Five Tips for Crafting the Perfect Budget

By Jason Gazaille, Vice President of Finance

Let’s imagine for a moment that you are a seasoned pilot. Your staff members are your passengers, and it’s your duty to deliver them to their destination safely. You take your place in the pilot’s chair and harness yourself in, only to find you have a blank instrument panel and no communication tools! There are no gauges that show your route, airspeed, altitude, or fuel level. No tools to show if your landing gear is down or the position of your flaps. No air traffic controller to help guide you to your destination.

In the above scenario, I would argue that most of you wouldn’t feel comfortable piloting the plane or carrying passengers. Could you get the plane off the ground? As a seasoned pilot, it’s likely. However, would you be able to navigate the course and land the plane safely at the desired destination? Maybe, but the chance is low.

So, what does this have to do with the funeral industry?

The pilot’s instrument panel and navigational tools are all necessary to ensure a successful flight and the safety of the passengers, and believe it or not, similar tools are necessary for a funeral home. As an owner, your job is to guide your business and employees to success, and you can’t do so without the proper tools.

One of these tools that is often overlooked – but extremely necessary – is a proper budget. An improper budget is like missing navigational panel; you don’t want your funeral home to be without one. After talking to hundreds of funeral home owners who (9 times out of 10) tell me they don’t have a budget, I thought it was time to share why a budget is so essential.

 

Budgeting: A 30,000-Foot View

 

Every funeral home should have a strong strategic plan that covers its mission, business plan, marketing strategy, proforma, and budget, to name a few. The budget is one essential piece of that strategic plan.

For a funeral home, a budget should not simply project income and expenses. An effective budget:

  • Provides a roadmap for the future
  • Is aligned with the overall strategic plan of the funeral home
  • Highlights strengths and exposes improvements
  • Is updated and analyzed on a routine basis
  • Is fluid and versatile

The creation of a budget can seem overwhelming, daunting, or at times, even impossible, but I’d like to share five tips you can use when creating (or improving!) your funeral home’s budget.

 

Tip #1:  Utilize Technology

 

Historically, funeral professionals have been slow to adopt and incorporate technology in their day-to-day operations. You might be surprised by the number of funeral home owners I speak to who are still utilizing pen and paper to run their business!

To build an effective budget, you’ll need as close to real-time data as you can possibly get. The use of a cloud-based case management system greatly increases the efficiency of data access in a funeral home.    The data contained in these systems can help you identify and quantify important metrics, including monthly revenue and expense trends, cremation rate fluctuations, peak vs. slow times, and more. This technology is also crucial to help you efficiently update your budget on a monthly basis.

 

Tip #2: Establish a Quality Accounting Process

 

Most funeral homes I speak with rarely produce financial statements (we’re talking once or twice per year)! Their financial decision-making process usually involves their current bank balance or their last tax return. If this sounds like you, creating and maintaining a budget will be challenging, but not impossible.

Much like having adequate technology identified in the first tip, establishing a quality accounting process is crucial in many ways. Quality accounting:

  • Is consistently up to date
  • Contains monthly financial reports
  • Has an organized chart of accounts
  • Increases visibility in accounts receivable and clarity in revenue lines

If you are already accomplishing the above, then congratulations to you! If it all sounds impossible, I can assure you, it isn’t with the right help. Like pilots with air traffic controllers, some funeral homes choose to enlist the help of funeral home accounting companies to assist with their bookkeeping processes and to deliver financials on a consistent basis.

The real accounting magic happens when you combine tips 1 and 2. Then, you have reporting that shows the performance metrics of your funeral home (in funeral home language) and how those metrics affect profitability.

 

Tip #3:  Analyze Industry and Funeral Home Trends

 

As funeral professionals, you know the industry has experienced enormous change in the past decade. Cremation rates have risen exponentially. You may interact with your families more digitally or no longer market your funeral home in the yellow pages.

Keeping these industry changes in the front of your mind is extremely important to your budgeting process. For example, if you are seeing a 5% increase in cremations year over year, you should be budgeting for that increase in future months and years.

Estimating how many dollars you’re expected to spend to operate your facility is also important. To identify your funeral home financial trends, start by categorizing expenses into main categories, such as auto expenses, cost of goods sold, and administrative expenses, and show those categories as a percentage of revenue. Those percentages should then be compared to industry standards to identify any abnormalities that might exist.

