Your End-of-Year Funeral Business Check-Up

Posted December 27, 2017

8 min read

What can you do this time of year to better gauge the health of your funeral home business?

We sat down with Tim Bridgers, General Manager of Funeral Home and Cemetery Lending at Live Oak Bank, one of the nation’s top originators of small business loans, to discuss that topic.

As a leading small business lender, Live Oak has a dedicated team that specializes in providing financing solutions for funeral home and cemetery owners. Tim and his team have a deep understanding of the funeral profession and what owners need to succeed.

Here are seven things you can use when assessing 2017 and when creating your objectives for 2018.

1. Re-examine your strategy for growth

“This is time, if you haven’t already, to schedule time to talk with your trust administrator and investment manager. Are you satisfied with your asset allocation? How do you feel about your strategy for growth?” If you are not satisfied, some banks will review your portfolio and give a second opinion for free, explains Bridgers.

Related to this is making sure your business is operating as smoothly as it should be.

Especially in preparing for future growth, how well organized are your documents? Are you able to use digital workflows to help manage your most important information on your families? And, are you compliant with state and federal laws?

2. Family satisfaction

While you are attentive to customer satisfaction every week (and every day!), a good time to review feedback is now. “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.”

Combine that with other feedback you are collecting directly from your families. Then be sure to act on all the feedback you receive so you can continually improve customer satisfaction.

3. The balance sheet and your cash flow

Looking at your financials at this time of year is a no-brainer. Make sure your books are current and accurate. If they aren’t, be sure to take steps so that at this time next year, they are up-to-date.

If you have outstanding receivables, 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.

“Also, be sure to 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,” explains Bridgers. Freeing up cash flow now will prepare you for future growth or any surprises or any drops in death rate.

4. Cost of Goods Sold (COGS)

Fourth, take the time to look at your Cost of Goods Sold (COGS). Your 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 percent,” says Bridgers.

When looking at this metric, the lower the percentage is, the more profitable the business. By comparing your cost of goods to the average, you can assess whether you need to make improvements.

Product presentation may be a simple way for you to improve COGS. “Can you rearrange your selection room to encourage purchases of particular products? Do families quickly and easily recognize 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 on COGS,” claims Bridgers. 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 doing as well as you would like? “It may be time to reduce the price to move those products and replace them with more attractive options,” states Bridgers.

5. Employee Engagement

Employee engagement impacts several aspects of your business, from the ability to attract families, your customer service, and even your bottom line.

If you aren’t already doing these, consider taking these steps to gauge and improve engagement:

  • Meeting with employees to get feedback and to see areas where they company could improve
  • Brief surveys to help measure employee perceptions and attitudes
  • Examine certain measures of customer service and productivity that indicate your levels of engagement

“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,” says Bridgers.

6. Net Operating Margin

No list of metrics would be complete without looking at your net operating margin (NOM). Showing—and measuring—your NOM helps you know more about how well you can control your costs. It’s been said that many businesses see costs increase by at least three percent per year (regardless of actual growth), so this also gives you the ability to watch your bottom line.

Bridgers states, “To find NOM, divide Net Operating Income (NOI) by your revenue. For high performing funeral homes, we typically see NOM around 26 percent to 29 percent.”

The importance of metrics like these isn’t just in the numbers themselves. It’s also in the action you take after figuring them out. “Are there variable expenses that can be better controlled? Or do you need to implement a marketing campaign to increase business? Do you need to adjust your pricing? These are the questions that can be asked,” says Bridgers.

7. Debt Service Coverage Ratio (DSCR)

Another key metric to consider in your end-of-year check-up is debt service coverage ratio. Your cash available to service debt (NOI) divided by the total debt service for all interest, principal, and lease payments (NOI/total debt service) is what this metric entails.

Bridgers gives this example to help explain: a DSCR of 1.50 indicates there is 50 percent more income than is required to repay all debt, or $1.50 available to pay each $1.00 of debt. On the other hand, a DSCR of 0.90, for example, 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,” says Bridgers.

“The higher the DSCR number is, the more profitable the funeral home,” explains Bridgers. “When examining Live Oak funeral home portfolio, we see a national average of DSCR at 2.02. By comparing your metrics to the averages, you can assess and plan for your next year.” Part of the real power in metrics like these is tracking them year after year and seeing trends.

Looking Towards 2018

“Write down what business goals you plan on completing next year,” says Bridgers. “From that, you want to be able to create an action plan to carry out. If necessary, include milestones for each month and keep them visible. Remember to involve your staff in the plans.” When team members understand the goal and vision of the business, they can better help your funeral home succeed.

Take Your Current Business to the Next Level

CRäKN is a tool that provides everything you need to advance your business in 2018. With CRäKN, you can centralize your information and manage day-to-day activities in order to streamline your operations, prevent errors, and save time at your funeral home. To see how CRäKN streamlines and automates routine tasks to reduce costs, request a demo today.

About Live Oak Bank

Live Oak Bank started in 2008 to provide loans to small, independent businesses looking to expand, remodel, refinance and acquire existing practices.

With expertise in the funeral industry, Live Oak Bank takes a personal approach and sees clients not as numbers, but as real people facing real-life opportunities and challenges. Live Oak has clients across America but still sees each one as an individual entrepreneur who deserves undivided attention. With this philosophy, Live Oak is now one of the largest originators of small business loans with one of the strongest loan portfolios in the country. Learn more about improving your cash flow and growing your business with Live Oak Bank here.

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