May 3, 2024 • 33 mins
Discover the roadmap to financial mastery within the painting business landscape as Daniel from Bookkeeping for Painters and I, Richard, your tax guru, lay out the must-know metrics that can make or break your venture. It's time to move beyond the brush and palette and get intimate with your profit and loss statement. We decode the language of numbers, giving you an inside look at revenue, cost of goods sold, and the all-important gross profit margin. This episode is more than just a numbers game—it's a strategic lesson in boosting your business's bottom line, and we're here to steer you through it.
Take a seat at the table where the financial big hitters play; here, Daniel and I dissect what it takes to scale your painting business from its humble beginnings to a multimillion-dollar empire. We share insider knowledge on salary percentages, optimal team structure, and how to hit benchmark profit margins at every stage of growth. Whether you're hiring your first production manager or building a C-suite, we cover the financial tactics that ensure each brushstroke you make is a stroke of genius. Tune in and transform your painting business into a masterpiece of profitability.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to the Profitable Painter Podcast.
The mission of this podcast issimple to help you navigate the
financial and tax aspects ofstarting, running and scaling a
professional painting business,from the brushes and ladders to
the spreadsheets and balancesheets.
We've got you covered.
But before we dive in, a quickword of caution While we strive
to provide accurate andup-to-date financial and tax
(00:20):
information, nothing you hear onthis podcast should be
considered as financial advicespecifically for you or your
business.
We're here to share generalknowledge and experiences, not
to replace the tailored adviceyou get from a professional
financial advisor or taxconsultant.
Speaker 2 (00:40):
We strongly recommend you seeking individualized
advice before making anysignificant financial decision.
This is Daniel, the founder ofBookkeeping for Painters.
Speaker 3 (00:44):
This is Richard tax director.
How's it going, daniel?
Speaker 2 (00:49):
Going well.
It's been a while since we'verecorded together getting
through tax season.
Speaker 3 (00:55):
It has been, in case folks don't know.
I took a little hiatus from thepodcast for the first few
months of the year to getthrough tax season.
But I'm back.
I'm sure nobody missed me andthat's okay, but it is nice to
be back.
Speaker 2 (01:12):
Yeah, a few more gray hairs I've noticed since before
tax season.
Speaker 3 (01:21):
Yeah, every tax season has its own challenges.
This one is no different.
They keep making changes to thetax code, and so you really
have to kind of stay up onthings.
Yeah, job security assured inlife than death and taxes.
(01:48):
So it's either mortician or taxplanner, and I don't know if I
picked the right one, but I usedto get job security, yeah, yeah
.
Speaker 2 (01:54):
Well, today we are going to discuss knowing your
margins.
Trying to help folksunderstanding their numbers is a
big part of what we do, and sohopefully this podcast will help
you understand, when you'relooking at your profit and loss,
what it is, what is you'relooking at and also what numbers
should you be hitting.
So we're going to go throughsome basic definition of terms,
(02:16):
because a lot of times it canget confusing with a lot of
different, a lot of differentterms and people say them in a
different way And's a lot ofjargon associated with this
stuff, like COGS and EBITDA, tomake things more confusing.
So we're going to go throughdefinition of terms, make sure
everyone's on the same page, andthen we'll go through what
(02:39):
should you aim for in yourmargins?
We're going to give youbasically what we've seen the
best painting businesses, whatkind of margins are they hitting
, what their numbers look likefor different stages of a
painting business.
So hopefully this will be agood reference episode for you
in your journey.
Speaker 3 (02:57):
Yeah, you mentioned that.
It makes it more difficultbecause these things have
different names.
And I thought just off the topyou know we're going to go over
a profit and loss statement,don't you mean income statement?
No, because the statementitself literally has different
names.
So you know, as crustyaccountants, we tend to stick
(03:18):
with the traditional incomestatement, but profit and loss,
p&l income statement.
Speaker 2 (03:27):
But profit and loss, p and l, it's all the same thing
.
Yeah, technically it's undergap, it's the only.
If you're using gap, then it'san income statement, but
everything else is a profit andloss.
So there's actually the um.
Aicpa has like rules on if youcan call it an income statement
or not.
So, uh, yeah, so unless unlessyou're following GAAP strictly,
it's going to be a profit andloss is the right.
(03:50):
But yeah, you're right, it'sall these different terms and so
we're going to be talking aboutthose definition of terms.
So if you're looking at yourprofit and loss or what you
might hear other folks refer toas an income statement, the
first thing you see at the verytop is revenue, or even some.
Depending on your software, itmight even say something else,
(04:11):
like total income or gross sales.
So even that term revenue mightbe substituted for a few
different things, but it'sbasically the thing on the top.
That's revenue, total sales,gross sales, total income that's
(04:35):
the money coming in from yourcustomers without anything taken
out.
Speaker 3 (04:37):
So when they talk about growing your top line,
that's what they're talkingabout.
Right, the you're increasingthe total amount of money that
comes into your business,without regard to expenses and
things like that right, yeah,and just this first one.
Speaker 2 (04:54):
I mean, there's so many different ways to say
revenue.
Uh, I think in quickbooksonline it doesn't say total
income.
Speaker 3 (05:05):
I want to say Now, like I was taught that the term
revenue refers to, like grossrevenue, money coming in without
regard to expenses and incomeis more of what you have after
you factor out all of yourexpenses.
(05:25):
I don't think that's a hard andfast rule.
I still kind of stick with that.
But tax returns will say totalincome.
When they're talking about topline, quickbooks will say income
.
So, yeah, I mean again, it'swhatever you feel comfortable
calling it, as long as we, as weunderstand right, it's the top
line there, the gross sales orthe gross income.
Speaker 2 (05:48):
yeah, and then right below that section, that top
line is is the cost of goodssold section, or sometimes
referred to the cost of sales,cost of services.
So it's basically the sectionwhere your, your direct costs
are supposed to be in there.
So this is like your directmaterials, your paint and
(06:11):
supplies, and then your, yourdirect labor, uh, you know,
employees or subcontractor crewsworking on the job site.
That's the cost of goods soldsection.
And uh, so that's the nextsection there and then right
below that it should be grossprofit margin or gross profit,
and so gross profit is what'sleft over after you take your
(06:32):
revenue and subtract out yourcost of goods sold, or COGS.
Some people refer to it as COGS.
That's another piece of jargon.
