As summer schedules disrupt normal routines, it is a good time to schedule your mid-year funeral business check-up. Just as you regularly assess your physical health, you need to assess the health of your business. Set aside time this month to take a look over the first half of the year and make plans for the second half.
What about those New Year’s Resolutions?
If you set goals at the beginning of the year, now is the time to assess your progress. Are you on track with what you wanted to accomplish? If so, continue towards completing the goal or layer on a few new goals for the second half of the year. If you forgot about your resolutions before February started, it’s better to start back now than put it off another six months.
When assessing your progress, keep in mind the external factors that can positively or negatively affect your success. For example, let’s say your goal included attracting more business through a new marketing plan. When measuring its effectiveness, consider the death rate in your market. If you can compare the death rate and your increase in business year over year, you will have a better idea of your success. If you served more families at need and the death rate was lower in 2016 than in 2015, you can likely contribute that success to your marketing plan.
While assessing your business, evaluate what your competition is doing and what affects it may have on your business. Their plans will likely impact how you achieve your goals.
Write down what business goals you still plan to complete in 2016. Create an action plan to carry out the remainder of the year. If necessary, include milestones for each month and keep them visible. Remember to involve your staff in the plans. When they understand the goal and vision for the business, they can better help the funeral home succeed.
While you are attentive to customer satisfaction on a daily basis, your mid-year check-up is a good time to review feedback from the first half of the year. If you are not already, search for online reviews on Google, Yahoo and Bing. The comments will provide candid feedback on what your funeral home is doing well and what might need to improve.
Keep track of verbal compliments and feedback as well. If you are consistently receiving compliments about one of your employees, look for ways to use their strengths to continually improve customer satisfaction.
The mid-year point is a good time to review your trust accounts. Make sure your documents are organized and compliant with state and federal laws. Schedule time to talk with your trust administrator and investment manager. Are you satisfied with your asset allocation? Do you have a clear strategy for growth? If you are not satisfied, some banks will review your portfolio and give a second opinion for free.
Take a look at your financials. Make sure your books are current and accurate. Do you have outstanding receivables? If so, take the time to reach out to families who still owe for services. If you notice a recurring issue with collecting receivables, work with your team to set up new policies and goals to receive payments on time.
Review your funeral home’s debt and make sure your loan terms are competitive. You may be able to improve cash flow by refinancing current debt. Freeing up cash flow now will prepare you for future growth or any drops in death rate.
The mid-year point is also a good time to review your estimated taxes. Are you revenues on track with your initial projections? If not, make sure you prepare for end of year tax bills by making adjustments now. Consult your accountant before making any changes.
Examining the Vital Signs
During your mid-year review, it is important to take a look at a few key business metrics. Just as a physician checks your vital signs, you must do the same for you funeral business.
If possible, we recommend assessing these metrics year-over-year to look for trends and improvement. If you do not have these metrics from 2015, let 2016 be your benchmark year.
Cost of Goods Sold (COGS)
COGS is the funeral home’s cost for products that are later sold such as inventory purchases, caskets and urns. When looking at our portfolio of funeral home clients, we typically see COGS as a percentage of revenue around 21%. When looking at this metric, the lower the percentage is, the more profitable the business. We often see areas with higher cremation rates with a lower percentage of COGS because the cost of urns and memorialization products typically less than caskets.
By comparing your cost of goods to the average, you can assess whether you need to make improvements for the next half of the year. Product presentation may be a simple way to for you to improve COGS. Can you rearrange your selection room to encourage purchases of particular products? Do families quickly and easily the quality difference in a $2,000 casket versus an $8,000 casket? Proper presentation and product knowledge when helping families choose a product can have a great impact of COGS.
COGS can also be improved by adjusting your pricing. If you have not raised your prices in the past few years, assess the market and your competition to see if a price increase can improve the financial health of your business. On the other hand, do you have products that are not selling? It may be time to reduce the price to move those products and replace them with more attractive options.
Employee engagement impacts several aspects of the business from customer service to your bottom line. During June, meet with your employees one-on-one to discuss their performance and elicit feedback on ways to improve the funeral home.
Increasing employee engagement can in turn increase customer satisfaction. When your employees believe in the mission and values of your funeral home, it will translate into better experiences for families.
When evaluating your employees, measure the average time it takes to complete various functions. For example, how long is the average call? How much time is spent embalming? How long does it take to write an obituary or plan the service? If necessary, look for ways to increase efficiency among your employees.
On a national average, we see wages in our funeral home portfolio at 18% of revenue. Depending on the size of the funeral home and cremation/traditional service mix, this percentage can vary. Typically, the lower the percentage is, the more efficient the staff.
Once you have met with your team and compared your wages to the average, determine if you need to make adjustments. Is one employee more efficient at a particular task than another? Do you need to hire another employee to keep up with demand and prevent burnout? Should you have more contract employees and less full time employees? Your employees ultimately represent your funeral home, so be sure to spend adequate time assessing what is going well and how employee engage in their day to day roles.
Net Operating Margin (NOM)
When performing your mid-year check-up, you need to assess your net operating margin. As a measurement of profitability, NOM is an indicator of how well a business controls its costs. To find NOM, divide Net Operating Income (NOI) by revenue. For high performing funeral homes, we typically see NOM around 26%-29%.
If you notice your NOM is weak, consider ways to increase sales and decrease expenses. Are there variable expenses that can be better controlled? Do you need to implement a marketing campaign to increase business? Do you need to adjust your pricing?
Debt Service Coverage Ratio (DSCR)
The fourth metric to consider in your mid-year check-up is debt service coverage ratio. Cash available to service debt (NOI) divided by the total debt service for all interest, principal, and lease payments (NOI/total debt service).
For example, a DSCR of 1.50 indicates there is 50% more income than is required to repay all debt, or $1.50 available to pay each $1.00 of debt. Conversely, a DSCR of 0.90 would indicate there are only 90 cents available to pay each $1.00 of debt.
As a lender, we like to see a DSCR at a minimum of 1.25 to ensure the funeral home has enough cash to cover the debt payments and cover the owner’s personal living expenses. When examining Live Oak funeral home portfolio, we see a national average of DSCR at 2.02. The higher the DSCR number is, the more profitable the funeral home.
By comparing your metrics to the averages, you can assess and plan to the remainder of 2016. As you begin to track these metrics month after month, year after year, you will notice trends and be better prepared for the future.