It’s November. . . have you set your budget for the new year

I live in Minnesota and every year when the calendar turned over into November I had two thoughts. . . Five months of winter ahead and time to make sure the income and expense budget for the funeral home is set up for the new year ahead.

I operated a funeral home that over time had a volume of slightly over 300 calls per year.  From 1980 when I started until 2013 when I sold the majority of the business our cremation rate went from virtually zero to about 40%.  As those of you who operate funeral homes know, the cremation rate rise put another variable into the mixture of how you set budgets and pricing.

Today, I am going to tell you how I set the expense side of the funeral home budget and then in a subsequent column I will tell you how I set the revenue side so that even if we slightly under performed on our death call numbers we would have a chance to reach our overall goals of profitability.  For this exercise, simply because it is easy to see mathematically, we will be operating a fictional funeral home that does a 100 call volume annually.

The first thing I would always do is what could be described as “Zero-based” budgeting.  I never just took the actual line item expenses and added a certain percentage to them, simply because that is not the way that business works.  Your business adapts — you may want to use more or less advertising or add a staffer — and those decisions reflect more on the budget than just adding a percentage. . . they change the dynamics.

So, the first thing you do is go through every line item and what you think you will spend on that item for the coming year.  Maybe you want to reach out and try for more pre-arrangements.  That might entail advertising more for that client or it may entail hiring somebody (maybe only part-time to begin with) and raise your advertising costs and/or payroll costs.  Make sure that you get that number on the budget.

Conversely, you may have found a supplier who is willing to give you a better discount on embalming fluid for an exclusive purchase and save you money.  If you choose to go with that supplier, make sure your budget reflects the lower cost.  Remember, we are trying to get this budget accurate.

And, don’t forget to make sure you pay yourself (as the owner) a salary that is commensurate with the work that you do.  Pay yourself and let profits be extra.  For the sake or our discussion, we are going to say that this hypothetical 100 call funeral home has overhead expenses that equal $400,000 annually.

What about profits?  My take is that you should plan for profits and decide what is a reasonable percentage of the assets that you have tied up in the funeral home business that you should expect to achieve in profitability?  If you look at the public companies in this business sector, you will find that in 2018 Service Corporation International made a $621 million operating profit on an asset base of $12.6 billion — that’s a 4.9% return on those assets.  Carriage Services, in the same time frame, made a $42 million operating profit on an asset base of $918 million — that’s a 4.57% return on assets.  So, those are some comparables.

Quite frankly, for operating a funeral home and the risks that are present for an owner with his name on the bank loan line, I don’t think those numbers are big enough.  You can get an over 5% return on an ETF of Preferred Stock or an ETF of Senior Bank Loans. . . . and you don’t have to be the boss and take potential liability issues in operating a business to get that return.  I’m thinking that you need to have an 8% return on your investment.  Again, our hypothetical funeral business has an asset base (mostly the physical plant) of $1 million. . so we need to add 8% or $80,000 to the bottom of that budget to make sure that we price for our 8% return profit.

Finally, I always added a savings component to my business budget to build a bag of cash for the future.  The money was put into stocks, bonds, and mutual funds to build a base of cash for the down payment of a future acquisition or construction of a new funeral home building.  I started this process in the early 1980’s with a fund built on $25 per service and over the years that was increased.  At the end of the day, I was able to make an acquisition and build a new funeral home with the cash that had accumulated in this account over the years.

For the sake of our hypothetical funeral home, let’s say we want to save $250 per death call.  So, with our 100 call firm that would be $25,000 annually that need’s to be added to the funeral home’s operating budget.

There you have it. . . $400,ooo for overhead, $80,000 for profit, and $25,000 for savings.  That totals $505,000 that we will have to generate with our operating income to reach our goals.

In a subsequent column, I will tell you how I constructed my income budget to make sure that we made those goals with our annually operations.

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