Decoding the Financial Secrets of a Profitable Painting Business

This is Daniel, the founder of Bookkeeping for Painters, and for this week's podcast, we're releasing an interview I did with Austin over at Base Coat Marketing. He had me on his podcast and we had a really good conversation about knowing your numbers and what they mean. So definitely check this podcast out.

Welcome to the Base Coat Brainiac Podcast. My name is Austin Houser. I'm Chief Brainiac over at Base Coat Marketing. If you own a painting business and you're listening in right now, you are in the right place. So today I have a very special guest, Daniel Honan, with, uh, Bookkeeping for Painters, and we are going to discuss a rather unsexy, boring topic that could not be more important to the success of your painting business, and that is the financials. So Daniel, first of all, thank you for, for being here, man. I really do appreciate your time today.

Yeah, I'm excited to be here, Austin. Thanks for having me.

Awesome. So let's start with you, uh, Daniel. Tell me your story. How did you get started? Why are you in the professional painting space? The floor is yours.

Sure. Yeah, I got started on the job site. My dad had a painting business, so I was 15, uh, just working on commercial repaint jobs and new construction. And that's where I got exposed to the painting industry first. I went to college to get my degree in accounting. During that time, I did the College Works Painting Program. It's like an internship where you learn to run a painting business similar to College Pro. So I did that, and a pretty, pretty exciting experience, learned a lot. Very difficult, probably up into that point in my life, the most difficult thing I had experienced, running my own painting business. And then after college, got a degree in accounting, went into the military for a while. And then when I got back from one of the deployments and doing the civilian world, I wanted to use my degree in accounting and my MBA to to help, you know, small business owners. And reflecting on my experiences, you know, I had run that painting business, had grown up on job sites, so I thought it would be cool to help any business owner. So I started Bookkeeping for Painters back in 2016. And yeah, since then we've helped, you know, hundreds of painting businesses know their numbers and what they mean and saving in tax.

Amazing. So you actually started on the production side of things helping out your father, is that right? And then you moved into financials?

Yeah, I was just, you know, just a painter on the job site, um, and also occasionally help them with admin stuff. Um, and, and so yeah, I was exposed pretty early in my teenage years and then got another opportunity in college to to test out the, uh, running a painting business.

So, so good. So I would— I wouldn't call myself a freak in the sheets with the spreadsheets, but I, I definitely rely on our spreadsheets to run our financials here in addition to QuickBooks and everything else. But I feel like most guys think they know their numbers, but numbers can be scary. And when you open up your financials and look at them, a lot of guys just try to close that book and try to outsell their, their problems. Which we know is not scalable or smart. So let's start with a really easy question, 30,000-foot view. I own a painting business. What should my financial benchmarks look like? You know, how much money should I be spending on material, production, marketing, and ultimately what should my profit look like there?

Yeah, absolutely. Yeah, that's the big question. So what I like to focus in, in on is gross profit. Gross profit is the key metric that is going to make sense to look at first for profitability. And so gross profit, just to define that first, is basically your revenue, your top line, what you've produced and received money from your customers. That, that's your, your top line revenue. And then you subtract out your direct labor, so your painters, and your direct materials, so any, you know, paint, caulking, whatever you've purchased for that job. So you subtract out those costs. What's left over is what is called gross profit. So your gross profit margin percentage, uh, the average is 40% gross profit margin. So basically, if you have a $10,000 project and you spent, uh, you know, $6,000 in direct costs for, for labor and materials, what, what would be left over is $4,000. So that would be 40%. So that's, that's if you look across, um, the painting industry, 40% is pretty much the average. And that does We do internal benchmarking with the painting businesses we work with, and 40% is pretty much the average. Now, obviously folks listening probably are not shooting for average, so we typically recommend to shoot for 50% or higher as a percentage for gross profit because that's going to really open up your profitability in general. So that typically looks like, you know, 35% to 40% for labor, and around 10 to 15% for materials. And so when you add that together, subtract it from 100%, you get about 50% gross profit. So that's kind of what we recommend folks to do. And if looking at the metrics, like the benchmark data, the top, you know, 10 to 15% of painting businesses have 50% or higher gross profit margin.

Interesting. Okay. So it does bring up a question. Can that number ever be too high?

I, I would say no. I mean, if you can charge the folks, uh, you know, you know, so much where you're getting a 90% gross profit margin and they, they're, they're still buying from you, I mean, and you're making what you want to make, I mean, there's no upper limit to what gross profit could be. Yeah, you're good.

And on the painting side of things, how is that different than if EBITDA.

