Funeral Industry - Research Paper Example

1.0 How is the funeral industry changing? The funeral industry has changed rapidly over thirty years ago since 1970’s. The changes that have taken place are attributed to both internal and external forces that influence the funeral industry. The internal forces include increasing costs as well as changes in management. Increasing costs have led to reduction of profits making the industry less attractive for sole owners. This has made the funeral directors to adopt cheaper and efficient methods of providing funeral services and goods. In response, funeral directors are diversifying their services from providing traditional funeral services to provision of complementary services and products. In addition, the ancient funeral directors are getting older and dying. This leads to emergence of more dynamic and responsive funeral directors who are flexible and innovative. The external forces are numerous. They include increasing competition, changing consumer preferences, changes in government policies, changes in technology, consolidation and division of labour. According to Garces-Foley (221), division of labour has contributed significantly to the changes in the American Funeral Industry. In the eighteenth century, traders provided goods and services necessary for preparing the body for burial while the family prepared and disposed the body. Division of labour precipitated increased competition in the funeral industry. However in nineteenth century, funeral directors and the undertakers emerged. Funeral directors prepared the body for burial; undertakers disposed the bodies while carpenters provided coffins. Secondly, changes in consumer preferences played a role in changing the whole funeral industry in the world. Embalming began to gain popularity and public approval in the nineteenth century. Most people prefer cremation currently as compared to the past when people embalmed and buried the deceased. Thirdly, policies regulating the industry changed considerably after 1970’s. The funeral directors were portrayed has salesperson selling unnecessary funeral products and services at the expense of the consumers. As a result, the Federal Trade Commission enacted policies and statutes that made it mandatory for all funeral directors to provide breakdown of all prices of their prices and goods. Therefore, people can purchase caskets and other funeral goods and services from other providers who are more affordable. Fourthly, the changing technology has led to changes in the funeral industry. Internet availability has led to cyber funerals proceeding. Through the internet, people can buy caskets, order flowers, make obituaries, send memorial cards, watch funeral proceedings and sign grief books. Improved technology has made cyber tributes very possible. For example, according to Garces-Foley (222), some of the friends and relatives of Barbara Anne who died of Lung cancer gathered for her funeral service online. Space burials are emerging. Bodies are cremated and ashes are packed into capsules that are loaded on a rocket and launched into space. First space burial was done in January 1998, when Dr. Shoemaker’s cremation remains were packed to capsules and send to the moon by his students as a tribute to the leading lunar researcher who always wished to visit the moon. Other emerging trends include cryonics. Cryonics involves freezing of a dead body and keeping it frozen until such a time when science will be too sophisticated to resuscitate the body and continue life. Finally, consolidation has led to change in the funeral industry. Large companies are purchasing family owned Funeral Homes and consolidating them into single larger ones. This enables them to take advantage of economies of scale. 2.0 The likely response of Joan Bak. (a). Joan Bak may find herself in a dilemma concerning the decision to sell the Bak funeral home to her daughter Sabina and rent the building to her. The building would earn her a total net income of $24,000 annually and the burden of paying utilities, repair, maintenance and real estate tax is transferred to her daughter. Therefore, Joan Bak would not incur $ 56,716 (utilities $ 9835, repairs and maintenance $ 5901and real estate tax $ 40980) because it was paid by her daughter. This would be attractive to her mother. On the other hand, the mother may not want to privatize the Bak Funeral Home by selling it to her daughter because she may want all her children to inherit it or she may want Sabina to inherit it for free. (b). Proforma cash flow statement using 2004 as a base year. Assumptions are as follows (1) repairs and maintenance and utilities expense will remain the same (2) depreciation equals capital acquisitions, so there is