Someone says what's your COGSCost of goods sold, but anyway,
so gross profit margin isrevenue minus your cost of goods
sold equals your gross profitmargin, and that's a key number
(06:52):
for painting businesses, and theaverage gross profit margin is
40% and that's the averageacross the industry that we see.
And again, that's your revenueminus your direct materials job
site materials and minus yourdirect labor job site labor
(07:15):
equals your gross profit.
Speaker 3 (07:18):
And we want that gross profit to be you said, 45%
.
This is kind of the goal.
Speaker 2 (07:23):
Well, the average is 40%.
So you typically want to shootfrom better than average.
So I typically recommend 50%gross profit margin.
And again, the percentage iswhat's left over divided by the
revenue.
So if you have a house that youpainted, you charge the client
$10,000, you paid $3,000 for thelabor and then $2,000 for the
(07:47):
paint and supplies.
Your cost of goods sold is$5,000, $3,000 plus $2,000.
What's left over is $10,000minus the $5,000.
The cost of goods sold equals$5,000 of gross profit.
And so if we take $5,000divided by what we charge the
client, that's $10,000.
That equals 0.5, which is 50%.
(08:10):
So again the percentages.
Whenever we say percentageswe're basically talking about
taking that number and dividingit by their top line revenue.
Speaker 3 (08:20):
So a nice rule of thumb is when you go to bid a
job, you need to bid it twice asmuch as it's going to cost you
in paint, supplies and labor.
Speaker 2 (08:31):
Yeah, exactly as a general rule of thumb, for sure.
Yeah, so that's gross profitmargin.
And then there's anothersimilar one, which is
contribution margin, or somepeople might just say margin.
And so this is where it kind ofgets confusing.
(08:52):
When people are talking aboutwhat's your margin percentage or
what's your contribution margin, what's your gross profit
margin, people are usually usingdifferent words to mean
different things and it can kindof get confusing.
So gross profit, like I said, iswhat's left over after you pay
for direct cost materials andlabor.
(09:15):
Contribution margin is what'sleft over after the same thing,
but also some other variablecosts.
So variable costs are usuallythings related to production,
job site production.
So these could be things likeauto expenses, because a lot of
(09:35):
times you're driving from makingtrips to the paint store going
out to the job.
Those types of things arevariable based on how much
production you're doing to thejob.
Those types of things arevariable based on how much
production you're doing, and sothat's a variable cost that you
can include up above the line,which we'll come back to that
phrase above the line in asecond.
(09:55):
But you can include that inyour calculation for
contribution margin.
And then payment processingfees might be another one.
It's a variable cost becauseyour payment processing fees are
going to go up as you chargeyour clients more money Because
Stripe or Square that they'redoing.
So that might be anothervariable cost that you have that
(10:37):
you include in the calculationof your contribution margin.
And some people even includesalespeople up in the
contribution margin to basicallyuse all those variable costs to
subtract from revenue to getyour contribution margin.
So that is another term thatfolks use.
(10:57):
So it's similar to gross profitmargin, just adding a few more
of those variable costs in there.
Speaker 3 (11:04):
It's similar to gross profit margin, just adding a
few more of those variable costsin there Sounds like the big
difference between direct costsand figuring gross margin and
then these other variable costsis the fact that they're
variable.
Is that right?
Yeah, if I have to go down toSherwin-Williams and buy paint,
I have to pay whateverSherwin-Williams is charging for
that paint.
(11:24):
You know, my guys, they getpaid a certain amount per hour.
I have to pay them to do thejob.
These other expenses, likevehicle expenses and bank
processing fees and things likethat, they are tied directly to
the job because we wouldn't havethese expenses if we weren't
doing the work.
But maybe there's moreflexibility in controlling them.
(11:48):
Like maybe I can, you know,choose to drive less or drive
less expensive vehicles or maybefind a better payment processor
with cheaper fees.
Is that kind of the bigdifference between the
contribution margin costs andthe direct costs, or am I just
thinking about it kind of weird?
Speaker 2 (12:06):
contribution margin and gross profit margin, like
you're in your.
So like, yeah, gross profitmargin, is this like simple.
Try to keep it.
It's simple, simple andcomparable across different
companies.
Pretty well, because you caneasily identify these are
supplies and materials that wepurchased for the job and this
is what we paid our folks.
So those are direct costs andthat subtracts out to get a
(12:28):
gross profit margin,straightforward.
And then contribution marginit's very subjective.
What can you include incontribution margin?
Basically anything that'svariable.
So you know, like you said,auto costs, paying your
production manager, paying yoursalesperson, potentially, and
people have a differentdefinition of what they would
(12:49):
include in contribution marginand it's somewhat based off
preferences, whereas grossprofit margin is pretty much
materials and labor for the mostpart.
That's what most people meanwhen they say that.
But, uh, you know, even then itcan be a little subjective, but
it's a little bit morestraightforward than
(13:10):
contribution margin.
Gotcha, um, and the other thingthat you might hear is above
the line or below the line.
So above the line, the uh.
So this is a different line thanthe top line.
So the top line refers torevenue or total income, total
(13:30):
money coming in when someonesays above the line or below the
line.
This is actually a differentline that we're referring to.
This is the line that is belowthe cost of goods sold.
It's basically the line betweenyour cost of goods sold and
your gross profit margin, oryour cost of goods sold and
(13:55):
variable costs and yourcontribution margin, depending
on who you're talking to and howthey're tracking this portion
of their P&L.
That's where the line is.
It's either basically wherecontribution margin is or where
gross profit margin is, and sowhen they say above the line,
they're talking about the costs,the variable or direct costs
(14:16):
involved.
If they say below the line,they're talking about overhead
costs, and so overhead costs arebasically anything that's not
job site related.
So that's another piece ofjargon that you'll hear.
A lot is above the line orbelow the line, and so the next.
Speaker 3 (14:39):
Oh yeah, go ahead.
As far as overhead goes, ohyeah, those overhead costs are
(15:07):
going to be there and that'skind of what puts them below the
line, in that they're necessary.
Speaker 2 (15:21):
But they're not directly tied to the work that
you or the services that yousell.
Exactly, yeah, they're not tiedto the.
They're not tied to a job, orthey're if you're using
contribution margin.
They might be more fixed costsor semi-fixed where, like for
example your insurance, there'sa little bit of it might be
(15:43):
semi-fixed.
