All About the Numbers that Matter with Daniel Honan

So the number one mistake that I see painting contractors make in regards to their numbers is underpricing. So when a new painting contractor comes to me and I'm looking at their financials, most of the time it's their profitability is off because they're just not charging enough. And so kind of a simple heuristic that I give to folks, especially if they're just starting out, is that in order to, to be profitable, you generally want to charge double of what it costs you to do the job. So if you add up your, your direct labor costs, so your, your painter costs, how much you're paying your labor, plus your, your direct material costs like the paint and sundries, you add those two costs together, just the, the raw cost, and then double it, 100% markup. That's going to give you a target of 50% gross profit for, for that job. And so, you know, the budget, that's the budgeted amount. Maybe your actuals come in a little bit under that, but you're at least starting out with you know, a 50% gross profit target.

Hi Daniel, and welcome to our podcast today. It's so exciting to have you with us.

I really appreciate the invite. I'm glad to be here.

Uh, we are so glad. And you know, just for our Estimate Rocket community, we have known Daniel and his wife Melissa for so many years. They are outstanding people, quality people. And you know, it isn't often when you get to deal with another company that's also owned by another couple. So we know what you and your wife go through, and it's just a pleasure to have you here today. So welcome to our studios. So tell us, what is new at Bookkeeping for Painters? How's everything going in your business? And you know, what, what are the latest things that's going on there?

It's, it's going great. Uh, we're working with a little over 160 painting businesses across the US and Canada. And we're helping folks, you know, know their numbers and what they mean, save big in tax and streamline and automate their, their record keeping system.

Oh God, you're, you're speaking to our heart and soul here at Estimate Rocket because I don't know if you know this, Daniel, but Tom and I actually met in college. And we were both finance majors. So at Estimate Rocket, we really— and I usually don't want to make a commercial, but at Estimate Rocket, everything focuses on your numbers. And I'm sure you have some of our customers that work with you, and they give you outstanding reports out of Estimate Rocket because, you know, that's one of the advantages of having technology. And when you're streamlining your business through one platform, the numbers are with, you know, at their fingertips. And we love making sure that our service contractors are making a profit. Now, do you guys do tax preparation as well for service contractors?

Yes, we do tax prep and tax planning. So a lot of folks are under the impression that taxes are just something that happens to them every April, but they don't Some folks don't realize you can actually impact how much you pay in tax through proactive tax planning done throughout the year instead of just waiting for it to happen. You can actually save a lot of money. Actually, I just talked to a painting contractor yesterday and he is doing about, he had about $100,000 in net profit and which is great, you know, that's great news. But the bad news was he was still being taxed on as a sole proprietor. He had just started his business and started running it, didn't really pay attention to, you know, forming an LLC and electing an S corp status. And, you know, he was just overpaying. I think we calculated, you know, he was overpaying at least $10,000 in taxes by not electing that S corp status. So, you know, just a little filing, a few pieces of paperwork with the IRS can, can save you tens of thousands of dollars.

Right, right. And who wants to pay more taxes than they're already supposed to be paying, right? Yeah. Yeah.

It's not fun. I mean, you know, definitely want to stay compliant with the IRS. They'll get their money. But there's, there's a, you know, a lot of ways to, to get around having to pay more than your fair share.

Right, exactly.

Yeah.

And $100,000 in profit doesn't always mean you got $100,000 in the bank at any given time. So that can be, you know, that can be a challenge if they haven't done the tax planning appropriately and they get whacked with that, you know, that big tax payment at the end of the year. That can really be, you know, obviously if they're not expecting it, that can put a crimp in their future business.

Yes, absolutely. Yeah, $100,000 in profit, you might have used that throughout the year. If you're not proactively looking at it, you think, oh, this is something I earned and I can go ahead and spend it as needed, and then don't realize, oh, I should have been putting aside some money for tax, uh, you know, paying those estimated taxes, or at least setting aside money for taxes, um, which, you know, like I said, there's plenty of ways to get around paying taxes, or as much as, you know, you might want, but you're still likely going to owe at least some amount of tax if you're, if you're hitting some level of success in your business. So definitely have to pay, pay attention to it.

