Crafting Million-Dollar Blueprint: Elevate Your Painting Biz w- Expert Budgeting & Mgmt Strategies

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution: while we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decision.

This is Daniel, the founder of Bookkeeping for Painters. In this episode, we're going to talk about budgeting for 2024. So first of all, let's talk about why budget. Why should we take the time to actually budget? In our businesses? The answer is budgeting is basically planning. So you might have an idea in your head like, hey, I want to hit $1 million, or I want to hit $2 million in revenue. Well, that's just kind of a wish unless you actually plan, you come up with an active plan to accomplish that goal. And that's what budgeting is, is actually putting numbers behind your, your goal of hitting whatever you want to hit. So that's why we want to budget. And, and when you go through the budgeting process or the planning process, it should help you answer certain questions like, should you hire more crews? Should you hire more salespeople? Should you hire a production manager? How should you spend your marketing dollars? What should your discretionary earnings goal be? And discretionary earnings, again, That is basically money that you're going to take home, whether that be through salary or as net income from the business. So your, your budget or your plan should help you answer a lot of these questions going into the new year. Now, the first thing you want to do when budgeting is develop your sales budget, because when we were budgeting, you're really kind of generating many different budgets. You do your sales budget, your production budget. Your marketing budget, all these different things kind of put together, they come up with your overall budget. So first you want to start with your sales budget. And your sales budget is basically what do you think the top line revenue is going to be for this coming year? Ideally, you want to do this broken down by month. And so what you can do is look at previous years, what your revenue was, and kind of look through the seasonality. Usually painting businesses, you know, your revenue is a little low in the beginning of the year, then it increases in the spring and the summer and goes back down towards the end of the year, typically. So you want to look at those trends historically, and then you kind of want to take your best guess on how things are going to go in the, in the next year given the activities you're going to put in. And the activities that I'm referring to are basically your marketing activities. And this, this is kind of the hardest budget to develop because it's a lot of guessing involved. So because there's factors outside your control, like the economy, you can't really impact the demand for painting services. So, or at least you have a very little impact on overall demand for that. So you can do the things that you need to do in your business, like your marketing activities for whether that be cold calling, Facebook ads, those kind of things. but some of it is out of your control. So developing the, the revenue top line is a bit of a guess, but it's an educated guess based off what's happened and what you've seen work over the time you've run your painting business. But this is the first step, is figuring out, okay, what, what do I think I can hit in revenue? Now we can run through an example of how you might generate a revenue goal. And then work backwards to arrive on how you're actually going to accomplish that goal. Because when you come up with your revenue level, you'll, you'll want to work backwards to say, okay, what amount of activities do I need to, to do in my business to actually accomplish this revenue goal? So if you have a, a revenue goal of $1 million, let's say, and let's say your average job size is $10,000 per job. You'll need to do 100 jobs to hit that $1 million revenue goal, because 100 jobs times $10,000, uh, dollars average job size is a million dollars. So now you know that, okay, I need to close 100 jobs this coming year. Now, next thing you might want to do is look at your close rate over the past year or so. What is your, how often, what percentage do you close, uh, the proposals that you're giving to your prospective customers? Usually I see businesses do anywhere from 20% to all the way up to 50%, depending on how strong their sales process is. So just to run with the same example, let's say that your close rate is 40%. You did. Uh, your goal is to hit 100 jobs at a $10,000 average job size. So in order to close 100 jobs, if you divide 100 by 0.4 or 40%, you will get the amount of proposals that you'll need to send during the year, which is 250 in this example. So you'll need to do 250 estimates or you know, provide 250 proposals, and with a close rate of 40%, you should be able to close 100 of those 250 jobs. The next thing you might want to consider is your show rate. Now, everyone— not everyone who schedules an estimate with you will actually show. Some folks will cancel for whatever reason, so you'll want to factor that into your activities. Because you might actually need to book more than 250 estimates, uh, to actually do 250 estimates. So let's say that your share rate is 75%. Usually share rates are relatively high. So let's say your share rate is 75%. So if you need to, to send out 250 proposals or provide 250 proposals, or or do 250 estimates, then with a 75% show rate, you can get how many estimates you'll need to actually schedule. Because again, not everybody shows up for those, those estimates that you're going to schedule. So you take