It's somewhat dependent on howbig of a company you have, but
for the most part throughout theyear, a single year, it's not
going to change substantially.
Or accounting costs is asemi-fixed.
You have an agreement withwhoever you're working with.
They're probably charging youabout the same If your services
(16:04):
don't change you about the sameamount per throughout the year,
but obviously as you grow a lotlarger, that will change the
value chart.
So it's like semi fixed.
But yeah, those type of costsnot associated with a job or
somewhat fixed are going to bein overhead.
And also positions that are notapplicable, not have to do with
(16:32):
not any specific job.
Like, obviously, your crewsthat are working on the job site
are not going to be in overhead.
They should be up in cost toget sold.
And then your office workerwould be an overhead salary,
like we said before, productionmanagers and salespeople they
can be an overhead, but somepeople do track them up in
(16:54):
contribution margin to derivethat.
So those are dependent on who'ssetting up your chart of
accounts.
You can do it either way.
I think for comparabilitypurposes, if you want to compare
your numbers to other paintingbusinesses, gross profit margin
is the safe way to go becauseit's for ease of comparability.
(17:16):
If you know your margins reallywell and you know exactly how
much you should be paying, maybecontribution margin would be a
good option.
And you know exactly how muchyou should be paying, maybe
contribution margin would be agood option.
But so overhead, not jobspecific, and usually fixed or
semi-fixed.
Speaker 3 (17:33):
And-.
Would this also include, likeyour advertising and marketing
costs in overhead?
Speaker 2 (17:39):
Typically yes, typically sales and marketing is
in overhead.
Occasionally you'll seesomebody put it up in
contribution margin with theidea like, oh, these are
variable, it's not necessarilywrong, but most of the time
you're going to see sales andmarketing in overhead cost.
And then that leads us into netoperating income.
(18:00):
So net operating income also.
Some people say EBITDA is avery similar concept here.
Basically, what's left overafter paying for your direct
costs and your overhead, what'sleft over before any kind of
interest or depreciation, that'syour net operating income.
(18:20):
Some people say EBITDA, whichis earnings before interest,
taxes and amortizationdepreciation.
So that's the net operatingincome.
So then we get into the lastcouple of ones, which is other
income and expenses.
Other income might be likecredit card rewards, or other
(18:42):
expense might be interestdepreciation, those type of
things.
Speaker 3 (18:48):
If you have any investments for the company or
even just like the interest offyour savings accounts and things
like that, that would be inother income.
It's not directly related toyour operations but is on your
profit and loss.
Speaker 2 (19:05):
Yep exactly, and then , finally, we get to the bottom
line, or net profit, net income.
What are some other words thatpeople use?
Speaker 3 (19:19):
My pocket money yeah.
The bottom line, that's thereally important one.
The net profit yeah, Becausethat tells you how much you
actually made.
Speaker 2 (19:31):
Right In some cases.
We'll get to another term herein a second.
But net profits, your bottomline net income, what's left
over after you pay for all thecosts of the business, what's
left over for the owners.
Now, sometimes, as an owner,you're not just the owner of the
business.
A lot of folks that arelistening to this are working in
(19:53):
the business, and if you're anS-corp, you're required to run a
reasonable officer salary andso you're probably running, or
hopefully running, a reasonableofficer salary and your, your
salary is, on the incomestatement, probably an overhead,
uh, you know, as officer salary.
So to really calculate whatyou're making in the business,
you would take your net profitand then add your salary
(20:16):
together to get yourdiscretionary earnings, or cash
flow to owner is another way tosay it.
Basically, what do you, what doyou make in the business as a
business owner?
So discretionary earnings orcash flow to owner is another
way to say it.
Basically, what do you make inthe business as a business owner
?
So discretionary earnings?
You'll hear that, you'll hearcash flow to owner, and that's
basically what your net profitis plus any salary that you're
taking.
Speaker 3 (20:37):
Gotcha.
Speaker 2 (20:39):
Cool.
So hopefully that those aresome definition of terms.
Hopefully that makes things alittle bit more clear, as can be
confusing even for me ontalking to people, what they're
saying and what they mean bywhat they say.
So hopefully that clears thingsup a little bit.
Piece we're going to go into iswhat should you actually aim
for in your margins, and so I'mgoing to do a a screen share so
(21:06):
if you're listening to this, youcan go watch the the youtube
version of this and actually seethe screen, but we'll try to
explain it for the folks thatare just listening.
So we have a growth model thatkind of gives a recommendation
for what you should be hittingin your margins for each stage
(21:26):
of your painting business.
We have four different stages.
We're going to cover probablythe first three just for this
episode, and the differentstages is basically foundation,
which is zero to 500K in revenue, growth, which is 500K to 1.5
million, and then expansion is1.5 million to 5 million.
(21:48):
So those are our threedifferent revenue levels.
Each one of these we haverecommended margins that you
should hit and recommendedpercentages that you should be
paying out for a particularexpense category.
So, for example, for directlabor, your direct labor should
(22:14):
typically run around 35% ofrevenue.
So, to use an example again, ifyou have a ten thousand dollar
project, you should be payingaround thirty five hundred to
your, your painters that arepainting that house with fully,
(22:34):
fully loaded with a payroll andworkers comp.
So thirty,500 should go to thatdirect labor and that's 35%.
That's typically where youwould want to shoot for.
(22:54):
So we'll go through threedifferent models.
So we'll stick with the firstone, which is foundation first,
which is the zero for 500K.
So this is typically a paintingbusiness owner that is wearing
a lot of the hats, and so we'llsay that this painting business
owner is the salesperson, theproduction manager, the office
(23:15):
worker and also the businessowner.
So with those different roles,their discretionary earnings,
what their cash flow tothemselves, is going to be a lot
higher of a percentage than asthe business grows.
So let's start with what shouldthis person make, to kind of
(23:36):
illustrate what we're talkingabout here.
So if the paying business owneris, you know, the salesperson,
production manager, officeperson and also the business
owner, what should they bemaking?
So if we take the net profit ofthis business, recommended
percent to hit is 11 and a halfpercent.
Then we add in a salespersoneight and a half percent.
(24:00):
We add in a office worker,because oftentimes with the
smaller businesses you're alsodoing the office work too, along
with everything else, andyou're also the production
manager.
So with those four differentroles, production manager is
7.5%, salesperson 8.5%, 8%Salesperson 8.5%.