So earnings before taxes, interest, amortization. So that's kind of a— EBITDA is kind of a corporate type, you know, metric that's private businesses don't really need to use that specific because it's what you want to— what I like to say is discretionary earnings or Cash flow to owner, that's kind of what's important. You know, basically what are you making out of your business? Um, EBITDA, you know, I, I think it's, it's fine. It's just maybe not as precise of a term, and that's fine. But what I think matters to most folks is, is what, what cash are they bringing home? You know, what are they actually making in their business, which is discretionary earnings or cash flow to owner. Um, so that number, uh, You know, the average painting business, if you look at the benchmark data, is somewhere between 15% and 18% for the painting industry, which is pretty low. We definitely don't recommend to shoot for that. And it also kind of depends on what you're doing in your business. So, you know, some painting business owners, they're doing sales, they're doing production management, some are still on the job site. Actually painting as well. So what you are making in your business depends on what your roles are in the business. So just let's say that you're a painting business owner, but you are completely passive, meaning that you, you own the painting business, but you are actually not doing anything in the business. You— someone else runs it, doing the sales unit, production management, doing the painting. You're just kicking back and getting the profits. In that scenario, we recommend to shoot for 15% discretionary earnings or cash flow to owner. So, so really that's the average that a painting business owner makes, but we recommend 15% if you're passive. Now, if you're actually working in the painting business, which I imagine most listening are, you know, you might be doing sales and production management. So for the sales, you want to be making somewhere around 8% of revenue, 8% of what you sell. So if you're selling everything, 8% of revenue. So if we add that on to the 15%, that's 23%. And then for production management, if you're doing that as well, that should be around another 5 to 7% for production management. And so if we just say 7%, add 7 on the 23, and that's 30. So if you're doing sales, sales, production management, and you're the business owner, your, your discretionary earnings or cash flow to the owner should be about 30% of revenue. So good.

All right, so I love these number breakdowns here, and one thing I didn't hear in there is cost of marketing. So just real high-level, I do want to dive into that in a more detailed question, but do you include cost of marketing in your gross profit calculation?

So no, uh, the, the numbers that we just run through for gross profit, no, um, Advertising would be in the overhead costs. So, and typically, you know, folks that are, are actively spending on marketing, and that's typically is somewhere between 5 and 10%, maybe a little bit higher.

Yeah.

But what we usually recommend is, you know, looking at your marketing costs, try to get somewhere at least an 8x return which would correspond to somewhere around 10% of your revenue would be going to marketing.

Love it. Yep, those numbers are definitely in line with what we would expect as well. So a few questions that does come up just based on those numbers that you mentioned. Is that the same for both commercial and residential companies?

Uh, commercial and residential, so pretty much. I mean, the gross profit, you You definitely want to be hitting those numbers. And even for discretionary earnings, yeah, it's pretty much the same. What is usually the difference is what type of commercial we're talking about. If you're working under a GC, you know, you're— the pain point there is the cash flow because you are potentially working on a lot of longer term projects and you're getting paid less frequently. So the, the thing that is really, from a financial perspective, to pay attention to for, for those folks that are working under GCs or general contractors is, is, uh, cash flow. And, and to really actively pay attention to that and figure out what you can do to fix those problems. For residential, cash flow is less, less of it. It can be an issue, but most folks are, you know, you go to the— you complete the job, you do a walk around, you collect the check. Like, it should be a pretty straightforward thing. You shouldn't— should not be struggling with cash flow as a residential painting contractor. Your cash flow should be awesome. If you're having cash flow issues, there's something, something definitely wrong. Commercial is a different story. You definitely have to pay attention to that. Love it.

And so the numbers you mentioned there, gross profit, that is at the project level. When we're looking at the company holistically, including things, um, like the cost of marketing, let's say, are there any numbers in there that change or shift around that we should be aware of?

So it's a good question. So there definitely is changes. Usually the changes on the P&L are based off of the where you are in your business, like what growth— we kind of break it down in the growth phases. So you're like Are you between $0K and $500K? Are you between $500K and $1 million, $1.5 million? Are you above that? So break that down.

Let's talk about each level there, as I think that'll be important to define those distinctions.

