There is a level of neglect in our profession that will (and is) causing too many to approach the end of their careers facing great disappointment, forcing the postponement of retirement or spending retirement much more humbly than anticipated. It is too dangerous to be considered benign. Dangerous, certainly, at the individual firm level. But, collectively, and ultimately dangerous at the industry level as an outmoded pricing strategy and misunderstood value proposition drive consumers to lower and lower price points.
The need for awareness
Metaphorically, let’s say you are driving your car on the interstate. At both the conscious and unconscious levels you are AWARE. Aware of your speed and lane, distance to the next car and where you are relative to your destination (your goal). But you are also aware of other environmental factors. Road conditions, for instance. Or subtle noises in your car. I know that when I hear “thump-thump-thump” I have a bad tire. If I feel the vibration in my seat it is a rear tire, if in the steering wheel a front tire. If the thermometer gauge goes above the red line I know my engine is overheating or if the “check engine” light goes on I know to pull over and see what’s going on. I don’t exactly know how to fix my car but I know when it needs to be fixed, I know when I have taken a wrong turn, I know when I am about to run out of gas and I know how long it will be before I reach my destination. BUT I AM NOT A MECHANIC I AM ONLY A DRIVER. I can’t build a car or design a car but I would be poor driver, indeed, if i were not AWARE of a myriad of things while I am driving.
But my consistent experience, even among some of the more prestigious firms, is that most business owners operate without the slightest awareness of what is happening with them and to them financially. During the past several years I would guess that 8 out of 10 of the firms I have helped have been experiencing a decline in average sale. Some of these were significant! In every case the owner was unaware. At best they had a vague feeling something wasn’t right.
The need to be better stewards
Over the course of 30 + years experience I have seen a number of times where firms have made critically poor financial decisions because of fads. I did this myself in the ’80’s when my partner and I bought a flower shop. We were lucky to get out 7 years later with our shirts on but would have done much, much better using those resources elsewhere.
Today, we are seeing firms over investing in facilities and rolling stock and getting involved in the latest fad: Pet Services. I know, I make myself unpopular by making this point but it serves as an excellent illustration.
In and of itself the pet service business is not bad. But in light of the fact that it normally requires in excess of $200,000 in capital investments (ignoring the reallocation of human resources) it deserves serious consideration. Especially when it requires most firms to take on debt. There was an old advertising slogan that went “never borrow needlessly but when you MUST…”. In light of our profession’s current economic environment (let alone our national one) this slogan should now be axiomatic. Borrowing money to fund a venture with margins that are a fraction of the margins generated even in a cremation business has the potential to put many firms in a very untenable position in the future.
In the ’90’s the investment firm of Duff and Phelps approached me to start another funeral home acquisition firm. I admit I was less than enthusiastic (it was in 1998 as I recall) but it’s hard to turn down such a heady opportunity so I sought the counsel of a very wise friend. He asked me if I thought I could generate an 18% annual return. I said “no” to which he responded that I should just buy SCI stock because at the time they were generating that return. In 1999 the whole acquisition trend collapsed. He was right.
My point?
When using precious limited assets (financial, physical or human) you need to know how to make decisions with your head as well as with your heart. Otherwise, you can find yourself working for the bank instead of yourself.
The process of doing this is simpler than you might think.
You don’t need to be an accountant
When I passed the CPA exam I went to work for a man who I still consider the best accountant I have ever known. He could look at a set of financial statements and within one or two minutes spot either a mistake or an issue that needed closer attention. I was trained to do extensive analysis so this talent truly intrigued me. I asked him to teach me and he did.
That is what I want to teach you.
You don’t need to be an accountant.
But you do need to be AWARE just as you are aware as you are driving a car…both at the conscious and subconscious level. You need to know what key numbers you need to be aware of and where the “check engine” light and fuel gauge are. You need to be able to distinguish whether that “thump-thump-thump” you hear is cracks in the pavement or a tire going bad.
What my boss taught me enabled me to do just that. Complicated? A little. But no more so than learning to drive… and probably less complicated than learning to embalm. Less smelly too.
PROFIT CLINICS
Goal:
- Using your firm’s own financial reports enable you to quickly identify your key numbers and use those key numbers to know where to focus your energy
- Recognize the “early warning signs” before they get out of hand.
- Develop a long term strategy to move from “Cost-Led Pricing” to “Price-Led Costing”
- Learn how to determine whether an investment is right for you without adding so much debt you sink your ship
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