(24:20):
Office workers 4.5%.
And then net profit is 11.5%.
The discretionary earnings forthis painting business owner
would be 32%.
Should be going to them in theform of net profit and any
salary that they're running, ifthey're running that Another key
number to know.
(24:41):
So that's what you should bemaking.
But what should your grossprofit margin be Like?
We said before, the average isaround 40%, but you should be
shooting for around 50%.
So we have 47.5% gross profitmargin for this level.
It's a little bit lower thanthe other levels because when
(25:02):
you're getting started it'susually harder to.
You don't have as muchauthority to charge as much.
It's a little bit hardergetting started maybe newer in
the industry, so you're not aswell known.
Maybe you don't have as manyGoogle reviews, so it's harder
to charge as much as someonethat's been around for a decade
(25:23):
plus.
So that's why the gross profitmargin is a little bit lower,
but you should still shoot for50%, and then maybe you'll end
up somewhere around 47%.
Speaker 3 (25:35):
Yeah, I imagine you still have some efficiencies to
work out too with your crew.
When you're just starting out,maybe you take a little bit
longer than than you should, ormaybe you're not quite as um
efficient with the materials.
And as you, as you grow and youlearn these things, then the
costs of your direct labor anddirect materials will start to
(25:56):
shrink as you become moreefficient.
Speaker 2 (25:59):
Exactly.
So.
That's the foundation phasezero to 500K in revenue.
Bottom line is if you're theproduction manager, salesperson,
office worker and the businessowner, you should be shooting
for about 32% in discretionaryearnings cashflow to yourself
(26:19):
and a 47.5% gross profit target.
Those are your key numbers forthat.
Now there's some other keynumbers here for this level
which we'll cover here at theend.
We'll go to the next one, whichis the growth stage, which is
(26:44):
the 500K to 1.5 million.
Uh, and they're often at thispoint they've most, or a lot of
them have a production managerat this point.
Not all of them, but many, many, you know, end up getting a
(27:07):
production manager in place.
Uh, and they often also have a,an office worker helping them
as well, and so they're doingsales still and they're uh,
they're, making a profit as thebusiness owner.
Now, of course, this might beslightly different depending on
your situation.
Obviously, someone closer to500k and the stage will likely
(27:30):
be doing production managementas well and maybe even the
office work, and then, if you'reclose to 1.5 million, you're
probably doing maybe less things, maybe just the salesperson
role and the business owner.
So let's say they're thesalesperson, the business owner,
at this stage you should begetting 8.5% for your sales role
(27:50):
and then about 14% in profit,bottom line profit.
We add those together, that's22.5% in discretionary earnings
going to you.
We add those together, that's22.5% in discretionary earnings
going to cash flow, to the owner22.5%.
And then you're paying yourproduction manager around 7%,
you're paying an office workersomewhere around 4% of revenue,
(28:15):
and then your margin, your grossprofit margin, you should be
shooting for 50% at this stageas a recommendation, and so that
is the growth stage.
Then the third one we'll coverhere is the expansion.
This is 1.5 to 5 million.
So at this point a lot ofpainting business owners
(28:38):
actually get out of sales aswell.
They have a sales person oreven a team of salespeople, and
they have production managers.
And so really there's a newline item that pops up here,
which is the C-suite.
This is your CEO, coo, cfo, cmo.
(29:00):
So chief executive officers,chief operating officer, chief
financial officers, chiefmarketing officer, your C-suite.
And so we have a nice.
Speaker 3 (29:10):
those are the nice offices on the top of the
building, with corner windowsand the leather chairs, exactly.
Speaker 2 (29:22):
Okay.
So three and a half% isallocated to that.
So if you're at this level,you're probably, if you're doing
around 2 million, you'reprobably doing all those roles,
you're probably the full C-suite, so you might have 5 offices
with great views, and so that3.5% is probably all going to
you and you likely have yoursalesperson, production manager,
(29:45):
covered at least a lot of folksdo at this point and then you
are the business owner.
So you get that 15% profit andso that's 18.5%.
So you'll notice that thepercentages are going down as
you're growing, but that's okaybecause the overall pie is
(30:06):
growing.
So you're getting a smallerpercentage of that pie, but pie
is growing.
So you're getting more overallin terms of dollars in your
pocket.
So 18.5% discretionary earnings, which is 3.5% for the C-suite
roles that you're playing, andthen your bottom line profit and
(30:28):
at this point your gross profitmargin target we recommend to
shoot for.
Try to improve a little bitover 50%.
At this point you've probablybeen around a while.
You probably have a strongsales process that you can
command higher prices, so youcan start getting a little bit
over 50%, and so we recommend53% gross profit margin.
(30:48):
And so those are the threescenarios to give you an idea of
what you should be shooting foryour numbers.
There's other key numbers herethat are kind of the same across
the different stages, which wetalked about direct labor for
the most part, it's somewherearound 35%.
Direct materials, you know,somewhere between 12 and 15%.
(31:13):
Obviously, as you get moreexperienced and bigger you can
usually start.
You have better negotiatingpowers with your vendors, that
sort of thing, so you should beable to drive those costs down.
A smaller as a smallerpercentage of of revenue uh,
auto expenses somewhere aroundtwo to three percent for the
(31:35):
most part across all levels.
Marketing uh, marketing includesthe cost to do marketing,
either pay someone to do it orhire an outside firm to do it.
Somewhere around 7% is what youshould aim for, or at least we
(31:56):
recommend somewhere around 7% ofrevenue.
Your accounting you might hirethis out or you might have
someone in-house doing it or acombination of that.
So you're probably to do allthe things that you need done,
which is your bookkeeping andyour taxes and your invoicing
(32:20):
and your accounts payable allthat stuff somewhere around 3%,
and then we have a couple ofsmaller items there.
So those are somerecommendations on what you
should be hitting for yournumbers and the margins.
You should be seeing as youmove through your journey as a
(32:44):
painting business owner.
Speaker 3 (32:49):
That's a great graphic you have, Daniel,
Definitely very informative, andI love how it kind of breaks up
the journey of a business intostages.
You know we take things onestep at a time and as we grow
and mature our numbers adjustslightly to reflect that growth.
So I appreciate you sharingthat.
Speaker 2 (33:11):
Glad I could help.
All right, cool.