Right. So the first one is the startup phase. You're, you know, starting your painting business. You're, you know, maybe in the first couple of years, you're probably you're definitely doing sales and production management, and you may even be on the job site. So this— your gross profit margin here, um, you still should shoot for 50+ percent, but you should be making a lot more money in your business, um, especially if you're working on the job site too. I mean, your cash flow to owner or discretionary earnings should be, you know, above 30%, you know. Maybe if you're working on the job site all the time, maybe it's even 60, 60, uh, or 70 because you're doing everything, right? So you should actually be making a lot more money, um, you know, uh, so if you're just doing $200,000 but you're doing like everything, you could make six figures. Um, so, you know, that, that's, that's kind of the big— when we're looking at financials there What are you doing in the business? And you should be, your margins should be a lot higher because you're probably doing a lot more. Once you get to $500,000 above that level, you know, you're probably, you know, somewhere around $750,000, $1 million, you're probably gonna be capped out on doing the sales and production management yourself. At this point, you probably have crews that are working under you. So you're, you know, you're probably doing that 30% I had mentioned where you're doing sales, production, management, and you're the business owner. So you should be shooting for 30% profitability. But at this point, you probably need to hire a production manager or salesperson to take the load off of you so you can focus on growing your business to the next level. And so this is a key hire, right? Your first big hire. Obviously, you've hired painting crews before, But, uh, getting someone to manage those crews or getting someone to represent your company in your sales process is a big hire. So, uh, getting that hire right is important. And also the compensation structure, which a lot of people need help with, like how much should I pay a salesperson? So that goes back to what I was talking about before, which a salesperson should generally get paid somewhere around 8% of what they close. Now, that can be strictly commission, like 100% commission. It could be, you know, 90% commission and maybe a low base salary, but it's typically pretty high in commission because you want a salesperson that's going to be motivated by money and wants to close work for you. The production management side, like getting a production manager, they're probably— you could still do commission and bonuses for gross profit, maintaining gross profit margins is a common one. And maybe also a bonus based off a net promoter score, like, which is the, um, uh, basically a question you would ask your customers after you complete a project. Hey, how likely are you to refer friends of— friends and family? Yeah. And they give you a score of 1 to 10, 10 being highly, highly likely to recommend you. So a lot of folks do like a bonus based off of gross profit margin. Hey, production manager, production manager, if you keep production, uh, gross profit above, you know, 50%, um, and you also keep in a net promoter score of at least, uh, 80 or whatever, you know, you'll get an X bonus or percentage of, of the revenue. So you can do maybe a bonus, but a lot of times production managers kind of get a salary with bonuses. Is it more of an even split? So, but the key for the production manager is that they're making somewhere between 5% and 7% of what they produce, whereas salespeople somewhere around 8% of what they sell. So getting that key higher when you're between $500,000 and $1 million or maybe $1.5 million depending on your situation. Getting that first hire is super important. And then also setting up the compensation for that person so that they're motivated and their interests are aligned with yours is set up right. So that's that phase. And then, you know, above $1 million or $1.5 million, you're maybe still doing the sales or maybe still doing production management and you're the business owner. So at this point, you know, you're, you should still be getting that 15% profitability plus whatever you're still doing in the business. So maybe you're still doing sales. That's usually the common thing. You're still doing sales, you have a production manager, and you're the business owner. So that at that point you should be getting cash flow to owner or discretionary earnings of about 23%, 15% plus 8%. Um, and so at this point, uh, you're, you're the CEO and you're the salesperson Now, some folks also get it to the next level where they get rid of sales as well. And so now they're just the CEO. So at that point, you know, that you'll need to make room in your P&L for another 5% for CEO. So if you're a CEO, if you have a sales team and a production management team, you should be making around 20% discretionary earnings cash flow to owner. Yeah, so that's kind of the progression of how things would change and shift. And it's, yeah, kind of the pain points in the first phase for them is getting help just on the job site, you know, and making sure their pricing is right. Because a lot of times smaller painting businesses, they don't get their pricing right and they don't have margins. And then the second phase is like, okay, I've got my pricing right and I have crews, but now I need someone to help me to get to the next level. So they hire that, they make that first big hire with production manager or salesperson. And then the next phase is doing it again with the other side of either production manager or sales. And then you're just running the business as like kind of the CEO and having processes in place and a constant marketing campaign that that you're feeding your, your, your company with, and also constant recruiting process to, to get folks in the door. So those are kind of the challenges on each, uh, growth phase.

So that was brilliant. I appreciate you breaking that down at that granular level. Uh, what's important to, to really iron out here, and this is what I think separates the guys who own a job and the guys who own a business, is the trap of having that 50% profitability and all 50% is going into your pocket, right? But you're trading off your time for that money. And that's the trap that I think a lot of us business owners fall into, is as you start to scale and you grow and you start to build out your employee base or your, your team, that profitability number shrinks, right? It goes from 50% down to 20%, right? And the important distinction here is it's 20% of a larger number. Would you agree with that?

Yeah, absolutely.

And you get your time back, right?

Exactly. Yeah. You gotta grow the pie for everybody else and you might get a smaller slice of the pie, but the pie is a lot larger than it was when you started for sure. Yeah.

Yeah. So that, that's where I feel like a lot of guys who are doing under $500K just get stuck in that trap. They're like, well, I don't want to spend more money. I look at all this money I'm putting in my pocket. It's like, all right, well, how much you working? How dirty are your hands? You know, if you really want to be that CEO role, it's a smaller chunk of a bigger pie. I love it. Uh, and I am curious, what do you recommend as far as bank transfers go for owner take-home pay? I know some guys just do straight up payroll. They get hit with taxes over there. Do you have any particular strategies that you recommend for paying themselves? Correct.

Yeah. So this, this, uh, depends on the type of entity they are. So in the United States, you know, most painting businesses are going with the LLC, limited liability company, to protect themselves. It's kind of a legal structure. You file it with your state. So by default, the LLC is taxed on your personal tax return as a Schedule C, or if you're a partnership, will be taxed on a partnership 1065 return. So what that means basically is an LLC tax, disregarded taxation is what it's called. Um, every dollar that the business makes, you're, you're getting taxed on self-employment taxes, 15.3%, and then you also get hit with your, uh, your, your, um, tax bracket tax, whatever tax bracket you're in. So if you're— if that is you, if you're an LLC disregarded where you're an LLC taxed on your personal return or LLC taxed as a partnership, you're getting that 15.3% self-employment tax applied on all your profits. So in that case, you know, you would just pay yourself, um, with it, right? The business would just write your— write you a check, do a bank transfer to you, whatever is easiest. Um, the downside of this entity structure is that once you get— once you start having profits of over $60,000, generally speaking— now this doesn't apply to everybody because Some states it does not make sense, um, but once you get $60,000 or more in profit per year, you're paying a lot in self-employment taxes at 15.3%, and it might start making sense to being taxed as an S corp, which is a different type of taxation. You can keep your LLC structure, but then you would elect for an S corp status, uh, taxation there. Um, doesn't always make sense in every case, but generally speaking, it's probably 80% of folks, that would make sense. Um, and so the S corp, uh, in that, if you're an LLC taxed as an S corp or a corporation taxed as an S corp, that when you're in, in that situation, you would actually be on payroll and you'd run payroll for yourself, um, up to the reasonable amount.