your 250 divided by 0.75, and that gets you 333 estimates scheduled for the year. So now you know, yeah, throughout the year I need to get 333 estimates on the, on my calendar to get 250 estimates sent off and, and then actually book 100 jobs for the year. So this kind of breaks down the activities involved, um, for accomplishing your annual revenue goal of $1 million. And then you can break it down even further by week. You know, there's 52 weeks in a year. If you divide your numbers by 52, that will give you the activity you'll need to perform each week. So you can kind of evaluate each week how you're performing. You know, do you need to increase the amount of activity you're doing or whatever? Or are you on track or not on track to hit your goal? So for proposals accepted per week, if you're If you need to hit 100 jobs per year, if you divide that by 52, you'll need to basically hit about 2 estimates, 2 proposals accepted per week. So you need to close 2 jobs per week to hit your goal of 100, about. And then for your number of estimates you need to schedule per week, we said 333 in this example. So we divide that by 52 and you get about 6. Estimates scheduled per week. So if you know, okay, I need to book 6 estimates per week, I need to close 2 of them, that will give you a good kind of working goal throughout the year to hit those numbers. And so instead of just saying, hey, I want to hit $1 million in revenue and not have any kind of further numbers, you have broken it down to the activity you need to do per week. Now you can even do this, keep going with this backwards planning and ask yourself, okay, how do— what activities do I need to do to book, you know, 6 estimates per week? Do it, you know, maybe you're doing cold calling. How many doors you need to knock on to get to 6 estimates? Typically this is 100 doors knocked to get 1 estimate/one job, depending on who you talk to. So, you know, whatever your numbers are, you could work backward and maybe you'll say, okay, in order to get 6 estimates per week, I need to knock on 500 doors. And so now you or your, your cold calling team will have a hard, a hard number to work towards each week. Now you can apply this to other marketing activities as well. It doesn't have to be specifically door knocking, but you get the idea. You want to take your revenue goal and break it down as far as you can to get the precise numbers that you need to hit each week. So this is developing your sales budget and then backwards planning to get the marketing activities of what you need to do. The next piece is your production budget. So once you've established, okay, I want to hit $1 million in revenue, here's how I'm going to make that happen through the marketing activities I'm going to do. Now you need to have some sort of budget or plan for how you're actually going to produce that work. So again, you might want to look at your previous profit and loss statements to see what your margins are. You know, how much are you paying for paint and materials as a percentage of revenue and how much you're paying for your subcontractor or labor costs as a percentage of revenue to see what your cost of goods sold percentage and your gross profit percentages are. And so that's going to basically give you the information on how much you're going to have to pay for your direct labor costs, direct material costs, and give you your gross profit margin. And then we can break that down further to understand how much are you going to have to— how many crews you're going to need to produce that work. So you'll also need to look at your previous profit and loss statements to understand how much can a particular crew generate in production per week or per year? Because, you know, you may need to— if you have a higher revenue goal than you did last year, then you may need to actually be prepared to hire an additional crew or maybe an additional production manager, whatever the case may be, to help you generate that, the level of production you want to hit. So let's take an example. Let's say again, you're trying to hit $1 million in revenue. Average job size is $10,000. So you need to have, you need to produce 100 jobs at $10,000 per average job size to get $1 million in work produced, right? And so let's say you have a couple crews already and you went back through the previous year and you identified that 1-year crews can, can produce $425,000 per year. And you break that down per week, you know, with some slack in there for, let's say the $425,000 includes some holidays and time off and stuff like that. So usually your crew can produce about $10,000 per week, but over the course of a year with weather and all that stuff built in, They're, they're producing, you know, 425,000 per year. And then the second crew can do 7,500 per week. And then with the holidays and weather issues and all that stuff, it's about 300,000 per year. So with this current capacity, that's, that's 725,000 for those two crews. So if you're shooting to hit a million, but your current crews can only produce 725,000, then you may need to be prepared to hire a third crew. So knowing this at the beginning of the year, before you actually, you know, months before you might actually need that third crew, it's good to know because then you can go ahead and come up with your plan to hire another crew. However you recruit the painters, you know, going to the paint store and putting out job ads, going on Craigslist, whatever the the way that you're getting your painters. So doing the production planning is, is important so you can pre-plan those hires. Now, you might identify that a production