Understand the numbers that affect your operation’s fiscal health
Written by ICCFA
Debt service coverage explains how much money you have to cover every dollar of debt. The national average here is 2.02 times. What that means is you have $2.02 to pay every dollar of debt you have in your business.
I can tell you, as a financial institution, I’m looking for 1.25 for every dollar of debt. So this is a nice average—two times is really good. The higher the number, the more profitable that business is.
Let’s look at this example:
We have Funeral Home One with 140 calls and a 73 percent cremation rate, and we have Funeral Home Two with 800 calls and a similar cremation rate.
Funeral Home Two is around six times the call volume of Funeral Home One. However, Funeral Home Two’s revenues are about seven times the revenues of Funeral Home One, therefore the revenue per call of Funeral Home Two is greater.
What does that mean for Funeral Home One? Well, if you look at Funeral Home One’s cost of goods sold, you notice that it’s about 20 percent higher than the state average. That’s one thing to look at.
Number two, look at the debt service coverage. Remember when we said that as a banker, I want 1.25 as a minimum for you to be able to acquire, expand, add debt? It’s 0.95. That means that Funeral Home One has 95 cents to cover every dollar of debt they have.
When you look at it that way, that’s a pretty important metric to know about your business—especially if you’re thinking about adding debt.
What can we do to improve this? One, the revenue per funeral call from Funeral Home One is less than the revenue per funeral call from Funeral Home Two, so there might need to be an adjustment of price points.
Maybe you evaluate things. “Am I charging enough? Is my service charge in line with my competition? Or am I trying to gain market share by dropping my prices, therefore hurting my cash flow?”
Maybe you consider changes. “I’m going to increase my price, but I’m going to justify that by adding more experience for the customer.” Maybe this starts driving the direction of your business.
Be aware of what cremation is doing to your company’s revenues
The first thing I do when I look at financials is I look at the trend of revenue over the past four to five years. Are revenues going down as call volume goes up? Obviously that’s a sign of cremation increase. To me, that sparks the question, what are you doing to increase the service charge for cremation, which is obviously impacting your revenue.
And I can’t tell you how many times I’ve had a funeral home owner say, “What do you mean? I’ve increased my calls by 15 this year.”
Yes, but half of those were cremations, and it caused your revenue trend to drop. Be aware of what your profession’s trends are doing to your revenue model.
A webinar recording of this presentation is available here.