So, which is very ambiguous.

Yeah. So, yeah. The game here is that you don't want to pay yourself more than you have to on payroll because it costs extra money. It costs you extra payroll taxes, but you do have to run a reasonable amount. The IRS says that, like you said, Austin, it's very ambiguous. What we do at Bookkeeping for Painters, we'll do an analysis of what you do in your business, do a salary analysis of where you live, what do people get paid to do those things. And so we'll generate, okay, based off your— the fact that you do sales, you do production management, um, you should pay yourself, you know, $42,000 based off your area, uh, salary data. So we take that, and then that's your— which you should run through salary, um, through payroll, and, um, that will keep you protected. So if the IRS challenges you on that reasonable officer salary, you'll have that data to back you up, and you'll be fine. and then the rest of it, the rest, if you still want to get paid more than the $42,000 you ran through, through payroll, you would just write a check from the business to yourself to pay yourself as a distribution. Um, and the benefit again here is that your S-Corp tax, uh, the S-Corp entity, you can really lower your, your, your payroll, your self-employment taxes by thousands of dollars every year. Um, once you get over that $60,000 profit profit mark usually. So that if you're over that amount of $60,000 in profit, you might want to consider electing the S-Corp status.

Yeah. And then C-Corp is what we're looking at, $10 million plus?

Yeah, yeah. I mean, it's, uh, I mean, really any of these, uh, tax— any of these entities you can take up to multiple millions for sure. It kind of depends on what you're trying to accomplish to be— for being a C corporation. You know, if you're trying to get like funding from investors, a C corp is more flexible in that sense. So if you're trying to really scale and get more people involved and get a lot of investors, C corp might make sense. You know, as far as saving on taxes, it usually doesn't make sense in most cases. There are some things that might apply in some scenarios that it makes sense, but overall, usually the C-corp is, it's higher in tax, generally speaking, but it can be beneficial in other ways. So kind of depends on the situation.

Okay, love that. So thank you for that breakdown. Super important stuff, guys. Um, let's Let's jump back to the gross profit for a moment, and I just want to understand something. So we have a lot of guys who are strictly subs or hire W-2 employees, or a lot of them have a mix of the two, and I think that model makes the most sense to deal with the seasonality of the painting industry. Do those— let's say the 50% profit margin, does that apply to those who are either hiring subs or W-2s, or are those numbers going to look a little different in either case?

Yeah, usually subs are a little bit more expensive, so we're— but, but they, they are, they have their benefits. Um, so I would say, you know, if we said 35% for labor for employees, it would be like 40% for subcontractors. So it might be a little bit more expensive, uh, but obviously the benefit with subs is you, you don't have to manage them as closely. Hopefully you shouldn't be managing— you should not be managing them as closely because they should have their own tools, their own training, their own transportation, you know, and they should, uh, kind of handle things on their own a little bit better. And, um, it's also for subs, another advantage is that you can kind of manage your cash flow a little bit better because you could set up an agreement with— a lot of folks do this, so they set up an agreement with their with their subcontractor and say, hey, you don't get paid until I get paid. And so whereas employees, you usually have to pay them biweekly or weekly depending on your payroll cycle, um, with subs you can kind of manage your cash flow and say, hey, you get paid when I get paid. So that kind of, um, alleviates your cash flow issue there.

Love it. And diving into payroll, that's— let's just kind of pause here for a moment. Is Is there any particular payroll service that you recommend? Is that something that your company does internally, or do you have a preferred vendor for that?

Yeah, we, we, we do it internally. Um, but we also like, uh, Gusto is, is pretty, uh, useful for most folks. And it's, it's, it's has a nice, like, uh, a lot of good features for the employees where they can log in, pull their own, you know, W-2s and and their own pay stubs and everything. So there's a lot of self-service. It has a good interface. So, and it's also very, the support is very strong, like their customer support. So we usually recommend them. I mean, QuickBooks Payroll, QuickBooks Online Payroll is also another option. It can work very similarly. It's just, I think the support is not as good as Gusto's. But, uh, you know, and we also do payroll as well. If you feel like you need some extra support, but also maybe you want to implement something like performance pay, we can help you implement that.

