Analyzing Your Trust Fund Performance: Key Metrics for Owners

Why Trust Fund Performance Matters to Your Bottom Line

Many funeral home owners think of pre-need as a simple revenue stream: families pay, you deliver services. But pre-need profitability depends on financial metrics you might not be tracking.

The reality: if your pre-need fund isn't generating adequate interest, if your costs-to-deliver are too high, or if you're over-leveraged (promising services worth more than your trust fund contains), your pre-need business is actually a liability, not an asset.

This article breaks down the 5 financial metrics every funeral home owner should monitor quarterly. These metrics tell you whether your pre-need business is profitable, whether you need to adjust pricing, and whether you're at regulatory risk.

The Five Essential Metrics for Pre-Need Performance

Metric #1: Total Fund Size (Dollar Amount in Trust)

What it measures: The total dollar amount currently held in your pre-need trust account.

How to calculate it: Look at your trust account balance statement from your bank or trust custodian. It's simply the total cash balance.

Professional benchmark: Most funeral homes should have 3-5 months of operating expenses in pre-need trust. For a funeral home with $500K annual operating expenses, this means $125K-$250K in trust.

What it tells you: This is your cushion. It tells you how much liquidity you have if multiple services are activated simultaneously, and whether you're generating enough pre-need business to build a meaningful reserve.

Red flags:

• Fund size too small: Less than 2 months of operating expenses = you're not generating enough pre-need business, OR you're paying out too quickly when services are delivered.
• Fund size shrinking: Declining quarter-over-quarter = more services are being activated than new contracts are being sold, or families are cancelling contracts.

Metric #2: Annual Interest Rate (Return on Fund)

What it measures: The percentage return your trust fund earns annually through interest on the balance.

How to calculate it: (Interest earned in last 12 months ÷ Average trust balance over those 12 months) × 100

Example: If your trust fund averaged $200,000 and earned $4,000 in interest, your return is 2%.

Professional benchmark: 2-4% depending on where funds are held (money market account, CD, etc.). Current rates vary with market conditions.

What it tells you: This reveals whether your funds are in the right place. If you're earning less than 1%, your money is in a non-interest-bearing account when it should be earning more. If you're earning more than 5%, great—but verify that your trust custodian isn't charging excessive fees.

Red flags:

• Rate below market average: Check with your bank. If they're offering 2% money market but yours is in a non-yielding account, you're losing thousands annually.
• Negative rate trend: Market conditions affect rates, but if your rate dropped significantly, verify why. It could be account mismanagement.

According to the Federal Reserve's interest rate data, money market fund yields currently range from 4-5% for accounts with reasonable balances. If you're earning less, it's worth investigating.

Metric #3: Cost-to-Deliver Ratio

What it measures: How much you actually spend to deliver a service compared to what families paid for it. This is the most important profitability metric.

How to calculate it: (Actual cost of service delivered ÷ Price family paid for pre-need contract) × 100

Example: A family contracted for a full service funeral for $5,000. When the death occurs and you deliver the service, your actual cost was $3,500 (casket, embalming, staff time, etc.). Your cost-to-deliver ratio is 70%.

Professional benchmark: 65-85%. Most funeral homes aim for 75% or lower to ensure healthy margin.

What it tells you: This tells you your gross profit margin on pre-need services. At 75%, you have 25% margin to cover overhead, make profit, etc. At 90%, you're barely making money.

Red flags:

• Ratio above 85%: You're pricing too low OR your service delivery costs are too high. Either adjust pricing on new contracts or analyze where costs are creeping up.
• Ratio trending higher: If this metric is increasing quarter over quarter, costs are rising. This could be inflation in casket/supply costs, or staff wages increasing. You need to adjust pricing.
• Ratio varies dramatically by service type: If cremation services have a 60% ratio but full services are 90%, you're mispricing one category. Investigate.

Metric #4: Pre-Need ROI (Return on Investment)

What it measures: The overall profit generated from your pre-need business as a percentage of pre-need revenue.

How to calculate it: ((Total pre-need revenue - Total pre-need service costs - Pre-need management costs) ÷ Total pre-need revenue) × 100

Example: In the last 12 months, you had $200,000 in pre-need revenue. Your service delivery costs were $140,000. Pre-need management costs (admin, marketing, trustee fees) were $20,000. Your profit was $40,000. Your ROI is 20%.

Professional benchmark: 15-25%. Anything less is underperforming.

What it tells you: This is your true pre-need profitability. If ROI is below 15%, your pre-need business isn't worth the management complexity.

Red flags:

• ROI below 10%: Your pre-need business is barely profitable. Consider whether marketing spend is justified or whether you need to raise prices.
• Negative ROI: You're losing money on pre-need. This happens when cost-to-deliver is too high or management overhead is excessive.

Metric #5: Fund Adequacy Ratio

What it measures: Whether your trust fund is large enough to cover all service obligations if they were all activated at once.

