Axel Jean-Francois
on
The Real Picture, Part 1: What Your Balance Sheet Is Actually Telling You
Most funeral home owners can tell you what they made last year. Revenue, expenses, what was left over. Ask them about their balance sheet and the answer is usually some version of: “My accountant handles that.”
That’s not a knock. The income statement is intuitive. Money in, money out, here’s what’s left. It’s a film. The balance sheet feels like accounting furniture. Something the bank asks for. Something filed away after tax season.
But the balance sheet isn’t furniture. It’s the theater. You can have a sold-out show every night, but if the foundation is cracking and the rafters are rotting, the profit is an illusion. Everything your income statement reflects sits on top of it. And if what’s underneath is weak, none of the performance above it matters as much as you think.
A Photograph, Not a Film
A balance sheet is a snapshot. It captures the condition of your business at a single point in time. Assets on one side, liabilities on the other, and whatever’s left is equity. What you actually own.
One balance sheet tells you where you are. Two tell you whether you’re building something or quietly losing ground. This year against last year. This quarter against the same quarter prior. The change between them tells you whether equity is growing, whether the debt is getting paid down, whether the foundation is getting stronger or starting to shift.
Most owners look at one and move on. That’s like watching a single frame of a film and deciding you understand the plot.
What’s Actually on It
Assets come first. Current assets are the liquid ones. Cash, accounts receivable, inventory like the caskets and urns on your showroom floor. These can be converted to cash relatively quickly. Fixed assets are everything else. The building, the prep room equipment, the vehicles, the retort if you run a crematory.
Fixed assets don’t stay new forever. Every year the IRS allows you to recognize their declining value as depreciation, a non-cash expense that reduces your taxable income. Most owners treat this as a tax gift. It isn’t. Not entirely.
Depreciation runs through the income statement but the asset lives on the balance sheet. Buy a vehicle for $80,000 and it hits your balance sheet as an asset. Each year a portion of that value comes off as depreciation and runs through your financials as an expense. The cash left the day you wrote the check. The income statement feels it slowly, over years. But the balance sheet is watching that vehicle move toward zero. The day you need to replace it the cash requirement arrives all at once, sudden and real.
The bill always comes.
Liabilities mirror the asset side. Accounts payable, current obligations, and then the long-term notes. The mortgage, the vehicle loans, the acquisition financing. The outstanding principal balance lives here. The interest cost of carrying that debt runs through the income statement. What you owe and what it costs you to owe it are two different numbers on two different statements.
Equity is what’s left. Assets minus liabilities. If the business were forced to liquidate everything at book value tomorrow, what remained would be yours. Positive equity means you own something real. Negative equity means the liabilities have outgrown the assets. That gap doesn’t stay quiet for long.
The Slow Leak: Working Capital
Liquidity is the least dramatic concept on a balance sheet and one of the most dangerous to ignore.
The question it answers is simple. Can you pay your bills right now? Not eventually. Now. Current assets divided by current liabilities gives you a rough read. Below 1.0 and your near-term obligations exceed your near-term resources. Above 1.5 and you have reasonable cushion.
Working capital is the more practical measure. It’s expressed as days of operating expenses sitting in accessible assets. A smaller single-location operation probably wants 60 days. A larger multi-location group with more predictable volume might run closer to 45. The more confident you are that revenue is coming through the door, the less cushion you need against a gap.
The owners who get into trouble aren’t usually the ones who ignored a gaping hole. They’re the ones who watched the bank account look fine while the current ratio quietly slipped below 1.0.
There’s a version of this that’s even more common. The owner who looks at the bank account, sees a comfortable number, and concludes the business is doing well. What they’re not seeing is everything that money is already committed to. Debt service. The next payroll cycle. Vendor invoices that haven’t cleared yet. What’s actually left, the portion that belongs to the owner free and clear, is often a fraction of what the balance suggests. Cash and profit are not the same number. The balance sheet is where you learn the difference.
The Sandbox: Strategic Latitude
Your balance sheet doesn’t tell you what you’ll do. It tells you what you’re allowed to do.
A funeral home with modest debt, positive equity, and adequate working capital has options. It can absorb a bad year without existential consequence. A key director leaving, a volume dip, an unexpected capital expense. It can invest when conditions are right. It can move when others can’t.
A funeral home carrying heavy debt, thin equity, and tight liquidity has a much smaller sandbox. Every decision runs through the same filter. Can we actually afford this? Want to replace the fleet? Not yet. Want to add a location? The bank says no. Want to wait out a difficult year? The debt service doesn’t pause because your call volume did.
Consider two owners. Same market, similar revenue, roughly the same number of calls. Owner A bought conservatively, paid the note down steadily, carries solid equity. Owner B stretched to acquire two additional locations in 2021 when rates were near zero and structured the debt with terms that reset after five years. Through 2022 and 2023 the businesses performed similarly.
Then the rates reset. Owner B’s debt service increased. Not catastrophically but enough that a 15% volume dip, the kind Owner A absorbs without a conversation, becomes a crisis. Refinance? The bank looks at the balance sheet and says no. Wait it out? The covenants don’t allow that much patience. The only remaining option is to sell. Not because the business is broken. Not because Owner B ran it poorly. Because the balance sheet ran out of runway.
Same business. Different balance sheets. Completely different outcomes.
What This Means When You Sell
Buyers are sophisticated. The income statement is the first thing they read. It’s not where they spend all their time.
They want to know what’s holding the business together. To a buyer, the income statement is the face. The balance sheet is the skeleton. A strong one tells them the performance above it is real and sustainable. A weak one tells them the opposite. That the income looks good until something goes wrong and then it doesn’t. Buyers price for that risk. They do it by lowering the multiple.
The owners who sell at premium multiples aren’t just the ones with the best numbers. They’re the ones who can tell the complete story. The balance sheet is the foundation of that story. Without it buyers assume the worst or discount until they don’t have to.
Next month we’ll look at the income statement. What it actually reflects, what it hides, and why it means something very different depending on what’s underneath it.