Love that. And when we're looking at payroll, typically the next segue into that is, you know, you start hiring a production manager, uh, project manager, and then you need to start attracting some higher quality talent. And the best way to do that is by offering them something outside of just a monetary value for their time, which is going to be benefits. So things like health, health insurance, healthcare. Now I know you can do that through Gusto, but is there a particular point in a company's journey from $0 to $500K, from $500K to $1 million, that you typically see people start offering benefits to attract that higher quality talent? Because that obviously doesn't make sense from day one for most companies to start doing.

Yeah, well, I would say that there are different types of benefits. I think when we think, when we say benefits, we usually think health, healthcare, or those kind of more expensive benefits. But there are no-cost benefits that you can frame even at the, when you're getting started, you can frame those and sell those to the folks that you wanna bring on board. So for example, Advances, you know, we might not think of that as a traditional benefit, but it's very beneficial to employees, especially if they're, you know, if you're doing a biweekly payroll cycle, but you have a benefit of, hey, you can get it in advance up to, you know, 20% of your pay or whatever it is, you know, some sort of policy in place that can be attractive to potential new hires. So the fact that they know that even though they're getting paid every 2 weeks, but they can get an advance on that pay, you know, can be attractive. So don't, don't discount the, the no-cost benefits there. But then there's, you know, before we even get to the healthcare, there's some, some low-cost benefits as well. So you could have something called the Qualified Small Employer Health Reimbursement Arrangement, QSEHRA. So this is a reimbursement for healthcare costs to your employees. So this is basically where instead of paying for their health insurance right out, which you're basically establishing as a policy like that says, hey, we don't cover your— we don't pay for your health insurance, but any healthcare costs that you are Accru will reimburse you tax-free, um, up to $200 per month or whatever dollar amount you want to establish. And the benefit to the company is one, that's tax deductible to the, to the company, so it's a tax write-off for you. It also is tax-free reimbursement to the, to the, uh, to the employee. So it's not— when you put it through payroll, it doesn't get those payroll taxes applied to it. Um, and then it's a health benefit, healthcare benefit. So you have some level of healthcare even though you might not have the full-fledged healthcare insurance. It's a healthcare reimbursement program. So that would be like a low-cost benefit you could implement. And then you have the higher-cost ones that I think everyone's more familiar with, like full-fledged healthcare insurance, a 401(k). Those, those type of things. Um, and so in terms of when that— those are implemented, uh, I typically see them implemented, you know, when folks are above a million for sure, probably maybe even 1.5 and higher, um, where they start implementing like a 401k or something like that. But even before you get to that level let's just take the 401k, like a retirement plan. You, you might want to do a simple IRA first because that's less expensive. It's a little bit more simple. So that might be your first step, you know, do a simple IRA, um, because a 401k is a little bit— it's kind of expensive. And it can make sense for the business owner to do a 401k if you want to— if you, the business owner, wants to put a ton of, um, put a ton of money into a 401(k) for tax purposes to lower your tax bill, that could make a lot of sense. But if you're not doing that or if you're not ready to do that, then 401(k) usually doesn't make sense because it is kind of expensive to have someone administer for you, whereas a SIMPLE IRA, it's, it's pretty cheap.

So good. Yeah, and you know that, that talent is really important. And also, you know, it does get more expensive depending on which route you pick you know, subs, W-2s. The more you scale, the more costs you have. Um, so let's just break down the cost of production here real quick. So we're obviously going to have things in there like your salaries, but also things like material. Uh, what on average do those percentages look like when we're breaking that part of that number down, or that, that slice of the pie?

Yeah, for, for residential repaint, you know, typically see somewhere between 10 and 15% as a percentage of revenue. So for materials, for direct costs, and that can fluctuate a little bit. Like, obviously, if you're doing a lot of exterior brick repaints or something, or, you know, if you're painting a lot of brick or something, or stucco, that's just sucking up a lot of product. That's obviously going to cost more in materials than if you have to go in and just do a lot of painting of railing or something, where it takes a lot of labor, but it's not as much for the product. So you're going to have those differences there. So you definitely want to pay attention to your material costs, make sure you're getting with your Sherwin-Williams rep or your Benjamin Moore store and making sure you're getting those discounts if you're a you know, have an account set up with them and stuff like that. Um, but I would say if, you know, so there can be efficiencies made there for sure. I mean, that doesn't need to be paid attention to, but the kind of the key is, is getting the overall, um, gross profit kind of dialed in. Uh, so It's, it's, I, I would say I wouldn't pay attention to the materials until you have the labor figured out, like, because that's usually like the biggest thing that folks struggle with is just their pricing and then their labor for being efficient. Once you get those two things figured out, your pricing and then your labor, then you can start looking at your materials for, uh, seeing how you can, you know, either be more efficient or get your, the best pricing from your your, uh, your rep.

Yeah, so you brought up a great point there. You know, when we're looking at the cost of production, the labor is going to be the larger slice of that pie. And let's talk about pay scales just for each position. Uh, you know, you have multiple layers to your company. Let's take a company maybe doing $1 million to $1.5 million. Um, what should that pyramid look like in terms of who you're paying for in different positions of your company? Just all On average, typical million, million and a half company.

