Strategic Budgeting to Prepare for Cash Flow Seasonality

Written by Jarod Bernat, Senior M&A Analyst

It’s well known that in our industry, there are slow and high-volume periods that vary with the seasons due to the ebbs and flows of mortality rates as the year progresses. The timing of these periods can vary from region to region, but generally, they are fairly predictable based on historical precedent – this is what we call “seasonality”. During the summer, the sun nourishes our bodies with more Vitamin D than the rest of the year improving our immune systems, we’re more active outdoors, and overall moods improve. These factors combine to lower mortality rates compared to the winter month when the cold and lack of sunlight negatively impacts our immunity and health.

Based on The Journal of Steroid Biochemistry and Molecular Biology, US death rates are about 25% higher in winter than in the summer. This means that as a funeral home owner, operating budgets must be prepared accordingly. Knowing that Revenue will follow suit and fall by about 25% in the summer, this has a significant impact on the cash flow of the business since Funeral Homes are generally what’s known as a “fixed cost” business. This means that regardless of whether you perform 25% more calls or 25% fewer calls, your expenses will remain reasonably similar: rent is the same every month, salaries don’t change much if most employees are full-time, nominal fluctuations in embalming fluids and auto expenses, etc. This causes profit margins to tighten during the summer and leaves little room for discretionary spending or investment activities (purchasing a new vehicle, renovating a service space, or repaving the parking lot). These expenses are called Capital Expenditures “CapEx”, and barring an unforeseen maintenance disaster like storm damage, the timing of these items can be planned out well ahead of implementation.

Knowing death rate fluctuations will likely occur at a similar time each year, we must take this seasonality into account when setting budgets at the beginning of the year. This way production expectations are set properly, and strategic cash flow management can be employed throughout the year. Let’s break down an example of a quarterly cash flow budget for a year considering a funeral home performing 100 calls, $500,000 of revenue, and $100,000 of cash flow.

Assuming all operating expenses are fixed (not always true, but assumed to simplify the model), a very simplified quarterly budget without strategic CapEx deployment would look like the following:

In this scenario, due to the slow nature of the third quarter, Cash Flow is only $5,000. This means that if the business serves only 2 fewer calls than expected, cash flow would be negative for the quarter. This is why we advise our clients to strategically plan out their capital expenditures each year. By limiting capital expenditures in Q2 and Q3, this affords them the opportunity to make these investments in Q1 and Q4 when cash flow is strong. Thus, cash flow remains stable throughout the year despite the up-and-down nature of the quarterly call volume and revenue.

Adjusting the previous budget to include strategic CapEx deployment (highlighted in yellow), quarterly cash flow looks like the following:

The above cash flow illustration, while still reflecting the exact same annual cash flow as the previous example, shows stable positive cash flows of $25,000 each quarter. This simply might just mean that summer plans to repave the parking lot are deferred until the start of Q4, or maybe a new vehicle is purchased at the beginning or end of the year when cash reserves are stronger. Strategic planning of investment timing allows business owners to focus solely on serving their families to the highest degree all throughout the year, rather than worrying whether a missed call or two would bring their accounts into the negative.

As the weather warms and summer approaches, funeral home owners across the country are starting to go into “defense mode” with their cash, focusing on what costs they can cut until summer passes. This is a stressful pattern we see all too often, but it can be avoided with some upfront strategic planning. If you are someone looking to better understand the seasonality of your business’s cash flow and how to properly prepare for the fluctuations of your annual cash flow, Foresight can help with this process. Do not hesitate to inquire about our Strategic Performance Analysis “SPA” services, and we will help you find the peace of mind you deserve.