So hopefully that this podcastwas helpful for you to know,
understand your margins so youcan get grow your business to
the next level.
We'd love to hear your thoughtsor comments on this episode.
If you want to join theconversation, go to grow your
painting business.
(33:31):
You type that into Facebook, uh, ask for an invite to the group
and we will let you in.
Definitely, let us know whatyour thoughts are on on margin,
what you shoot for.
Love to hear your thoughts andwith that we will see you next
week.
Speaker 3 (33:46):
All right.
Thanks for listening.
Welcome to the Profitable Painter Podcast.
The mission of this podcast issimple to help you navigate the
financial and tax aspects ofstarting, running and scaling a
professional painting business,from the brushes and ladders to
the spreadsheets and balancesheets.
We've got you covered.
But before we dive in, a quickword of caution While we strive
to provide accurate andup-to-date financial and tax
(00:20):
information, nothing you hear onthis podcast should be
considered as financial advicespecifically for you or your
business.
We're here to share generalknowledge and experiences, not
to replace the tailored adviceyou get from a professional
financial advisor or taxconsultant.
Speaker 2 (00:40):
We strongly recommend you seeking individualized
advice before making anysignificant financial decision.
This is Daniel, the founder ofBookkeeping for Painters.
Speaker 3 (00:44):
This is Richard tax director.
How's it going, daniel?
Speaker 2 (00:49):
Going well.
It's been a while since we'verecorded together getting
through tax season.
Speaker 3 (00:55):
It has been, in case folks don't know.
I took a little hiatus from thepodcast for the first few
months of the year to getthrough tax season.
But I'm back.
I'm sure nobody missed me andthat's okay, but it is nice to
be back.
Speaker 2 (01:12):
Yeah, a few more gray hairs I've noticed since before
tax season.
Speaker 3 (01:21):
Yeah, every tax season has its own challenges.
This one is no different.
They keep making changes to thetax code, and so you really
have to kind of stay up onthings.
Yeah, job security assured inlife than death and taxes.
(01:48):
So it's either mortician or taxplanner, and I don't know if I
picked the right one, but I usedto get job security, yeah, yeah
.
Speaker 2 (01:54):
Well, today we are going to discuss knowing your
margins.
Trying to help folksunderstanding their numbers is a
big part of what we do, and sohopefully this podcast will help
you understand, when you'relooking at your profit and loss,
what it is, what is you'relooking at and also what numbers
should you be hitting.
So we're going to go throughsome basic definition of terms,
(02:16):
because a lot of times it canget confusing with a lot of
different, a lot of differentterms and people say them in a
different way And's a lot ofjargon associated with this
stuff, like COGS and EBITDA, tomake things more confusing.
So we're going to go throughdefinition of terms, make sure
everyone's on the same page, andthen we'll go through what
(02:39):
should you aim for in yourmargins?
We're going to give youbasically what we've seen the
best painting businesses, whatkind of margins are they hitting
, what their numbers look likefor different stages of a
painting business.
So hopefully this will be agood reference episode for you
in your journey.
Speaker 3 (02:57):
Yeah, you mentioned that.
It makes it more difficultbecause these things have
different names.
And I thought just off the topyou know we're going to go over
a profit and loss statement,don't you mean income statement?
No, because the statementitself literally has different
names.
So you know, as crustyaccountants, we tend to stick
(03:18):
with the traditional incomestatement, but profit and loss,
p&l income statement.
Speaker 2 (03:27):
But profit and loss, p and l, it's all the same thing
.
Yeah, technically it's undergap, it's the only.
If you're using gap, then it'san income statement, but
everything else is a profit andloss.
So there's actually the um.
Aicpa has like rules on if youcan call it an income statement
or not.
So, uh, yeah, so unless unlessyou're following GAAP strictly,
it's going to be a profit andloss is the right.
(03:50):
But yeah, you're right, it'sall these different terms and so
we're going to be talking aboutthose definition of terms.
So if you're looking at yourprofit and loss or what you
might hear other folks refer toas an income statement, the
first thing you see at the verytop is revenue, or even some.
Depending on your software, itmight even say something else,
(04:11):
like total income or gross sales.
So even that term revenue mightbe substituted for a few
different things, but it'sbasically the thing on the top.
That's revenue, total sales,gross sales, total income that's
(04:35):
the money coming in from yourcustomers without anything taken
out.
Speaker 3 (04:37):
So when they talk about growing your top line,
that's what they're talkingabout.
Right, the you're increasingthe total amount of money that
comes into your business,without regard to expenses and
things like that right, yeah,and just this first one.
Speaker 2 (04:54):
I mean, there's so many different ways to say
revenue.
Uh, I think in quickbooksonline it doesn't say total
income.
Speaker 3 (05:05):
I want to say Now, like I was taught that the term
revenue refers to, like grossrevenue, money coming in without
regard to expenses and incomeis more of what you have after
you factor out all of yourexpenses.
(05:25):
I don't think that's a hard andfast rule.
I still kind of stick with that.
But tax returns will say totalincome.
When they're talking about topline, quickbooks will say income
.
So, yeah, I mean again, it'swhatever you feel comfortable
calling it, as long as we, as weunderstand right, it's the top
line there, the gross sales orthe gross income.
Speaker 2 (05:48):
yeah, and then right below that section, that top
line is is the cost of goodssold section, or sometimes
referred to the cost of sales,cost of services.
So it's basically the sectionwhere your, your direct costs
are supposed to be in there.
So this is like your directmaterials, your paint and
(06:11):
supplies, and then your, yourdirect labor, uh, you know,
employees or subcontractor crewsworking on the job site.
That's the cost of goods soldsection.
And uh, so that's the nextsection there and then right
below that it should be grossprofit margin or gross profit,
and so gross profit is what'sleft over after you take your
(06:32):
revenue and subtract out yourcost of goods sold, or COGS.
Some people refer to it as COGS.
That's another piece of jargon.
Someone says what's your COGSCost of goods sold, but anyway,
so gross profit margin isrevenue minus your cost of goods
sold equals your gross profitmargin, and that's a key number
(06:52):
for painting businesses, and theaverage gross profit margin is
40% and that's the averageacross the industry that we see.
And again, that's your revenueminus your direct materials job
site materials and minus yourdirect labor job site labor
(07:15):
equals your gross profit.
Speaker 3 (07:18):
And we want that gross profit to be you said, 45%
.
