There’s nothing more rewarding than freeing up cashflow or growing your business through the acquisition of another location. The key is how you do this without putting yourself in a worse spot than you started.
Here’s what you need to know:
What are You Used To?
Most funeral business ownerships have been around for multiple generations. Because of this, the current loans they have are typically smaller compared to what a new acquirer would be willing to take on in a new business. This means as private owners, we are used to having more cashflow to do what we want to do. When we consider refinancing or getting a loan for expansion, this is creating more debt and less cashflow than we might be used to. It’s critical that we understand what is the appropriate amount of free cashflow needed to run our business successfully.
Create a Budget
Based on your loan amount, you’ll need to create a budget. This will help to ensure that you don’t overextend your finances when revenue is difficult to predict. Creating a budget requires looking back at prior years and predicting the future. When doing this analysis, you need to consider things like payroll, facility expense, advertising, automotive, cost of goods sold, etc. If you want to be able to maximize your loan, you will need to be fair to the business (not yourself) on what the level of expenses should be and what those percentages are of net sales in your budget. You will need to know the appropriate benchmarks for these sections so you are fair to yourself and the business and maximizing cashflow which in turn maximizes the amount of loan you may receive. In summary, a correct budget will maximize the loan and ensure the success in paying for it, and a bad budget will do the opposite.
How Much Can I Afford?
As we mentioned, a budget is critical in determining how much you can afford. The end result of your budget should be the estimated free cash available (EBITDA). Now it’s time to use an industry formula for understanding how much debt you can have on that cashflow. A commonly used formula is the debt services coverage ratio (fixed charge coverage ratio). If you have $135,000 in cashflow in your budget, a bank would typically feel that you could afford $100,000 in annual debt payments. This example translates into a debt service coverage ratio of 1.35. Essentially, this means this is all that you can afford in debt payments on an annual basis. The fun part, where outside experts can help, is how you can take the $100,000 and now maximize the amount of loan you get from it. It’s now time to look at the other parts of lending terms, such as the amortization of the loan and the interest rate. Those 2 components of the loan, when negotiated correctly with the free cash available, can achieve higher loan amounts.
Keep an Eye on Your Performance
Once you have the loan and you start making payments, it’s now more critical than ever that you follow a budget and have accurate and timely financial statements. The success of this will depend on having industry specific financial reporting from accounting firms like Johnson Consulting Group. You will also then want to have monthly cashflow projection reviews to be sure your free cash is at the right levels (2 to 3 months of operating expenses).
Add to Your Team
Securing the right loan can be tricky. Finding the right consultant to help you with this is easy. Johnson Consulting Group’s team has secured loans of all sizes for funeral business owners across the US. Depending on your needs and your size of business, the lender that you go to may be different.
- How much real estate do you have?….
- Are you a new business?….
- Are you buying out a partner?….
- Are you refinancing?….
All of these matter and the team at Johnson Consulting Group can help find the lender that’s right for you.