Business

Annual budgeting. . .bringing in the revenue

Yesterday we started the talk of annual budgeting for a funeral home by looking at what are the expectations for overhead, profit, and a savings plan in that budget.  You can see yesterday’s article here.  Today, we will try to explain how we set the revenue parameters to make sure that we have a great chance to cover that budget — even if we under perform on the number of services we will do.

To understand how I set our revenue numbers back in the day when I managed the funeral business, one has to look at the funeral business in its unique character.  Most businesses set their revenue numbers for upcoming years, at least in some part,  with an idea of where the economy is moving at the time.  For instance, luxury purchases like pleasure boats and Hawaii vacations grow in sales when the economy is humming along and drop in sales if the economy suffers.

It is my belief that to understand funeral home business dynamics, one needs to understand the law of large numbers more so that the relative economy.  I say that because funeral service is not a “choice” purchase and the relative number of deaths will not deviate much from the norm in an area where there is enough numbers in demographics to fall under the law of large numbers.  Finally, families tend to make “historical” choices and be loyal in their decision of which funeral home to use.

That preamble gives credence to how I set the revenue side of the projected budget.  Acording to the law of large numbers, call numbers for the coming year should fall very close to where they are in the current year.  In addition, merchandise sales and cremation percentages should also fall fairly close to where they are currently.  Those facts give credence to how I set my revenue numbers.

First of all our hypothetical funeral home from yesterday was going to be a 100 call firm and needed to cover $505,000 in overhead, profit, and savings.  That would indicate that the business needs $5050 in margin from each case to make budget.

However, so we would not fall short in a light death call year.  I would always figure my revenue budget on 90% of the expected call volume. . .or in this case on 90 calls.  Using 90 calls, we would need $5611 margin on each call to reach our expense/profit budget.

I would also use my historical statistical margins from the year before on merchandise sales such as caskets, vaults, paper products, and urns.  Finally, I would combine those margins with the funeral/cremation mix to get a picture of what the expected merchandise margins would bring in.  Here’s an idea in our 50/50 mix funeral home with historical margins as guides:

  • Caskets:  $1200 margin x 45 units generates $54,000 in margin
  • Vaults:  $350 margin x 45 units generates $15,750 in margin
  • Paper Products:  $150 margin x 90 units generates $13,500 in margin
  • Urns:  $200 margin x 45 units generates $9,000 in margin

The total expected margin in those merchandise sales equals $92,250 or $1025 per case.  Subtracting that $1025 from the needed margin of $5611 leaves an average of $4586 per case to be raised in professional services per service  in 90 cases to reach your budget.

Take the $4586 and multiply by 1.25 and you come up with $5732 as a professional service charge for funerals.  Conversely, take the $4586 and multiply by .75 and you come up with $3439 for a cremation service.  If you did a 50/50 combination of funerals/cremations your average service charge would then be your target of $4586.

This is where the math comes out and you have to determine if your prices are within the boundaries of the competitive balance in your trade area.  Quite frankly, you might make a decision where your cremation price is high, but your funeral price may be low.  If so, make the adjustments with the $4586 average in mind.

And, don’t ever forget about service.  In many cases, you can be a little more expensive than a neighbor if your services and facilities are exemplary.  I never had anyone complain about great services!!

So, let’s look where we are at.  Yesterday, we built an overhead expense budget of $400,000, a profit goal of $80,000, and a savings (capital improvement) budget of $25,000 adding up to a total of $505,000 that we hoped to recover in margins/professional services.  This budget was set up for a 100 call firm.

Today, we figured our revenue budget on the idea that we could possibly only get 90% of the business we average.  We figured an average professional service charge of $4586 per case and an average merchandise margin of $1025 per case for an average margin of $5611 per death call.

  • Reaching 90 cases would bring in a margin of $504,990 (90 x $5611) which covers our overhead, $80K profit goal, and $25k of savings.

Here’s the great part.  Remember the law of large numbers?  You have just as probable a chance to do 100 (or more) calls as you do to just reach 90.  If nothing else has changed, the law of large numbers allows for that.  So, let’s say you just do your average 100 calls, but are set up on a 90 call revenue base budget.  Here are those numbers:

  • Reaching 100 cases would bring in a margin of $561,100 (100 x $5611) which covers your overhead, $80K profit goal, and $25k of savings.  In addition, it gives you another $56,100 of profit bringing your total profit to $136,100!!

Remember, yesterday we set your profit goal on an 8% return of your assets of which we said was $1 million, therefore the $80k goal.  However, at 100 calls, the profit came out to be $136,000 or 13.6% of your assets. . . that is 3 times what Service Corporation International or Carriage Services produces.

  • And, what if you had the year where you did 110 cases instead of 100?  Well 110 x $5611 would produce a margin of $617,210 and bring the total profit to almost $200,000 instead of the $80,000 budgeted for. . . all for only doing 10% more cases.  This scenario would bring your return on assets for the year to 19.2%.

And, it can be done.  It just takes good and detailed planning.  I know because we did that and even higher return on asset percentages for over 20 years.

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