Cash Flow Expectations From Your Pre-need Sales
How often have you heard some of the following phrases about pre-need?
"Ah yes I sell pre-need funerals because they are my security for the future"
"Pre-need is my short term investment for a longer term return"
"The more pre-need I sell the more valuable my business will be when I sell it"
"My pre-need book will be my legacy for my kids when they take over the business"
"All that admin and paper work I have to do when writing a pre-need ....when will I ever see a dollar back?"
Its true pre-need does take a little bit of work upfront. And it is also true that you won't necessarily witness an immediate return on the time you have invested. But it's also very, very true that inevitably you will reap the rewards.
That then begs the question....well when?
Have you ever thought to analyse your pre-need book and consider when some of your pre-need sales will convert to at need?
As morbid as that may sound....we are in the death industry so obviously mortality is part of our every day lives. Anecdotal evidence suggests that the average time a person is on the books could be as little as 6 years or as long as 20 years. In some respects both are right.
Because when you come to think about it if the average was 6 years this means some people will pass away in year one...some in year two and so on. So some contract holders could still be alive after 20 years! Rather than rely purely on anecdotal evidence we decided to extract some concrete data. With access to information on 160,000 pre-need contracts written since 1990 and 80,000 claims we were able to put together a fairly accurate picture of how theoretically claims should occur over a 20 year period.
We are confident that this information may assist firms better predict their cash flow position and more accurately present a better picture of when they can expect a return on their dollars invested in developing their pre-need sales.
Some general observations made from our analysis include:
Less than half of your book of business written in any one year will be claimed after 8 years nearly 17% of the people who took out a funeral bond or a pre-paid contract in any one year will still be alive 20 years on!There is a significant higher proportion of deaths in the first year There is also a slight increase in claims in years 7 & 8
Our projected payout pattern of claims following any one year's sales is:
Claimed in the following years
1. 9.2% 11. 3.7%
2. 6.3% 12. 3.4%
3. 6.4% 13. 3.0%
4. 5.4% 14. 2.8%
5. 5.0% 15. 2.8%
6. 4.7% 16. 2.7%
7. 5.2% 17. 2.5%
8. 6.0% 18. 2.1%
9. 4.2% 19. 1.9%
10. 4.0% 20. 1.7%
Greater than 20
So, what does all this mean in real terms?
Let's take the example of a business that wrote 80 pre-needs in any one year at a value of $5000 each. And let's assume that this money was invested in a fund that had an average annual return of 4%. Then based on this information you can then calculate your estimated annual cash inflows from that year's claimed pre-paid.
Year One Sales – 80
Ave Year 1 contract Price - $5000
Total Annual Sales - $400,000
Ave investment Return 4%
Estimated Projected Cash Flow From That One Year's Business
Year and Monies Claimed
Greater than 20
In other words following the 80 contracts written in year one you should claim on average $37,000 during that first year. In Year 2 an estimated $26K in claims revenue will flow in through deaths and so on and so on.
With the entire fund also enjoying investment earnings this will then mean that the value of the average claim will also increase each year. So theoretically after 20 years from the 80 original pre-needs written you should still have approx 13 active contracts.
If you find this type of information of interest we are more than happy to provide you with a copy of our simple Excel spreadsheet so that you can enter in your own figures and so model and project your own future cash flow.
Whilst the above is our best estimate based on historical data nevertheless we think it is pretty invaluable financial information that possibly your Accountants may be interested in sighting.