This is kind of the goal.
Speaker 2 (07:23):
Well, the average is 40%.
So you typically want to shootfrom better than average.
So I typically recommend 50%gross profit margin.
And again, the percentage iswhat's left over divided by the
revenue.
So if you have a house that youpainted, you charge the client
$10,000, you paid $3,000 for thelabor and then $2,000 for the
(07:47):
paint and supplies.
Your cost of goods sold is$5,000, $3,000 plus $2,000.
What's left over is $10,000minus the $5,000.
The cost of goods sold equals$5,000 of gross profit.
And so if we take $5,000divided by what we charge the
client, that's $10,000.
That equals 0.5, which is 50%.
(08:10):
So again the percentages.
Whenever we say percentageswe're basically talking about
taking that number and dividingit by their top line revenue.
Speaker 3 (08:20):
So a nice rule of thumb is when you go to bid a
job, you need to bid it twice asmuch as it's going to cost you
in paint, supplies and labor.
Speaker 2 (08:31):
Yeah, exactly as a general rule of thumb, for sure.
Yeah, so that's gross profitmargin.
And then there's anothersimilar one, which is
contribution margin, or somepeople might just say margin.
And so this is where it kind ofgets confusing.
(08:52):
When people are talking aboutwhat's your margin percentage or
what's your contribution margin, what's your gross profit
margin, people are usually usingdifferent words to mean
different things and it can kindof get confusing.
So gross profit, like I said, iswhat's left over after you pay
for direct cost materials andlabor.
(09:15):
Contribution margin is what'sleft over after the same thing,
but also some other variablecosts.
So variable costs are usuallythings related to production,
job site production.
So these could be things likeauto expenses, because a lot of
(09:35):
times you're driving from makingtrips to the paint store going
out to the job.
Those types of things arevariable based on how much
production you're doing to thejob.
Those types of things arevariable based on how much
production you're doing, and sothat's a variable cost that you
can include up above the line,which we'll come back to that
phrase above the line in asecond.
(09:55):
But you can include that inyour calculation for
contribution margin.
And then payment processingfees might be another one.
It's a variable cost becauseyour payment processing fees are
going to go up as you chargeyour clients more money Because
Stripe or Square that they'redoing.
So that might be anothervariable cost that you have that
(10:37):
you include in the calculationof your contribution margin.
And some people even includesalespeople up in the
contribution margin to basicallyuse all those variable costs to
subtract from revenue to getyour contribution margin.
So that is another term thatfolks use.
(10:57):
So it's similar to gross profitmargin, just adding a few more
of those variable costs in there.
Speaker 3 (11:04):
It's similar to gross profit margin, just adding a
few more of those variable costsin there Sounds like the big
difference between direct costsand figuring gross margin and
then these other variable costsis the fact that they're
variable.
Is that right?
Yeah, if I have to go down toSherwin-Williams and buy paint,
I have to pay whateverSherwin-Williams is charging for
that paint.
(11:24):
You know, my guys, they getpaid a certain amount per hour.
I have to pay them to do thejob.
These other expenses, likevehicle expenses and bank
processing fees and things likethat, they are tied directly to
the job because we wouldn't havethese expenses if we weren't
doing the work.
But maybe there's moreflexibility in controlling them.
(11:48):
Like maybe I can, you know,choose to drive less or drive
less expensive vehicles or maybefind a better payment processor
with cheaper fees.
Is that kind of the bigdifference between the
contribution margin costs andthe direct costs, or am I just
thinking about it kind of weird?
Speaker 2 (12:06):
contribution margin and gross profit margin, like
you're in your.
So like, yeah, gross profitmargin, is this like simple.
Try to keep it.
It's simple, simple andcomparable across different
companies.
Pretty well, because you caneasily identify these are
supplies and materials that wepurchased for the job and this
is what we paid our folks.
So those are direct costs andthat subtracts out to get a
(12:28):
gross profit margin,straightforward.
And then contribution marginit's very subjective.
What can you include incontribution margin?
Basically anything that'svariable.
So you know, like you said,auto costs, paying your
production manager, paying yoursalesperson, potentially, and
people have a differentdefinition of what they would
(12:49):
include in contribution marginand it's somewhat based off
preferences, whereas grossprofit margin is pretty much
materials and labor for the mostpart.
That's what most people meanwhen they say that.
But, uh, you know, even then itcan be a little subjective, but
it's a little bit morestraightforward than
(13:10):
contribution margin.
Gotcha, um, and the other thingthat you might hear is above
the line or below the line.
So above the line, the uh.
So this is a different line thanthe top line.
So the top line refers torevenue or total income, total
(13:30):
money coming in when someonesays above the line or below the
line.
This is actually a differentline that we're referring to.
This is the line that is belowthe cost of goods sold.
It's basically the line betweenyour cost of goods sold and
your gross profit margin, oryour cost of goods sold and
(13:55):
variable costs and yourcontribution margin, depending
on who you're talking to and howthey're tracking this portion
of their P&L.
That's where the line is.
It's either basically wherecontribution margin is or where
gross profit margin is, and sowhen they say above the line,
they're talking about the costs,the variable or direct costs
(14:16):
involved.
If they say below the line,they're talking about overhead
costs, and so overhead costs arebasically anything that's not
job site related.
So that's another piece ofjargon that you'll hear.
A lot is above the line orbelow the line, and so the next.
Speaker 3 (14:39):
Oh yeah, go ahead.
As far as overhead goes, ohyeah, those overhead costs are
(15:07):
going to be there and that'skind of what puts them below the
line, in that they're necessary.
Speaker 2 (15:21):
But they're not directly tied to the work that
you or the services that yousell.
Exactly, yeah, they're not tiedto the.
They're not tied to a job, orthey're if you're using
contribution margin.
They might be more fixed costsor semi-fixed where, like for
example your insurance, there'sa little bit of it might be
(15:43):
semi-fixed.
It's somewhat dependent on howbig of a company you have, but
for the most part throughout theyear, a single year, it's not
going to change substantially.
Or accounting costs is asemi-fixed.
You have an agreement withwhoever you're working with.
They're probably charging youabout the same If your services
(16:04):
don't change you about the sameamount per throughout the year,
but obviously as you grow a lotlarger, that will change the
value chart.
So it's like semi fixed.
But yeah, those type of costsnot associated with a job or
somewhat fixed are going to bein overhead.