If you're making money, you have to pay taxes. And I know, yeah, you know, who wants to pay taxes? But you have to do it and, and it just means you're, you're successful. So you have to look at it that way.

We had an attorney years ago when we first started out in business way, way back when. And it said, if you're not paying any taxes, you're not making any money.

Yeah. Yeah.

If you're any level of success, you know, you're going to hit taxes are going to be your biggest expense.

Right. And I know you're in an industry where a lot of our service contractors, they get nervous. They get, they sort of freeze when they talk about knowing your numbers and paying taxes and knowing pre, pre-planning for paying taxes. But if you can just take a deep breath and realize that, that you're working so hard to make money, you want to be successful, and at the end of the day, you want to defend what you're making. And part of what you do is give a service to people so that they can plan accordingly and defend every single penny that they're making. So that they're not paying too much in taxes.

Yeah, absolutely. Yeah. And, you know, folks that come to us, they, they're either looking to, to defend that money, and some are just looking to actually have something to defend, which goes into the knowing your numbers and what they mean part. Um, you know, because a lot of folks will come to us and they'll most of the time it's like a gross profit issue. If they don't have any money to defend from taxes, it's usually their gross profit is suffering. And so knowing that is really key, making sure your pricing is squared away, that you're estimating with your software using production rates so that they can have a profitable job to work off of and then making sure their crews are working efficiently so that they're getting it you know, a 50% gross profit or better.

Right.

So we're having them job— oh, sorry. So we're having them job cost and look at profitability in real time, and they can look at that daily. And that does change the whole— it might be a pain in the neck for some people that we make them— we don't make them, we highly encourage them to use that step. But the ones that are job costing and watching their profitability in real time in every single job, they're the ones that are making so much money because they're not waiting till the job is halfway through or all the way done. 2 weeks later they close out that job, they thought they were making a huge amount of money, and then they say, Kathy, I couldn't even take a paycheck out of what we closed that job with. For profits. Nothing was left for me at the end of the day, which is the owner. So it is so important to know your numbers.

Mhm.

And it was an interesting example at a, uh, presentation I did recently with a— we had done up a relatively simple spreadsheet for people to get a— easily be able to see what the impact would be of changing like 5 or 6 variables. I add people, I go from 1 person to 6 people, I change my labor rate, I change my labor price from $55 to $65 or $55 to $60. My labor cost goes up or down. Average labor cost goes up and down. How many weeks of vacation? So those are basically the variables. And it instantly tells you what your— if you bill all the hours that are available to be worked and tells you what your maximum gross profit would be. And, you know, maximum revenue and then maximum gross profit based on some material calculations as well. And one guy came up to me after the presentation and said, well, I, you know, thank you, that was really great. He said, I realized by looking at your— by looking at the spreadsheet that I actually have an overhead problem. I'm doing all the right things gross profit-wise, but I got way too much overhead here, which is, you know, the other thing that, like you said, But if they don't catch it at the gross profit, you know, they don't have a shot at all of making it. At least if they get into the gross, if they understand that they're making a reasonable gross profit, you know, they have a shot at covering the overhead.

Mm-hmm.

So awareness, I guess, is the key. Yeah. Most of the time it's gross profit. I mean, occasionally we'll come across like someone has an overhead issue. Usually it's the smaller ones, like they— it's an overhead issue slash they just need more revenue, you know, like their gross profit might be dialed in, but they just need to get some more revenue in to cover their overhead costs. Occasionally you'll come into contact with somebody who's just, you just need to dial back the spending and just kind of, you know, that's where coming, doing a budget each year and making sure you're comparing what you budgeted versus what's actually happening. It's called a budgeted versus actual report in QuickBooks Online. You can plug your budget into QuickBooks Online, You know, maybe around this timeframe of the year folks are doing that. And then throughout the year you can kind of see, are you overpaying on your, you know, your overhead software costs or your, you know, your insurance costs, your bookkeeping accounting costs, your automobile costs, those kind of overhead things.

