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?

Funeral Home Financing 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.