Okay. Uh, so if you're, you know, doing a million, a million and a half, you, you probably have, uh, either a production manager or a salesperson, or you might be looking to hire, uh, one of those two things. So, um, in terms of what you should be paying them for the production manager, I think usually that arrives somewhere around 5 to 7%. So if you're doing $1 million in revenue, that's a $50,000 to $70,000 salary for them. Or maybe it's, you know, $40,000 base with bonuses that they can get up to $70,000, something like that. And then for the salesperson, you typically want to do that all commission. If you say if you— if they can sell $1 million, in revenue over a year, you would wanna do most of it commission. So if you did a total commission, that would basically be, hey, you get paid 8% of whatever you close. And so that you can make up to $80,000 if you book a million. So those are the two key hires there. And then going to the, you also have, might have an admin person. So, you know, or maybe a virtual assistant. And really that's usually just paid kind of hourly, you know, $20, $25 an hour for some sort of admin support there. And then for the crews, you know, you have your painter, your, you know, junior painter, maybe a senior painter, crew leader, The way you can structure that is basically, most time folks are doing this on an hourly basis. So a typical painter, I'm seeing right now, like paying folks starting out somewhere around $20 an hour. And then a senior painter might be paid $25, $30 an hour, maybe even a little bit more depending on your skill level and and how they're performing. But the key is, I think for them is going back to the 35% of revenue. So the way you get there is basically price off of production rates, meaning that you, for each project that you bid on, you should generate a budgeted hours like, hey, this project is budgeted for 100 hours of labor. And so that estimate, you take that and change it into a work order, which some softwares do this automatically like Paint Scout. So that work order will have a breakdown of, okay, here's all the things that need to be painted and here's the budget hours for each of those items. You give that to your crew lead and say, hey, here's the budget hours and you hold them accountable. You know, hey, you need to get this product in by 100 hours or less. Now, you know, you can do some sort of performance pay system using that, you know, structures basically, you know, I'm going to pay out, you know, X amount of dollars in labor, you know, even if you do it under budget. So it's an opportunity for them to basically make more than their base rate. You can do some sort of bonus program like that to kind of incentivize those painters. So that's what I would look at, especially if you're struggling with those folks keeping under budgeted hours, is the first thing really get your pricing down so you generate budgeted hours, then getting a work order to your crew so they know the expectation and what's expected of them to paint this project. What's the timeframe looking like? And then you can, once you get those two items down, then you can look at maybe doing some sort of performance pay or bonus system to incentivize those painters to beat budgets.

Amazing. Yeah, love all that. Okay, let's shift gears here. The painting industry is obviously very seasonal. It's not an emergency home service. We consider it more of a luxury service where there's, you know, low entry to start painting. You know, a homeowner can go out to Lowe's or Home Depot, buy a gallon of paint and a paintbrush and get to it. So we do follow a seasonal trend depending on the holidays, the time of the year, all that kind of stuff, the weather. How do most painting companies stay financially sound with all of the seasonality in this industry? Do you have any strategies that you recommend on that side?

So yeah, there's a few things. Um, so I would say there's, there's one, it's, it's taking care of your your team. You know, if you, if you, if you're in a, if you have a seasonal business, you should have those conversations with your team to prepare them. But you obviously should also prepare yourself. But in addition to that, you should also look at your, your marketing, you know, customer reactivations, doing some sort of deals at the end of the year when you know things are going to slow down. To try to reactivate your customers. I've seen a lot of clients have success with that where they're, you know, having some sort of compelling offer in those slower times to kind of generate, you know, interior work or whatever the case might be, or even having another service line. Some folks have started doing a Christmas tree or not Christmas tree, but Christmas lighting to kind of have that service line that offsets, you know, the fact they're going to be kind of, if they're doing mostly exteriors, they're going to be kind of not have that much work to do in the winter. So they offset that with some sort of additional service. But yeah, I think especially for the folks that have been around for a while there, I just see a lot of painting businesses They've been around for years. They have a huge customer list of like hundreds of people they've worked with, but they're not like re-engaging those folks on a periodic basis.

Database reactivation campaigns, guys. Use the data that you already have. There's no reason to go out there and try to pull from the weeds in a time of the year where it can get very expensive. In about 45 days, we're going to be in that seasonality. And for most markets, it's going to be a challenge to generate new phone calls. Leverage that past data, get creative with your services. I love those solutions. So, um, let's say, uh, that I'm a painting business owner and I open up my books and get all of my numbers plugged in and they're way off from the numbers that you're proposing here, right? I'm sure this is— this pops up more often than you think. Um, so all my numbers are in the red. Where do I put my time and energy first? What what number or what slice of that pie should I be working on improving first that will help, uh, get all those numbers moving towards the green in the future?

