Last week I shared some of the ways I had developed a budget that allowed me to produce maximum profits to the business even in years when our death numbers fell short of what we really wanted or expected.  I talked on the revenue side of the budget and how discipline in planning can lead for some good financial years even in mediocre death call years.

In general, a budget should allow you to eventually maximize revenues while limiting costs during the operational year of that budget.  When setting the budget, however, I always erred on the side of budgeting for fewer than expected death calls on the revenue side and budgeting for more than expected death calls on the expense side.  This so called “shrinkage of the margin” in planning could lead to great upside surprises with extraordinary profits if you had an “average” year.

So, last week we talked about budgeting for the revenue side and in our fictional funeral home that does an expected 100 death calls we budgeted our revenue on 90 calls or 90% of the expected number.  You can read last week’s article here.

Today we are going to look at the expenses side and in our fictional funeral home of 100 calls, we are going to budget costs at 110 calls or 110% of what we expect.  And just like we talked about last week with revenues, you should have a line-item on all expenses that cost you money from a cash-flow point of view.  You should not just have a Cost of Goods Sold line. . . it should be COGS-Caskets, COGS-Vaults, COGS-Interments, and on and on.  Cost of Goods Sold also needs to over budget at 110% in order for the “shrinkage of margin” budget to work.  In normal expense items you should have a separate line item for all expenses too.  For instance advertising should have separate line items for newspaper, calendars, on-line, radio,  and on and on.

Your first step in budgeting for your next year is to look at each line item and determine if that money is necessary to be spent there and/or how you could change the dynamics to do it more efficiently.  For instance, what has happened with interest rates. . . can you go to the bank and re-negotiate your line of credit interest because interest rates have went down or your financial strength has gotten better?  Health insurance. . .generally young healthy employees.  . will higher deductibles save you money.  Don’t forget your utilities and property taxes will probably go up, so increase them accordingly. To get your expenses right you need to ask these questions line by line.

Finally, don’t think that you cannot negotiate better terms with some of your suppliers such as casket suppliers.  Virtually every year I sat down with my suppliers and negotiated.  When I started in 1980 we bought caskets from several companies and were granted a 2% prompt payment discount.  By the time I finished in management in 2013 I offered one-year exclusives to casket companies in exchange for higher discounts.  That discount had worked itself to 18% by then.  That 16% difference over time meant about $40,000 in savings to us annually.  I was able to do this once that I realized to the death care consumer, caskets were a commodity.  They did not care if it was a Batesville, Aurora, Milso, Artco, and so on.  . they purchased what we had available.

Employee salaries also have to be taken into consideration.  That’s a complete topic for another day, however, I’m a big believer in incentive pay depending on the number of death calls done. . . not on the sales done per call.  My take is that I want my employees bringing in market share and then I’ll worry how to make a better income off that market share.  I wanted my professionals to be known as professionals in the community — not as sales reps in the arrangement room.  In my opinion, I had a pretty unique bonus system that worked in building business for both management and employees.  By the way, make sure that your own salary is in this part of the budget.  The “profit” is not your salary. . . it is in addition to your salary.

Finally, once your budget numbers balance at 90% of revenue and 110% of expected expenses it is time to figure out a fair profit for you with the operating risk of the business.  This is where you have to juggle the revenue numbers to account for what is a fair profit.  And, if you get that number where you think it is fair, you will get that fair profit at 90% of calls and if you do your normal 100% of calls, the revenue from the last 10% of calls is virtually all profit and can make for a great year.

So, there are some thoughts on budgeting.  Be creative. . . how can you get more out of your business without spending anymore.  Doing these exercises annually will make you a better operator.

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