Episode 3: Daniel Honan - Know Your Numbers & Save Thousand on Taxes — Off the Ladder Contractor

Hey guys, I am Brandon Sewell, owner of Seal Pro Painting and Off the Ladder Podcast. We exist to help home service business owners learn so that they can lead well and ultimately live life off the ladder. Today's guest that I will be interviewing is Daniel Honan. Um, he is the business owner of Bookkeeping for Painters. He offers bookkeeping and tax services. He's been in business for 7 years. He serves the US. He has 20 employees. And I'm going to read you a quick bio on Daniel. He's no ordinary professional. His background is as diverse as it is impressive. He's a former painting business owner himself. So he's faced the same challenges that you and I have faced, and he comes from the trenches of cold calling, getting estimates, conducting in-home consultations, strategic planning required to manage crews, and running payroll. But that's not all. He is also a former military intelligence officer. He has unique skills in intelligence gathering, analysis, and he's not just theoretical. They've been put to test in some of the most demanding environments you can imagine. Daniel's academically equipped as well. He holds an MBA and a degree in accounting. It's a rare combination of street smarts, book smarts, and battle-tested wisdom that Daniel brings to the table. He has used his rich tapestry of experiences to develop a revolutionary back office system tailored for painting contractors. With his expert guidance, you'll not just learn to know your numbers, but you'll understand what those numbers mean. And Daniel has developed strategies to help you save significantly on taxes and has crafted streamlined processes to automate your operations, saving you both time and money. Welcome to the podcast, Daniel. I'm so excited to dig into this. And, um, you know, glean from the, the wisdom that you have. Is there anything else that you'd like to say to our audience before we get started?

No, I'm, I'm super excited to be here, Brandon. I appreciate the, the invites. I'm excited to get started and to dig into some of these topics.

Yeah. So tell me a little bit more. How did you transition from, you know, the oper— military intelligence operations into being a painting contractor and now owning a bookkeeping and accounting service?

Yes. So I started out on the job side working for my dad who had a painting business when I was 15, 16, doing work during the summer. Did that through high school. Then in college, I did the— while I was getting my degree in accounting, I did the CollegeWorks Painting Internship. So I ran a, a painting business there for a while. Then after college, I joined the military and went into intelligence. I went on several deployments. And then during a portion of that, I, I became a, a National Guard reservist. And so I was doing civilian life and military life. Trying to balance those things. Um, during that period, I ended up starting, uh, Bookkeeping for Painters and another painting business. And, uh, because when I was starting Bookkeeping for Painters, I wanted to do accounting, which my degree's in, but I also wanted to help a specific group of people. And I thought, well, I've kind of been exposed to the painting industry, I know a bit about that, so that's why I started there. And then I learned a lot from that, ended up running another painting business Well, I owned another painting business and did kind of the back office and portion of it. I had an operations manager and salesperson on the ground doing the day-to-day operations. Throw in another deployment in there while I was operating both of those businesses and came back and I consolidated my focus on bookkeeping for painters. Exclusively. So that's kind of the crazy journey there.

Nice. Well, that sounds loaded. I love, you know, that you have this background in the military. I find that guys that have military experience end up being pretty sharp business owners. But hey, let's jump into some questions. So obviously owning a business is very challenging. And I think that it's a very common thing that we see that a lot of business owners do not like being in the trenches of the numbers, right? So I want you to share from your experience with the clients that you have, what are some of the most common financial challenges, mistakes that painting contractors make when running their business?

I think, I think the number one issue is pricing, especially for painting businesses that are under $500,000 in revenue. That seems to be the real, real hang-up point for them because they're often not charging enough, and so their profit margins aren't there, and it's really preventing them from growing.

Yeah, that's, that's just so good. I mean, I can definitely speak to that myself. Can you go into a quick explanation of, you know, what good profit margins are? And I think maybe even try to help the audience understand the difference between like profit margin, markup, and kind of those nuances, because I think a lot of people think that they're charging enough, but they're really not, you know, they think they're making 50% profit margins, but really they're making 30% because they don't just understand the nuances of that. So could you go into a little bit of that detail?