The first thing I would just make sure that they're— have someone make sure the numbers are accurate, just because a lot of folks come to us and they think their books are accurate, but you go in and it's completely wrong. So I'd— that's the step one, is just make sure you're working off of good data. Before you try to make any analysis on what's happening. By having somebody that knows what they're doing, take a look at, verify everything's been reconciled and categorized appropriately. That's definitely step 1. And then step 2, assuming that that's done and you look in and everything's red, usually the first step, let's just say your profit, your, your bottom line profit is super low. I would— it's probably a gross profit thing. Your gross profit's probably super low. And so the first thing to look at is pricing. Like, how are you— are you pricing correctly? Are you marking up things basically 100%, right? Because if you're going for a 50% gross profit margin, you need to mark everything up by 100% because you need to basically charge the customer double what it takes you to produce it. So that's step one is look at your pricing. How are you arriving at your price? Once that is figured out, if you've determined that either you're doing that correctly or you fix that and your gross profit is still low, it might be because efficiency. So what are your crews painting efficiency? Are your crews painting efficiently? That would be the next thing to look at. Are they abiding by the budgeted hours that you give them? Are you giving them budgeted hours to work off of? And so that would be the next place to look. And then once you've done that, if your profitability is still low, then you look at your overhead costs. What are you paying for on your overhead? You know, and this might be, sometimes it's not necessarily overhead costs, it might just be your revenue's not high enough. Maybe you just need to get more work, turn on the marketing more. So it's kind of a depends on what's going on there. It could be that it's not often that people are just paying a lot in overhead costs unnecessarily. It does happen, but, you know, go through, I would say go through and develop a budget, you know, line by line. What are you paying for, for overhead costs? Do you need it to run your business? And then, you know, it also consider advertising. What are you spending on advertising? Maybe it's just that you need to grow your business and that's what, and that will, that overhead cost being a high percentage of your overall revenue will, that problem will disappear if you just increase your revenue. And so yeah, so that's basically the runout. Look at your pricing, look at your efficiency for your job, your jobs, then look at your overhead costs. In marketing, which you're putting into your marketing. And then that should hopefully resolve your profitability issues. Then if you're still having issues there, if your profit on your P&L says you're good, but you're having cash flow issues, like no cash in the bank, you look at your profit and loss, it's like, oh, it looks like I'm doing good, but I don't understand because my cash is super low. Then it might be some sort of a collection issue where you're maybe invoicing your customers, but you're not actually collecting from them. This is especially true for commercial, but it also can be an issue with residential if they're just like sending an email but not collecting right after the job is done. So figure— making sure you're collecting from your customers as quickly as you can. And then also look at How are you paying your bills? Are you paying your bills? Are you basically delaying your bills as much as you can to optimize your cash flow? Because the whole game with cash flow is get paid faster from your customers and then delay cash outflow from everyone else. This is a game you can play there to improve your cash flow.

So good. So let's just back up and look at like a business from a 30,000-foot level. You have a new client that's come, that's coming on board with Bookkeeping for Painters. What is the most common financial issues that you see time and time again that if you could scream from a mountaintop like, hey, do this today, that they'll set them up for success for the future?

I think the most common problem is probably the pricing. So making sure your pricing correctly. I recommend production rates. That's usually the most successful painting businesses that I see. They're using production rates and they have their pricing now nailed down, and that's gonna ensure you're profitable. That's definitely the problem number one, I would say. And then from there, it, Cash flow can be an issue for the, the commercial side of things, and it's just basically understanding how to play that game of cash flow, um, getting paid faster/delaying outflow of cash. And then there's some other hacks that you can do, like with your Sherwin-Williams, you know, pay it down with your credit card to extend it another 30 days, those kind of things, making sure you have a credit a Sherwin-Williams credit account to begin with and then stacking it with your credit card. So there's certain tactics you can do to improve cash flow there. And then, you know, the other thing would probably— the third thing I think would be, you know, marketing. A lot of folks are sometimes scared to put money into marketing. I don't know if scared is the right word, but hesitant. To put money into marketing because it's— they think it's too expensive. But, you know, as long as they're getting that 8x return, it's definitely worth it. So, you know, there's a, I guess, a kind of a hesitance to put money into marketing. But as long as, you know, you should be definitely cautious, you know, making sure you're getting that ROI. You can track it to make sure you are. But but you shouldn't just like not try it. So yeah.

Marketing. So there's one question I wanted to touch on is I know we briefly glanced over this earlier in the call is the cost of marketing on average. Now what we'd say is if you're a small company or a large company looking to grow, right? We're looking at 5 to 8% of your annual revenue back into marketing. If you are aggressive growth, you're looking to scale, you're looking to reinvest. Maybe 10-12% at most. And so if we're looking at a company, let's say you're doing a million a year, should be roughly about $4,000 to $8,000 a month, about $50,000 to $100,000 a year. Do those numbers align with what you typically preach to your clients?

Oh yeah, absolutely.

So, yep, good.

I was gonna say, yeah, that's pretty much, um, we look for 5-10%. Um, if it's over that, then we'll kind of dig into the details, okay, it might be okay, you know, just look into the return on investment for each marketing campaign. Is there anything that's really lagging that's not getting, you know, if you're doing Facebook ads and you're only getting a 4x return on investment or 3x return on investment, it's like, you know, something needs to change there. It's not very profitable. So, you know, if it's over 10%, definitely needs to be, you know, dug into to see what's going on there. But yeah, that, that's pretty much what we look at as well.