How to calculate it: (Current trust balance ÷ Total unfulfilled service liability) × 100

Calculating unfulfilled service liability: Add up the contracted dollar amounts for all active pre-need contracts that haven't yet been fulfilled.

Example: You have $150,000 in your trust fund. You have 30 active unfulfilled pre-need contracts totaling $180,000 in service obligations. Your fund adequacy ratio is 83%. This means if all 30 services were activated tomorrow, you'd need $30,000 more to cover them.

Professional benchmark: 100%+ (your fund should be able to cover all pending obligations). Many states require this by law.

What it tells you: This is a regulatory compliance metric. It ensures families' money is protected and you can actually deliver what you've promised.

Red flags:

• Ratio below 90%: You're dangerously close to being under-capitalized. You need to either stop selling new pre-need contracts or reduce your service offerings to lower obligation levels.
• Ratio below 80%: You may be in regulatory violation. Most states require 100%+ adequacy. Contact your state funeral board.
• Ratio declining: If this is trending down, you're selling new contracts faster than your fund is growing. This is unsustainable.

How to Calculate These Metrics: Step-by-Step

Quarterly Metric Calculation Checklist

1. Gather your data: Pull your trust account statement (balance, interest earned), list all active pre-need contracts with amounts, and document all services delivered in the last quarter with costs.
2. Calculate Fund Size: Copy trust account balance from your bank statement.
3. Calculate Interest Rate: (Interest earned last 12 months ÷ Average balance) × 100
4. Calculate Cost-to-Deliver: For each service delivered, calculate (actual cost ÷ contracted price). Then average across all services.
5. Calculate ROI: (Total revenue - Total costs) ÷ Total revenue × 100
6. Calculate Fund Adequacy: (Trust balance ÷ Total unfulfilled liability) × 100
7. Compare to benchmarks: See how each metric compares to professional standards above.
8. Identify trends: Compare this quarter to last quarter. Are metrics improving or declining?

Red Flags and What to Do About Them

Flag: Cost-to-Deliver ratio is 85%+

Action: Audit your service delivery costs. Are caskets costing more? Are you over-delivering (providing more service than families contracted for)? On future contracts, increase pricing. For existing contracts, absorb the loss but don't make the same mistake again.

Flag: Interest rate is less than 1%

Action: Call your bank. Ask if your funds are in the highest-yielding option available. If not, move them to a money market fund or high-yield savings account. This could generate thousands more annually.

Flag: Fund adequacy is below 100%

Action: URGENT. This is a regulatory issue. (1) Stop taking new pre-need contracts immediately. (2) Contact your state funeral board to report the shortfall. (3) Develop a plan to address it (either deposit additional funds or offer contract cancellations to families). (4) Do not ignore this—state regulators can fine you or revoke your license.

Flag: Pre-need ROI is below 10%

Action: Evaluate whether pre-need marketing is worth it. If you're only making 10% profit, you might be better off focusing on at-need and casket sales. Alternatively, raise pre-need pricing to improve margins.

Common Mistakes in Pre-Need Financial Management

Mistake 1: Not Calculating These Metrics At All

Many funeral home owners don't track pre-need profitability at all. They assume it's profitable without data. This leads to under-pricing, regulatory violations, or fund under-capitalization. Start calculating today.

Mistake 2: Mixing Pre-Need and At-Need Accounting

If you don't track pre-need revenue and costs separately, you can't calculate true ROI. You need separate accounting codes so you can isolate pre-need performance.

Mistake 3: Underpricing Pre-Need Contracts

Many funeral homes underprice pre-need to boost sales volume. This crushes profitability. If your cost-to-deliver is 80% but you're only pricing 15% margin, you're leaving money on the table. Use these metrics to justify higher pricing.

Mistake 4: Not Updating Liability Estimates

Your unfulfilled service liability should be updated quarterly as new contracts are sold and old contracts are fulfilled. If you're not updating it, your fund adequacy ratio is meaningless.

Quarterly Review Process

Create a simple quarterly process to calculate and review these metrics:

• Who: Assign this to your business manager or accountant
• When: End of quarter (last week of March, June, September, December)
• How long: Should take 1-2 hours
• Output: One-page summary showing 5 metrics, benchmarks, and any red flags
• Action: Review with your owner/partner. If flags exist, discuss corrective actions.
• Document: Keep summaries for regulatory audits

Related Resources on Pre-Need Finance

• Pre-Need Fund Audits and Reporting Best Practices – How to prepare for regulatory audits of your trust fund
• State Regulations for Pre-Need Trust Funds – State requirements for fund adequacy and reporting
• Pre-Need Trust vs. Insurance Requirements – Different financial implications of trust vs. insurance funding

Bottom Line

Pre-need profitability isn't obvious. Track these 5 metrics quarterly. They'll tell you whether your pre-need business is genuinely profitable, whether you need to adjust pricing, and whether you're compliant with your state's fund adequacy requirements.

If fund adequacy is below 100%, address it immediately—this is a regulatory issue. If ROI is below 15%, evaluate whether pre-need is worth your marketing investment.