Axel Jean-Francois on 
A few months ago we sat down with the balance sheet of a single-location funeral home we’ll call “Holloway Family Funeral Home”. By every measure that matters, it was healthy. Cash sitting well over 150 percent of plan. A current ratio north of six. Debt flat, untouched, exactly where it was the year before. If you read Part 1 of this series, you know what that means. Holloway had the foundation. The chassis was solid. They had room to breathe, room to make a decision instead of being forced into one.
Then we looked at the income statement, and the illusion broke.
The Collision
The plan called for around 160 calls in the quarter. Holloway came in around 110. That’s not a miss you shrug off. It collided directly with the one line item that can ruin an owner’s sleep. Compensation was planned at 35 percent of revenue. Actual landed near 53 percent.
Here’s the part that should stop you. Nobody did anything wrong. ARPC hit target. Gross margins were actually a touch better than plan. The team executed beautifully at the arrangement table. Every metric upstream of overhead was fine. And the bottom of the statement was still a mess.
That contradiction is the whole lesson. A strong balance sheet bought Holloway time. The income statement told them, urgently, what that time needed to be used for.
Why a Volume Miss Wrecks Your Payroll Line
A 30 percent drop in calls turning into an 18-point blowout in your labor ratio comes down to one mechanism. Operating leverage.
A funeral home’s cost structure is rigid by nature. You can’t cut licensed staff below a compliant floor. A single location means you carry the same payroll and the same building whether you serve 110 families or 160. Comp climbing to 53 percent wasn’t a spending problem. It was a math problem. The numerator barely moved. The denominator fell by nearly a third.
Most owners have never quantified their actual breakeven call volume. Below it, fixed costs eat you alive. Above it, every additional call drops disproportionately to the bottom line because the infrastructure is already paid for. Operating leverage cuts both ways. Few owners know which side of the blade they’re standing on in a given month.
Stop Fixing Your Pricing When the Problem Is Your Doorway
The instinct, looking at numbers like this from the outside, is to assume pricing slipped or margins eroded. That’s almost always the first guess, and in a volume slowdown it’s almost always wrong.
Holloway’s ARPC held. The case mix held. Families were choosing services and merchandise exactly as planned. The revenue coming through the door was healthy revenue. There just wasn’t enough of it.
That distinction matters because the two problems demand opposite remedies. A margin problem sends you to pricing, vendor costs, arrangement strategy. A volume problem sends you somewhere else entirely, into market share, awareness, referral relationships, the things that put a family in the building in the first place. Confuse the two and you’ll spend a year fixing something that was never broken.
The income statement, read correctly, ruled out the operational failure and pointed at one thing. The cases didn’t come through the door.
The Line Item That Changes Meaning Depending on Who’s Buying
Here’s where it gets more interesting, and where most owners stop reading their own financials too early.
Your CPA’s job is not to show you what your business actually earns. Their job is to legally minimize your tax liability, and they’re good at it. The statement you get every quarter was built for the IRS first. It wasn’t built to answer the question a buyer, or you, actually need answered. What does this business generate once you strip away the tax strategy and look at the operation underneath it.
At Holloway, part of that fixed cost structure was rent paid to a related-party entity, a property held by family. The rent wasn’t excessive. It reflected real tax and estate planning considerations, and at planned volume it was a normal, sustainable cost of doing business. The problem wasn’t the rent itself. It was the same operating leverage mechanic from before, now landing on a line item that happened to be owed to family instead of a vendor. At full volume it was invisible. At reduced volume it became one of the largest expenses on the statement.
This is precisely what a buyer is trying to isolate when they build adjusted EBITDA. Reported earnings, optimized for tax purposes, rarely reflect what a business actually generates as a going concern. A buyer adds back what’s real but non-recurring, strips out what’s personal rather than operational, and tries to land on a number that represents the business standing on its own.
The related-party rent is the clearest example of why that exercise isn’t mechanical. Whether it counts as an addback depends entirely on what’s being acquired. If the buyer purchases the real estate along with the business, the rent disappears into the math. It would simply be paid to themselves. But if the family keeps the real estate and the buyer only acquires the operating business, that rent doesn’t go anywhere. It’s a real, ongoing obligation to a third party, family or not, and it should be treated as a true cost when evaluating what the business can sustainably generate.
The same number on the same line means something completely different depending on the deal structure underneath it. That’s the whole reason the balance sheet and the income statement have to be read together. What you’re buying determines how you’re supposed to read what it earns.
You’re Always Reading the Past
The last thing worth understanding is that an income statement is never really about the present. It’s a report card on decisions made months or years before the period it covers.
Holloway’s staffing plan, their lease terms, their cost architecture, all of it was set long before this quarter went sideways. The volume miss didn’t create the structure. It exposed it. Reading an income statement isn’t watching the business happen in real time. It’s seeing the consequence of a hiring decision from two years ago, a lease signed before anyone could have predicted this quarter, a cost structure shaped by choices made well before the numbers ever printed.
Never read it as an indictment of the present. Read it as an autopsy of a decision already made.
Where This Leaves You
Holloway’s balance sheet did exactly what it was supposed to do. It bought them room. Cash on hand, low leverage, nobody calling the loan. They had the runway to diagnose the problem calmly instead of panicking into layoffs or a discount strategy that would have solved nothing.
But runway isn’t a strategy. It’s time. And the income statement told them, with precision, what that time needed to be spent on. Not a management overhaul. Not a pricing change. A hard look at fixed cost structure against a volume base that wasn’t where the plan assumed it would be, and an honest conversation about what some of those fixed costs actually represented once volume came up short.
The balance sheet is the foundation. The income statement is the engine, and it will tell you exactly how much horsepower you actually have, whether you want to hear it or not.
Next month, we put both of them together and ask the question every owner eventually has to answer. What is all of this actually worth to someone else?