Sure.

Just to keep an eye on it. Yeah.

Yeah, that's key. That's key. I guess one of the other questions is, what do you, where do you see the, you know, the most, the thing that happened that your customers do most often that gets them in trouble?

So from a knowing your numbers perspective, I think it comes down to pricing is the, is like probably the number one thing that affects overall profitability. So they just, You know, the way I explain it, especially to folks starting out, is just basically you want to charge double what it costs you to do the job. So you want to, you know, whatever your labor is and whatever it costs for materials, add that up and then double it so that you have 100% markup. And that's going to allow you to get at least be on target to hit a 50% profit. Now things might not—

Sure.

Happen exactly as you planned it and you might go under that. But at least, you know, you priced and hopefully you're using production rates, you know, you're actually measuring things out and calculating that effectively. But that's going to get you at least in the ballpark of where you want to be.

Sure.

And so that's probably like the biggest number one mistake for the financial side of things. And then for like the tax side of things, I guess the biggest mistake is kind of burying their heads in the sand when it comes to taxes, where they just kind of ignore. And, you know, the IRS is definitely not somebody to ignore. They'll make themselves known. They'll make themselves known.

They have an army that will just march up to your door and knock it down. So You have to, you know, these are little things. And, and I'm sure you'd say too that because what I think our job is, is to make people more comfortable with the, with the intention of putting numbers as a priority, right? Because if you're not making money the way you should be on every job, you might as well just close the doors. You know, it isn't, it isn't worth your time and your effort and the stress that it, that it puts on you being a business owner. So as uncomfortable as numbers are and as, as much as you would like them to go away and just be awesome all the time, it's not being realistic if you've raised your hand and chosen to be a business owner. And so we have to pay attention to it. And I think between you guys And what we do for our customers, you know, we're all setting them up for success. We're trying to do it every single day in everything they do so that by the time they get to you, their numbers are awesome. They're off the charts. They're the highest in the United States and Canada. You know, they're doing record numbers and record profitability, um, just in their day-to-day activities, which is That's certainly what we want for all of our customers.

Yeah, yeah, I was talking—

if they're not, if they're not, at least we let you know soon enough that you can do help them do something about it.

Yeah, yeah, I was talking to a painting contractor last year and he was, he, we jumped on a call and he was really flustered like he was doing about $1 million in revenue. And he needed a, he was doing the sales and the production management. He had crews on the job site. I think he was using the subcontractor model and he was kind of burning the candle at both ends and he was just, you know, saying like he was exhausted. He's working 80 hours a week. He want, but he wanted to bring on a production manager, but he didn't know if he was profitable because he didn't have that clarity on what his numbers were. Yeah, he didn't know if he could afford it. You know, he had, you know, crews working. He wasn't sure what his gross profit was on the job. He was thinking that it was 40% or lower, and he just didn't have a good, you know, clarity on what was going on in his business. And if he— and he wanted to grow, but again, he couldn't do everything right.

He— right.

No matter how much we try to be the superhero in our businesses, you know, it just at a certain point it breaks. So, uh, and, uh, you know, I kind of stopped at a certain point and said, you know, the feeling that you feel right now, like where you don't know what to do, don't know how to go move forward is basically you don't have, you don't understand your, your finance component in your business right now. Uh, and so that's, that's what's causing all this, this stress and, um, inability to take action.

Right. Right. Yeah.

So, so key.

So let me ask you this, Daniel, because, you know, you've got a lot of people in the Estimate Rocket community listening to this podcast. And is there anything we can do better to cue you up for when they get to you? Is there anything in our processes that on a day-to-day level that when someone new, say, comes to you, what would you like them to have in hand and be prepared so that you can have a really productive session with them to see if, you know, it's a good fit for you guys?