 

Tip #4:  Use Historical Data as a Benchmark

 

For funeral homes that have been in business a while, leveraging historical data is a great jumping off point when creating a budget. This will allow you to analyze your past performance and expose any improvements that can be made either immediately or over time.

For newer funeral homes, you won’t have historical data to guide you on your budget creation journey, but that doesn’t mean creating a budget is impossible! Instead, you’ll need to focus on building a budget based on a proforma (projections).

 

Tip #5:  Be Consistent (Or Partner with Someone Who Is!)

 

Let’s be honest, staying on top of your strategic plan, specifically your budget, can be challenging. But just like everything else in life, consistency is key! If you are not regularly maintaining and updating your budget, it will lose its relevance and effectiveness. That said, if budgeting is an area of weakness or inconsistency, there’s no harm in finding the right partner who can guide you through the process and maintain that consistency!

You likely entered your career thinking, “I can’t wait to do what I love: serve families,” not “I can’t wait to budget for my funeral home!” However, now is time to use your navigational tools and pilot your funeral home to success. That way, you can avoid having to deploy your parachute, and instead, apply these five tips to ensure a healthier business, less financial stress, and – quite possibly – an increase in revenue!

 

 

About the Author: Jason Gazaille currently serves as the Vice President of Finance for Funeral Directors Life Insurance Company (FDLIC) and Directors Business Solutions, a division of FDLIC that offers accounting services to funeral homes. With years of experience in the banking and funeral industries, Jason understands funeral home analytics and how funeral homes should be valued in the current climate.

Managing Finances with Ease

A Case Study with Marlan Gary Funeral Home, The Chapel of Peace

 

After a “cookie cutter” experience with a previous accounting firm, Marlan Gary sought a more customized partnership between a company and his funeral home. Enter Directors Business Solutions (DBS), a division of Funeral Directors Life. Not only did DBS provide the detailed reporting Marlan needed to run his business, but the team members presented themselves as true partners with a goal to streamline Marlan Gary Funeral Home’s accounting and payroll. One year later, Marlan reflects on how DBS “became more than a bookkeeper.”

 

What was your experience with accounting before Directors Business Solutions, and how did you hear about DBS?

When I first opened my funeral home, one of the biggest business pitfalls I made for myself was not hiring a full-time accountant to help me with the books. I learned from that mistake, and prior to DBS, I signed up with a well-known accounting service in the funeral industry. They were good at what they did, but I got the impression they were a bit “cookie cutter” in the sense that I felt like they were having the same conversations with all their funeral homes. Just like in funeral service, no two families are the same; no two funeral homes are the same either.

Over the years, I’ve built a relationship with Passare, which led me to learn more about DBS. I’m very pleased with the accounting services provided by DBS.

 

At what point did you realize that switching to DBS was the right move for your business?

I knew switching to DBS was the right move for my business when they took accounting a step further than simply recording numbers. The team actually provided suggestions on where we could increase revenue. They became more than a bookkeeper.

 

That’s great to hear! As you know, DBS integrates with Passare’s case management platform. How does the integration help streamline your business?

The DBS and Passare integration makes reporting simple. I plug information into Passare, and it’s automatically sent to DBS. I don’t have to send anything or turn in receipts or deposit slips. With the integration with Passare, DBS can see revenue generated, caskets sold, the cremation rate, the amount of goods and services, and more. It’s convenient.

“They became more than a bookkeeper.”

How do you feel about the reports and insights that you receive about your business?

I like the monthly reports I receive from DBS. I’m not a “numbers person” at all, but the reports help me a whole lot as a funeral home owner. I have more insight into what’s going on at the funeral home on a daily and monthly basis. For example, we make daily purchases, but with the detailed numbers from the reports, I see how integrated everything is with each other. The report tells a story. I wasn’t getting that level of reporting from the previous accounting service I used.

I used to write checks without taking the time to see how much I was spending with a single vendor or in a certain area. The great thing about DBS is we have monthly meetings to go over the report and financials so that I can adjust spending, if needed. I don’t have to wait for a quarterly or biannual meeting like before to go over the numbers and try to readjust things. DBS makes it simple.