And also positions that are notapplicable, not have to do with
(16:32):
not any specific job.
Like, obviously, your crewsthat are working on the job site
are not going to be in overhead.
They should be up in cost toget sold.
And then your office workerwould be an overhead salary,
like we said before, productionmanagers and salespeople they
can be an overhead, but somepeople do track them up in
(16:54):
contribution margin to derivethat.
So those are dependent on who'ssetting up your chart of
accounts.
You can do it either way.
I think for comparabilitypurposes, if you want to compare
your numbers to other paintingbusinesses, gross profit margin
is the safe way to go becauseit's for ease of comparability.
(17:16):
If you know your margins reallywell and you know exactly how
much you should be paying, maybecontribution margin would be a
good option.
And you know exactly how muchyou should be paying, maybe
contribution margin would be agood option.
But so overhead, not jobspecific, and usually fixed or
semi-fixed.
Speaker 3 (17:33):
And-.
Would this also include, likeyour advertising and marketing
costs in overhead?
Speaker 2 (17:39):
Typically yes, typically sales and marketing is
in overhead.
Occasionally you'll seesomebody put it up in
contribution margin with theidea like, oh, these are
variable, it's not necessarilywrong, but most of the time
you're going to see sales andmarketing in overhead cost.
And then that leads us into netoperating income.
(18:00):
So net operating income also.
Some people say EBITDA is avery similar concept here.
Basically, what's left overafter paying for your direct
costs and your overhead, what'sleft over before any kind of
interest or depreciation, that'syour net operating income.
(18:20):
Some people say EBITDA, whichis earnings before interest,
taxes and amortizationdepreciation.
So that's the net operatingincome.
So then we get into the lastcouple of ones, which is other
income and expenses.
Other income might be likecredit card rewards, or other
(18:42):
expense might be interestdepreciation, those type of
things.
Speaker 3 (18:48):
If you have any investments for the company or
even just like the interest offyour savings accounts and things
like that, that would be inother income.
It's not directly related toyour operations but is on your
profit and loss.
Speaker 2 (19:05):
Yep exactly, and then , finally, we get to the bottom
line, or net profit, net income.
What are some other words thatpeople use?
Speaker 3 (19:19):
My pocket money yeah.
The bottom line, that's thereally important one.
The net profit yeah, Becausethat tells you how much you
actually made.
Speaker 2 (19:31):
Right In some cases.
We'll get to another term herein a second.
But net profits, your bottomline net income, what's left
over after you pay for all thecosts of the business, what's
left over for the owners.
Now, sometimes, as an owner,you're not just the owner of the
business.
A lot of folks that arelistening to this are working in
(19:53):
the business, and if you're anS-corp, you're required to run a
reasonable officer salary andso you're probably running, or
hopefully running, a reasonableofficer salary and your, your
salary is, on the incomestatement, probably an overhead,
uh, you know, as officer salary.
So to really calculate whatyou're making in the business,
you would take your net profitand then add your salary
(20:16):
together to get yourdiscretionary earnings, or cash
flow to owner is another way tosay it.
Basically, what do you, what doyou make in the business as a
business owner?
So discretionary earnings orcash flow to owner is another
way to say it.
Basically, what do you make inthe business as a business owner
?
So discretionary earnings?
You'll hear that, you'll hearcash flow to owner, and that's
basically what your net profitis plus any salary that you're
taking.
Speaker 3 (20:37):
Gotcha.
Speaker 2 (20:39):
Cool.
So hopefully that those aresome definition of terms.
Hopefully that makes things alittle bit more clear, as can be
confusing even for me ontalking to people, what they're
saying and what they mean bywhat they say.
So hopefully that clears thingsup a little bit.
Piece we're going to go into iswhat should you actually aim
for in your margins, and so I'mgoing to do a a screen share so
(21:06):
if you're listening to this, youcan go watch the the youtube
version of this and actually seethe screen, but we'll try to
explain it for the folks thatare just listening.
So we have a growth model thatkind of gives a recommendation
for what you should be hittingin your margins for each stage
(21:26):
of your painting business.
We have four different stages.
We're going to cover probablythe first three just for this
episode, and the differentstages is basically foundation,
which is zero to 500K in revenue, growth, which is 500K to 1.5
million, and then expansion is1.5 million to 5 million.
(21:48):
So those are our threedifferent revenue levels.
Each one of these we haverecommended margins that you
should hit and recommendedpercentages that you should be
paying out for a particularexpense category.
So, for example, for directlabor, your direct labor should
(22:14):
typically run around 35% ofrevenue.
So, to use an example again, ifyou have a ten thousand dollar
project, you should be payingaround thirty five hundred to
your, your painters that arepainting that house with fully,
(22:34):
fully loaded with a payroll andworkers comp.
So thirty,500 should go to thatdirect labor and that's 35%.
That's typically where youwould want to shoot for.
(22:54):
So we'll go through threedifferent models.
So we'll stick with the firstone, which is foundation first,
which is the zero for 500K.
So this is typically a paintingbusiness owner that is wearing
a lot of the hats, and so we'llsay that this painting business
owner is the salesperson, theproduction manager, the office
(23:15):
worker and also the businessowner.
So with those different roles,their discretionary earnings,
what their cash flow tothemselves, is going to be a lot
higher of a percentage than asthe business grows.
So let's start with what shouldthis person make, to kind of
(23:36):
illustrate what we're talkingabout here.
So if the paying business owneris, you know, the salesperson,
production manager, officeperson and also the business
owner, what should they bemaking?
So if we take the net profit ofthis business, recommended
percent to hit is 11 and a halfpercent.
Then we add in a salespersoneight and a half percent.
(24:00):
We add in a office worker,because oftentimes with the
smaller businesses you're alsodoing the office work too, along
with everything else, andyou're also the production
manager.
So with those four differentroles, production manager is
7.5%, salesperson 8.5%, 8%Salesperson 8.5%.
(24:20):
Office workers 4.5%.
And then net profit is 11.5%.
The discretionary earnings forthis painting business owner
would be 32%.
Should be going to them in theform of net profit and any
salary that they're running, ifthey're running that Another key
number to know.
(24:41):
So that's what you should bemaking.
But what should your grossprofit margin be Like?
We said before, the average isaround 40%, but you should be
shooting for around 50%.
So we have 47.5% gross profitmargin for this level.