Basically, the folks that we work best with are, are folks who want to grow they want to use a cloud-based system software, you know, that Estimate Rocket, QuickBooks Online, you know, ProTiff or PerformancePay, you know, they kind of want to use a cloud-based system to kind of streamline their processes and they want to grow to the next level. So really it's just a willingness to be open-minded to kind of streamline those processes so that they're saving time. And then, uh, you know, since we've looked at hundreds of financial statements and we have— we do internal benchmarking, so we know what their numbers should be, what the top 10% hit in terms of gross profit, discretionary earnings at different stages in the business. Uh, just be open-minded to receiving— to, you know, to receiving some informed, you know, feedback on how they're doing and then how could they improve. And that's really, that's all I would really ask is that they'd have an open mind to learn from what we've learned working with painting businesses since 2016.

Right, right. I know it's been a long time, right? We've known you since then.

Yeah.

At what point in their, in their journey? And I have an answer to this too, which I have a feeling yours will be similar. But what, when should a contractor start thinking about bookkeeping service in their journey?

Yeah. So I would say you're going to need records pretty much when you, when you start out the gate in some form. Right. You know, and you can keep it simple in the beginning. You know, it doesn't have to be fancy as a sole proprietor. Kind of depends on what your goals are. Like if you're planning to scale, you know, to $1 million in your first year, you might need more accounting support than someone who just, hey, I'm going to be the owner-operator and produce work during the summer when it's, you know, there's a lot of exteriors and I might do $100,000 or something like that. Either case, in either scenario, if you're going to hit $1 million right out the gate or $100,000 or maybe even smaller than that, you're going to need some form of record keeping, just at least at a bottom line for compliance purposes, because the IRS requires that you have some sort of records so that you can file your tax return. So that's the base level, just compliance. Now, once you kind of hit about $50,000 in profit, $50,000 or $60,000 in bottom line profit, in most cases it makes sense for people to elect an S corp status for taxation purposes. And that, which is which will save money. The reason why you want to elect S corp status is it will save you in unemployment taxes. I gave that example earlier on how it saved that—

that could—

it was going to save that painting contractor about $10,000+ by switching to being taxed as an S corp. Now that's the benefit. But the kind of the drawback is that the IRS requires S corporations or entities taxed as S corporations to have a higher standard for their bookkeeping records. So not only do they need to have like basic bookkeeping records, but they need to have a balance sheet as well because that's going to be reported on, on their S corp tax return. So the kind of the compliance kind of increases, you know, when you are being taxed as an S corp. Sure. So, you know, you have your compliance piece. you know, to comply with IRS requirements. But then there's the actual managerial accounting piece where you just, you know, it kind of going back to what Kathy said, you know, knowing your numbers and staying on top of them, knowing what your gross profit is on each job as you move through the year, knowing what your bottom line is through the year, that's going to give you the information that you need to make decisions so you can steer your company in the right direction. Sure.

Yeah.

And I know some of our top customers, when they finish a job, they sit— the management, the leadership team sits and does an analysis over everything. They do a deep dive and they say, okay, you know, we only met this percentage on the profit margin and next time we want this to be better. So how can we all make some changes in our process, daily processes to make that happen. So it's very interesting. And I think, you know, we don't want our customers, any of our customers burying their head in the sand because it doesn't— at the end of the day, that doesn't change anything. In fact, it will even make things worse.

Mm-hmm. Absolutely.

Yeah.

Yeah. So, Daniel, I know that you're going to be— you're going to be at the PCA. Expo.

Absolutely right.

We will be there as well, so we can stop and talk to one another. That will be great to see you in person. But tell our, our followers where they can look you up and talk to you.

Absolutely. You can go to bookkeepingforpainters.com and you can schedule a consult, or you could follow us on Facebook or Instagram, LinkedIn. Uh, we also have a podcast as well called the Profitable Painter Podcast, which Tom was on recently.

That's great.

So yeah, uh, it's always important to be a profitable painter, right? I mean, there's no other, there's no other way to stay in business. Well, it's been an absolute pleasure having you on. I know your time is so valuable and we truly appreciate you having you as a guest on our podcast. So from the Estimate Rocket community, you know, we really want to say a big thank you and appreciation for your time.

Thank you. I really appreciate the invite. Glad to be here.