manager might be something that you need to hire for. There's a key number here for a production manager is 5 to 7.5%. It's usually what you should be prepared to pay a production manager, 5 to 7.5% of whatever they produce. Most folks are paying, most paying businesses I work with that are successfully doing this, they're paying their production manager, usually a portion of it is a salary and then the other portion is bonus based, based off of how much they produce and the, some sort of quality metric, usually like a net promoter score. Or some other quality metric to say, okay, they're producing quality work to the client and maybe also throwing in a gross profit mark that they have to hit, like they have to produce jobs over 50% gross profit or something like that. So they get a bonus based off of, you know, level of production, their customer feedback, and their gross profit margin. But typically you want their— whatever you're paying them and however you're structuring that compensation, you want that production manager to make somewhere between 5% and 7.5% of whatever they produce. So we talked about your sales budget, your production budget, then you have your overhead budget. So your overhead budget is made up of variable costs and fixed costs. Variable cost means, you know, as your revenue goes up, so does that overhead cost. Fixed means that it pretty much stays the same no matter how high your revenue goes up or down. So your overhead budget has both variable and fixed items in it. The biggest variable one is your marketing. Your marketing is going to be variable based off of You know, usually the more money you put in marketing, the more revenue you get. Generally speaking, um, the kind of the benchmark that I see a lot of painting businesses shoot for is 10x return. So if you put $10,000 into Facebook ads, you should shoot for $100,000 in booked work, as an example. So, um, you might want to look at your historical marketing costs and what, and see what you kind of return you've gotten for, for that. So is this gonna, typically what I see is somewhere between 5% and 15% of revenue is for marketing costs. So, and it's somewhat dependent on how aggressive folks are with growth and how much they're relying on referral and repeat business, because usually referral and repeat business is is cheaper. It might be more costly on time, but it's definitely cheaper to reactivate customers in most cases. Whereas if you're a newer company, you have less, you don't have a base of clients to work off of, usually have to pay a lot more money. And so especially if you're trying to grow fast, you know, those marketing costs are gonna be a bit higher, might be more towards 15% of revenue. So you want to develop your, your marketing budget based off of whatever your sales goal is, right? So if you know you're trying to hit $1 million and you're going for a 10x return, then you have a budget of $100,000 in revenue. Now obviously you need to make sure it's going towards things that you think will actually give you a 10x return. And that's again going to be based off of your analysis of how things performed in the past, what's worked well, what's not worked well, and kind of putting that plan together on that marketing mix. So that's your biggest variable cost is marketing for your overhead. The other overhead costs, we're talking about insurance, accounting, utilities, software, those sort of things are mostly fixed. And so you'll just basically you can look at your previous profit and loss for the previous year and kind of identify, okay, what expenses do I need to keep going in my business? I definitely recommend you go through line by line, like, what are you paying for, especially like for software and stuff, because I see a lot of folks forget that they have, you know, some sort of software that they don't use anymore. So go line by line through this stuff, just do it once a year, and you'll be surprised on how much money you can actually save just by doing that one activity. By just eliminating things you don't need anymore, because maybe you switch softwares from Pep to Pain Scout or whatever the case is, and you're still paying for Pep. You know, just get rid of the stuff that you don't need anymore. What do you actually need to run your business? A lot of that stuff is in your overhead on those, you know, recurring monthly subscriptions, those, those sort of things. So go through that and identify, okay, what do I need? What do I not need to run my business? And so that's gonna be mostly your fixed overhead costs, and that, that will be your budget there. So the end state is that you have an expectation of how the year will progress. You have a goal, and then you have a tentative plan on how you're going to accomplish that goal. What kind of hiring you might need to do, what kind of spending are you going to have to do? And this should be a flexible budget, right? Because as soon as the year starts, your budget's going to be wrong. It's not— the purpose is not for the budget to be exactly precise because it's going to be wrong the second the year starts. However, it should give you a good idea of how things might progress and it will give you a tentative plan on how— what actions you feel you'll need— you should take to try to accomplish your goals. So that's all for today's podcast. If you have any questions on budgeting or if you have any other techniques that you use definitely let me know. Go to Grow Your Painting Business on Facebook. You type in Grow Your Painting Business, request access, definitely jump in and join the conversation. Love to hear from you.