no need to add back depreciation to determine cash flows (3) there is no interest expense (4) 3% state income tax rate and (5) no profit sharing expense (6) no pay role taxes (7) the growth rates are average growth rates registered in 2003 and 2004. Bak Funeral Home Pro Forma Cash Flow Statement for 2005 Cash inflow Growth rate (assumptions)  Amount in $ Revenue 3.51 678676 Cash out flow     Expenses     Replacement Fringe Benefits   6,000 Replacement Compensation   60,000 Other wages 4 110846 Office expense 8.75 12834 Telephone and answering 4.86 11514 Direct funeral cost 6.83 86772 Refunds 4.05 17218 Livery 3.51 26469 General insurance 3.51 24432 Accounting 3.42 6781 Utilities 0 9835 Rent 6.54 38353 Repairs and maintenance 0 5901 Capital acquisitions 27.1 12770 Real Estate Tax 3.52 42421 Advertising 9.73 9277 Other expenses 4 18990 return on capital 11% 198,000 Total cost   698,413 Net Cash flow   -19,737 Figure 1: Pro Forma Cash Flow Statement for 2005 for Bak Funeral Home when the business and assets belong to Joan. According to Damodaran (311), cash flow return on investment (CFROI) is a project, business or company valuation method that uses cash flows to determine the value of the company or organization. It is computed by dividing the total cash flows by the market value of the capital invested in the business. Joan expects 11% cash flow return on $1,800,000 investment. Cash flow should be 0.11 × $1,800,000 = $198,000. Therefore, Sabina should not purchase the business and operate it as it is because it does not generate the cash flows necessary to make 11% return on investment employed. The cash flow is $-19,737. (c). Cash flows for Sabina if she buys the business. Sabina may purchase Bak Funeral Home and operate it else where as long as the initial customers would not be affected by the new location. This is because the investor would require 10% return on the $1,200,000 ($900,000 + $300,000) capital employed. The cash flow of the business should be at least $120,000 (0.1 ×$1,200,000) to enable the investor earn 10% cash flow return on ($1,200,000) capital employed. The current cash flow is$58,263 before tax (178, 263- 120,000). This is attractive for purchasing it. (d). Sabina should approach Modelski Funeral Home and suggest that she merge the Bak Funeral Home business into the Modelski Location. This is because the cash flow would increase significantly from $60,223 to $259,557. It is appropriate because the home has extra capacity and can utilize staff and other facilities appropriately. Bak Funeral Home Pro Forma Cash Flow Statement for 2005 Cash inflow Growth rate (assumptions)  Amount in $ Revenue 3.51 678676 Cash out flow     Expenses     Officers wages 2.55 151124 Direct funeral cost 6.83 86772 Advertising 9.73 9277 Sales tax -1.92 19508 State Income tax (3%) 4.22 12360 Corporate tax   140078 Total Cost   419119 Net Cash flow   259557 Figure 2: Pro Forma Cash Flow Statement for 2005 when Bak Funeral Home Modelski Funeral Home consolidates. (e). Sabina should not buy the Bak Funeral Home at the value in part d. This is because the higher net cash flow in Part (d) came as a result of sharing facilities and staff of the Modelski Funeral Home. If the cash flow accrued to Sabina at the Bak Funeral Home alone, then it could have been possible. (f). Sabina can purchase his own good reputation and not Bak Funeral Home. This is because her name will not be too expensive as compared to the whole Bak Funeral Home and she would be able to increase her cash flow when she consolidates with Modelski Funeral Home. In addition, she would be able to make decisions that are good for the business without consulting the sibling and her mother. (g). This may not be possible because the cash flow in part (d) above is not the true value of the Bak Funeral Home. The cash flow realized included input from Modelski Funeral Home. Therefore, the cash flow in part (d) does not reflect a fair market price. 3.0 Business risk is an uncertainty regarding a company’s ability to earn satisfactory return on its investments in light of cost and revenue factors. Two-column table to assess the business risk associated with Bak Funeral Home Increases business risk Decreases Business risks Competition Changing technology Discontinuation Changing policies Diseases- Customer preferences Increasing cost Delays caused by autopsy and criminal Investigations Infections Increase in population density Breaches of contracts Natural disasters Market manipulation Antitrust Figure 3 shows the two column table for funeral industry in 2005. Sources Damodaran, Aswath. Applied Corporate Finance. 3rd ed. New York: John Wiley and Sons, 2010. Garces-Foley, K. Death and religion in a changing world. New York: M.E. Sharpe, 2006. Read More