Yeah, and our minimum benchmark is 10x return. We figured that's a— so just in line with your 8x return. Uh, but you know, we have some guys doing 20, 30x, and the amazing part about that is we'll still find people who complain even if they're getting 20 or 30x return. It's, uh, it's always about expectation setting. I think that's, um, the hardest part about anybody's job, looking at numbers, right? Um, so I do have a few more questions for you here. First, um, are there any tax incentives or tax breaks that you like to inform your clients of? I'm thinking of things like purchasing a car at the end of the year, so you're not— let's say instead of giving your money to the government, you're reinvesting that back into your company. Are there any easy, low-hanging fruit that you like to, uh, to preach to your clients?

So I think the low-hanging fruit we kind of touched on already is, is your tax status. Like, you know, if you're, if you're getting over $60,000 in profit, definitely look at the S-corp election. It might, that might save, and that can easily save you like multiple thousands of dollars per year, if not more. Uh, so that, that would be a low-hanging fruit for sure. Um, and then once you have the S corp set up, another low-hanging fruit would be making sure you have an accountable plan, which is just another way of saying a reimbursement plan, so that you're getting reimbursed for all the things that you are using on your personal side. Um, you're getting reimbursed from, from the business, and not only for you, but you can also do this for your employees. But basically, you know, everyone's using their cell phone, that's probably yours, but you're not getting reimbursed from your business. You're probably using your vehicle that's yours, but you're not getting reimbursed from your business. You're probably using a portion of your house for either a shop or maybe a home office. So, and you might not getting— might not be getting reimbursed from your business. And so those reimbursements are not only reimbursements, but also tax deductions to your, to your business. And that's where the tax savings come in. So, so low-hanging fruit, S-corp election when it makes sense, and then an accountable plan set up in the S-corp to get— take advantage of those personal use items. And then other low-hanging fruit. I mean, there's a, there's a lot of other tax strategies out there that kind of get more, more and more complex. Uh, but those are two that are just like pretty much most people can easily take advantage of.

So good. So, uh, Daniel, we talked a lot about numbers, financials today. That can get complicated and it can get overwhelming. And as I mentioned earlier, numbers can be scary. You know, it's something that a lot of guys just think they can outsell their problems on the financial side. But if you want a professional to be brought in, you guys obviously know your things and it's not just numbers. You also have the strategy behind it, which I think a lot of people overlook when they're looking to just hire a bookkeeper, which they look at, you know, hey, let's make sure my numbers are in line. The benefit of hiring somebody like Bookkeeping for Painters is you guys actually understand the nuances of the painting industry at a very granular level. So if somebody's interested in potentially looking at how you can help them, where would they start?

Sure, yeah, go to bookkeepingforpainters.com and you can schedule a consult, and we'll— it's a free consult, and we'll basically go through kind of like what we did today, go through what your, what challenges you're facing on financial tax perspective and see what we can make recommendations to how you can improve your business. And then also if it makes sense to work together, we can also talk about that. And, you know, basically it's a 3-step process. You know, we first identify what, what do we need to track on the business? What decision, what information do you need to make decisions? And then step 2, we deliver that information to you so you can make decisions in your business to get to the next level. And then open up— that will hopefully open up your profitability. And then step 3 is to protect those profits through proactive tax planning. So you're, you know, getting your tax liability as close to zero as possible.

Yeah. And just for like context, roughly what do your services cost? You know, I know there's probably different ranges based on the size of the company, but for somebody to have some sort of price point in their head.

Yeah, so just as a, a general rule of thumb, um, for, for accounting and bookkeeping services, because really it can cover, you know, payroll, bookkeeping, tax preparation, tax planning, financial advisory. So there's a lot of different services in there, but just as a rough rule of thumb, you can say expect to pay between 1% and 3% of your revenue. For those types of services.

And the interesting part about your services is they're actually very similar to marketing in the sense that you're actually looking at a return on investment on that. Your, your job is to help them save money, which should ultimately recoup that 1 to 3%, if not more. And more so, you're protecting them from being audited, which we all know how fun that can be.

Oh yeah, yeah, definitely. Yeah, we shoot for a 10x return on Um, so our average, uh, tax planning client, for example, uh, they get about a 10x return. So, you know, that's kind of what we shoot for, um, for, for our clients.

Yep. Yeah, brilliant. Love it. Uh, so Daniel, any final last words, uh, final last, um, you know, inspirational thoughts that you would like to impart on any of those listening in?

Yeah, no, I think it's just, uh, running a painting business is, is all about knowing your numbers, what they mean, and, um, really getting a firm understanding of your numbers will, will help you get to that next level.

So know your numbers, make sure they're accurate. Call Daniel, he'll make sure they're in line. Daniel, thank you again for your time today, brother. Really do appreciate it. For any of those who are struggling on the financial side or want to make sure their numbers are in the right stratosphere, give Daniel a call. We have several clients who are using his services today that have personally reached out to say that they would not be in the position they are today if it weren't for them. So we can vouch for his services. Thank you, Daniel, again for your time today, guys. Cheers.

Thanks. I appreciate it. Awesome.