“The DBS and Passare integration makes reporting simple.”

Can you describe the ongoing relationship you have with DBS and how it’s different from your previous experience?

Well, I would never want to talk to my previous accounting company. That’s not the same for DBS. I trust DBS to handle the accounting, payroll, and taxes for my funeral home. Any time I have a question about anything, I can reach out to my designated point person or anyone on the team. They’re all very easy to contact, and I have their cell phone numbers, email addresses, and, of course, the office number. Whenever I need to reach someone, it’s never an issue.

The number, the myth, the legend: EBITDA

You’ve heard the term.  You know it’s important.  You may even know what it stands for (or maybe not)…

EBITDA

No, you didn’t sneeze…  You just pronounced EBITDA.  Did you say it correctly?  Who knows!

All joking aside, if you have ever bought a funeral home, refinanced your funeral home mortgage, sold your funeral home, or analyzed funeral home financials, you have most likely heard the term.  EBITDA’s main function is to determine how much cash your firm, or the firm you are looking to buy, has available after all operating expenses have been paid.

Some consulting companies will tell you that increasing your EBITDA is the easiest way to increase the value of your funeral home, but is it the most important analytic?

EBITDA is short for:

Earnings before Interest, Taxes, Depreciation, and Amortization

What does that mean?  In layman’s terms, it’s your net income (found on your profit and loss statement) with interest expense, federal income taxes, depreciation, and amortization added back into the net income figure.  These items can be added back because they are non-cash items or are not considered a component of operating cash flow.

Why is it important?  A strong EBITDA margin is important for funeral homes because for years and years (and still to this day), the most common way of determining the value of a funeral home has been to use a multiple of EBITDA.  Today, the most common multiples applied to EBITDA for funeral home values are five to eight times.

For purposes of succession planning, EBITDA is important, but even more important are the factors that directly impact EBITDA.  To increase the value of your operation, you must identify the variables that are directly affecting the financial performance of your business and minimize the impact of them.

As part of DBS’s valuation services, we will show you how you stack up against industry averages and identify areas that are impacting the value of your business.

Balances and budgeting

From time to time, we have clients that visit the home office.  When this happens, I like to carve out a little time to show them what we are working on.  A few of the questions I like to ask during our time together are:

  • Does your accountant make you a priority?
  • Is your accountant an expert in the funeral industry?
  • Do you have a budget?

In most cases, we could spend hours answering and discussing the questions above.  Many funeral home owners are frustrated with their current accounting processes, which aren’t automated and are often time-consuming, or they feel that their accountants aren’t as easily accessible as they should be. It is important that you feel confident in all aspects of your business, including accounting.

Roughly 75% of the funeral home owners I speak to DO NOT have a budget.  About 50% of the funeral home owners that I talk to don’t have their cash balance reconciled daily. What you have to spend is not the balance your bank account reflects.

It all starts with the plan. Directors Business Solutions has these tools built into some of our packages, and we would love to talk to you about how your firm could take advantage of these tools!

Jason Gazaille
Directors Business Solutions

A Little Background

Directors Business Solutions is Funeral Directors Life (FD)’s latest business venture.  You see, time brings experience.  Experience brings expertise.  In 2012, the FD executive team realized that the funeral industry is changing, and fast. We asked, “What challenges do current funeral home owners face, and what role can we play in answering those challenges?”

In addition to being the manager of DBS, I am also the Director of Finance for Funeral Directors Life and am responsible for nearly $100M in mortgage loans.  When I say mortgage loans, I mean funeral home mortgage loans. Our entire loan portfolio is comprised of loans to funeral homes.

Like most bank loans, we have a few covenants that we require our borrowers to comply with, and one of these is the submittal of yearly financials.  It became obvious to us that many funeral home owners weren’t considered a priority by their CPAs, who were more concerned with making other deadlines.  We had several clients who were forced to take a tax return extension for this reason.

Funeral directors don’t get into this industry because they want to bookkeep for a living. Funeral directors choose this industry because they have a deep passion for serving families who face extremely difficult situations. Our goal is to give you, the funeral director, more time to serve families by taking the worry and monotony out of accounting.

Jason Gazaille
Directors Business Solutions