It's a little bit lower thanthe other levels because when
(25:02):
you're getting started it'susually harder to.
You don't have as muchauthority to charge as much.
It's a little bit hardergetting started maybe newer in
the industry, so you're not aswell known.
Maybe you don't have as manyGoogle reviews, so it's harder
to charge as much as someonethat's been around for a decade
(25:23):
plus.
So that's why the gross profitmargin is a little bit lower,
but you should still shoot for50%, and then maybe you'll end
up somewhere around 47%.
Speaker 3 (25:35):
Yeah, I imagine you still have some efficiencies to
work out too with your crew.
When you're just starting out,maybe you take a little bit
longer than than you should, ormaybe you're not quite as um
efficient with the materials.
And as you, as you grow and youlearn these things, then the
costs of your direct labor anddirect materials will start to
(25:56):
shrink as you become moreefficient.
Speaker 2 (25:59):
Exactly.
So.
That's the foundation phasezero to 500K in revenue.
Bottom line is if you're theproduction manager, salesperson,
office worker and the businessowner, you should be shooting
for about 32% in discretionaryearnings cashflow to yourself
(26:19):
and a 47.5% gross profit target.
Those are your key numbers forthat.
Now there's some other keynumbers here for this level
which we'll cover here at theend.
We'll go to the next one, whichis the growth stage, which is
(26:44):
the 500K to 1.5 million.
Uh, and they're often at thispoint they've most, or a lot of
them have a production managerat this point.
Not all of them, but many, many, you know, end up getting a
(27:07):
production manager in place.
Uh, and they often also have a,an office worker helping them
as well, and so they're doingsales still and they're uh,
they're, making a profit as thebusiness owner.
Now, of course, this might beslightly different depending on
your situation.
Obviously, someone closer to500k and the stage will likely
(27:30):
be doing production managementas well and maybe even the
office work, and then, if you'reclose to 1.5 million, you're
probably doing maybe less things, maybe just the salesperson
role and the business owner.
So let's say they're thesalesperson, the business owner,
at this stage you should begetting 8.5% for your sales role
(27:50):
and then about 14% in profit,bottom line profit.
We add those together, that's22.5% in discretionary earnings
going to you.
We add those together, that's22.5% in discretionary earnings
going to cash flow, to the owner22.5%.
And then you're paying yourproduction manager around 7%,
you're paying an office workersomewhere around 4% of revenue,
(28:15):
and then your margin, your grossprofit margin, you should be
shooting for 50% at this stageas a recommendation, and so that
is the growth stage.
Then the third one we'll coverhere is the expansion.
This is 1.5 to 5 million.
So at this point a lot ofpainting business owners
(28:38):
actually get out of sales aswell.
They have a sales person oreven a team of salespeople, and
they have production managers.
And so really there's a newline item that pops up here,
which is the C-suite.
This is your CEO, coo, cfo, cmo.
(29:00):
So chief executive officers,chief operating officer, chief
financial officers, chiefmarketing officer, your C-suite.
And so we have a nice.
Speaker 3 (29:10):
those are the nice offices on the top of the
building, with corner windowsand the leather chairs, exactly.
Speaker 2 (29:22):
Okay.
So three and a half% isallocated to that.
So if you're at this level,you're probably, if you're doing
around 2 million, you'reprobably doing all those roles,
you're probably the full C-suite, so you might have 5 offices
with great views, and so that3.5% is probably all going to
you and you likely have yoursalesperson, production manager,
(29:45):
covered at least a lot of folksdo at this point and then you
are the business owner.
So you get that 15% profit andso that's 18.5%.
So you'll notice that thepercentages are going down as
you're growing, but that's okaybecause the overall pie is
(30:06):
growing.
So you're getting a smallerpercentage of that pie, but pie
is growing.
So you're getting more overallin terms of dollars in your
pocket.
So 18.5% discretionary earnings, which is 3.5% for the C-suite
roles that you're playing, andthen your bottom line profit and
(30:28):
at this point your gross profitmargin target we recommend to
shoot for.
Try to improve a little bitover 50%.
At this point you've probablybeen around a while.
You probably have a strongsales process that you can
command higher prices, so youcan start getting a little bit
over 50%, and so we recommend53% gross profit margin.
(30:48):
And so those are the threescenarios to give you an idea of
what you should be shooting foryour numbers.
There's other key numbers herethat are kind of the same across
the different stages, which wetalked about direct labor for
the most part, it's somewherearound 35%.
Direct materials, you know,somewhere between 12 and 15%.
(31:13):
Obviously, as you get moreexperienced and bigger you can
usually start.
You have better negotiatingpowers with your vendors, that
sort of thing, so you should beable to drive those costs down.
A smaller as a smallerpercentage of of revenue uh,
auto expenses somewhere aroundtwo to three percent for the
(31:35):
most part across all levels.
Marketing uh, marketing includesthe cost to do marketing,
either pay someone to do it orhire an outside firm to do it.
Somewhere around 7% is what youshould aim for, or at least we
(31:56):
recommend somewhere around 7% ofrevenue.
Your accounting you might hirethis out or you might have
someone in-house doing it or acombination of that.
So you're probably to do allthe things that you need done,
which is your bookkeeping andyour taxes and your invoicing
(32:20):
and your accounts payable allthat stuff somewhere around 3%,
and then we have a couple ofsmaller items there.
So those are somerecommendations on what you
should be hitting for yournumbers and the margins.
You should be seeing as youmove through your journey as a
(32:44):
painting business owner.
Speaker 3 (32:49):
That's a great graphic you have, Daniel,
Definitely very informative, andI love how it kind of breaks up
the journey of a business intostages.
You know we take things onestep at a time and as we grow
and mature our numbers adjustslightly to reflect that growth.
So I appreciate you sharingthat.
Speaker 2 (33:11):
Glad I could help.
All right, cool.
So hopefully that this podcastwas helpful for you to know,
understand your margins so youcan get grow your business to
the next level.
We'd love to hear your thoughtsor comments on this episode.
If you want to join theconversation, go to grow your
painting business.
(33:31):
You type that into Facebook, uh, ask for an invite to the group
and we will let you in.
Definitely, let us know whatyour thoughts are on on margin,
what you shoot for.
Love to hear your thoughts andwith that we will see you next
week.
Speaker 3 (33:46):
All right.
Thanks for listening.
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