stating this use of accounting 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 to a business owner is to use accounting to accurately plan and balance income and expenses to ensure a satisfactory profit year after year.
One of the great benefits of an accurate history, of course, is that we can learn from it. So what do you learn about your funeral business by an examination of your financials? And even more importantly, what do you do with your financials to utilize them as planning tools for your future business?
Here are some key questions to ask yourself:
- Is the information you get from your accounting source such that it provides all of 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 upcoming year to ensure that your business will be adequately profitable?
- Does your accountant understand your funeral business in such a way as 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?
It is not the intent of this article to provide the answers to these questions. But this is where I believe many funeral home owners miss out on very vital part of the accounting process. A firm with an accounting system that is not designed specifically for a funeral home operation, with the proper chart of accounts and experienced staff that can interpret the data and make insightful recommendations to strengthen the financials, is missing a wealth of opportunity. 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 the stakeholders in your business.
The profit climate in funeral service might seem to be rapidly declining; after all, every June for the past 29 years, the decline in funeral profit margins has been announced in glaring headlines. In 1980, the announced margins were about 14% and have come down steadily to less than 6% as of June 2009.
But these announced margins are not the same margins I have seen during the past 29 years of working with firms that have had funeral planning information properly presented by their accountants. Most of the well managed firms with whom I am familiar have consistently enjoyed profit margins (as a percentage of revenue) of at least 10% to 15% and above.
So, yes, good-clean-accurate accounting is important in providing information needed for tax preparation and also for establishing a line of credit with a banker or when there’s a need for financing. But the most basic use – the absolutely most important use – is for planning. In an accurate and timely manner, the right combination of income and expenses to provide adequate profits year in and year out. 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 what you need. Do it now! Your accountant must have the knowledge and expertise to provide you with the guidance to achieve profitability.
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 following question: “How many funeral home owners in this audience have calculated their cost of conducting a funeral?” I cannot remember ever getting a show of hands of more than 20% of the audience.
So the rhetorical questions follow: “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 invoices? This profession is still about service, is it not?”
When you get your financials as the year progresses, you must not only examine what has already happened but get the answer to why your bottom line is up or down. For 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 – that is the obvious. Does your statement identify exactly how much profit comes from those additional 15 families? Does it also measure for you whether your service charge is recovering the planned amount? If your casket average is where you planned, and if not, what is the dollar effect there? Same with your cremation average and your vault average, etc.
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 realizes that part of the deserved profit is going up the chimney, never to be seen again.
Also, 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, leaving you operating in the dark about what is happening top and bottom line, receivables and cash flow. You can’t afford to operate one single day with your only financial knowledge being the balance in your checkbook.
Finally, does the accountant or advisor you presently retain understand the dynamics of funeral service planning backward and forward? With his or her help, do you also have a pricing and expense plan in place when your new year begins? If you get management advice and planning four or five months after the year starts, what good is it?
Now I know the question you’re probably asking: How in the world can I plan profit when my 200-call business has 180 calls one year and 220 another? Those who are experts in the “planning for funeral profits” area know and understand the answer and are more than willing to share it.
Today, most of us use a global positioning system to help guide us as we travel in unfamiliar territory. With a GPS, you know exactly where you are. Moreover, you know exactly where and when to turn a corner and whether to turn left or right.
An example should make things crystal clear. There are two airlines. Airline Number One takes off and “heads west.” Airline Number Two has a flight plan and navigation systems that tell the pilots in advance exactly where and at what altitude they need to be the entire 2,500 miles of the trip. Which of the two airlines would you select when going from New York to California?
The answer is obvious. There’s no guesswork with Airline Number Two.
So why should you guess about the profits your pricing will produce? Would you not want GPS accuracy in determining those profits? After all, it is primarily the profitability of your business that determines the value of your business when you are ready to sell it or pass it along to a family member.
It’s your bottom line and quality of life we’re talking about. The value of your business is ultimately determined by the way you manage. So ask yourself: Am I running my business with precision or am I just winging it? The answer makes all the difference in the world.