Yes, absolutely. So we'll still— we'll stick with the $0 to $500,000 because that's usually where most folks are having issues with this. And so if you're in that category, you're— a good rule of thumb is that you're charging twice of what it costs you to do the work, as you alluded to, a 50% gross profit margin. So gross profit means after you pay for your direct labor and your direct materials, what's left over for, for profit and overhead costs. So, and again, the rule of thumb here is what is it going to cost you to produce a job? So let's say you have a job that's $10,000 that you, you're charging the customer $10,000. The labor that you need to pay out to, let's say, a subcontractor is going to be $4,000, and then you have to buy Sherwin-Williams paint and sundries for $1,000. So that's $4,000 plus $1,000 is $5,000. So $5,000 minus the $10,000 price $5,000 left over. So that is a 50% gross profit margin. So that's like kind of the, the rule of thumb, especially starting out. Obviously you can get really a lot, you know, there's painting businesses that we've worked with that do over $10 million and they have a 65% plus gross profit margin. So it's definitely possible to do way, way better margins than 50% gross profit margin, but that's kind of like the standard starting out. The average gross profit margin is 40%. So on it, because we do a lot of internal benchmarking with, we work with over 160 painting businesses across the US and Canada. So, you know, on average, 40% gross profit is what we typically see on average. However, the ones that are squared away that are really pushing what they can charge, it's looking like 50% plus is a good target, generally speaking. And to get to your question more specifically on like the nuances. So going back to the example, you have a project, the pricing really comes down to the production rates. And so to define what that is, that's usually the problem, like with the pricing, people don't understand production rates, they kind of charging with some other method. And not to say other methods can't work, I just know that folks that are successful, they're using production rates. And so something's working there. There must be— they must be doing something right, because for the most part, painting businesses over a million are pretty much exclusively using production rates. It's like an easy methodology that you can also replicate and get other people to do stuff for you, like other salespeople to use production rates to generate prices. So it's, there's something there. But just to define a production rate is basically your, how long does it take to paint any particular surface? So you measure the surface, 100 square feet of siding, how long is it going to take your team to paint that siding? Or, you know, 10 linear feet of railing, how long will it take your team to paint that? So you add up the budgeted hours for a project and you multiply that by your labor rate loaded with burden. So that typically these days, you know, $25 an hour, $20 to $25 an hour depending on the skill level of a painter, and then add 20% approximately. This is obviously slightly different depending on what your paying for workers' comp and what your state payroll tax is or that kind of thing. But just rough, rough numbers here, add 20%. So if you're paying someone $20 an hour, add 20% of that, it's like $24 an hour basically. So that's the loaded rate. And so you would take your, measure all the surfaces of the project, generate, okay, how long is it going to take my team to do this? Multiply it by your loaded burden. So to say $24 an hour and to get your, how much, how much is it going to cost you for labor? And then if you're shooting for a 50% gross profit margin, you would double that to 100% markup. 100% markup would get you a 50% gross profit margin. So 100% markup is basically double, you know, charge the customer twice what it costs you. And then for materials, similar thing here, you know, your— how much product do you need to complete the job? Add that up, you know, and then 100% markup. I mean, that's— there's other ways to do it, but that's the most straightforward way, is 100% markup on the product as well. And so that's going to again get you to 50% profit margin there.

Yeah, that's so good. And, you know, something that I hear a lot of times, because, you know, guys just don't know what they don't know. You'll have these guys who, when they hear something like this, their, you know, automatic response might be, how can you charge a customer that, you know, it seems to them unfair or unethical. Can you go into more depth of why that 50% profit margin or above is so important and what that additional 50% profit margin does, you know, for you as the owner, for the business, and why it's so important?

Yeah, that's a good question. So assuming you started your business to help people, right? In order to help people, you have to be profitable to run the business, to, to hire people to help you so that you can provide for their families, provide for your own family, but also provide a great service. I'm assuming you want to provide a great service to people, um, that they're going to be super happy that they worked with you. So when you have— when you price correctly and you have enough margin, that's going to give you enough, uh, give you the ability to hire people that are squared away and that will be able to help you. You'll be able to use great products. You'll be able to, you know, add certain things to your production process that maybe someone who is charging lower won't be able to do, like a great customer experience. And then obviously it's gonna provide for yourself and for your business. And if the business isn't being provided for, it's not gonna, probably not gonna provide a great service, probably not gonna be great for people to work for, uh, and it's not going to help you. So you need to have proper margins. And, and again, you know, 50% is kind of the starting point. There's, there's painting businesses that do well over 65%, uh, so it's not, you know, if you, if you believe that 50% is, is not possible or it's, you know, price gouging or something like that, you really need to break that belief because It's definitely possible. People happily pay that amount and have great experiences with painting businesses that do 60, you know, 55, 60, 65% gross profit margins.

Yeah, you know, we really look into what our profit margins end up being, you know, doing job costing. So, you know, we're averaging, you know, in that between the 50 to 60% uh, range. And, you know, one thing that really changed the way that I looked at, um, you know, the, the profit margins was, um, reading Profit First, um, for contractors. And, you know, just understanding that if you're not, you know, aiming for that, then, you know, what ends up happening is you're just in that cash flow cycle, right? So you're just selling the next job to pay for the production of the job you're doing. And it's like, if the cash flow stops, and then you're in panic mode because the money is not covering your expenses. So, you know, what I had to learn is, you know, by having those healthy profit margins, your business is healthy. So you're not relying on, you know, the next sale to cover the cost of the current job, if that makes sense. And, you know, I really want guys and gals in our industry to understand that it isn't unethical, but it's necessary because we all understand that we are in the business of offering customer service, right? At the end of the day, and painting is just something that we do, right? But really, in order to deliver that great customer service, You know, it's so necessary to have that, that margin there. So like you said, to be able to like have software so that we're organized, to be able to communicate better with our clients and show up professionally and, you know, pay guys a good living wage. You know, so all those things are really important and play into having good margins for your business. Is there anything that you want to add to that before we move on?

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Just to dig in further on the margins. So a common question that I get is, how much should I be making in my, in my business? And I think, you know, the answer— what I usually answer with is, what are you, what are you doing in your painting business? Start with the roles of what you do in your painting business. So obviously there's the business owner. So the business owner, if you're completely passive, you should be making between 10 and 15% going to you in a passive. You're just— you have someone else running it, you have team, they're running it, and you're passive. That you should be making 10 to 15%. Then, so that's the— that's how much you should be making as a business owner. Now, if for most of us, we're probably still working the business in some, some capacity. If you're under $500K, you're probably doing, uh, sales still. So you're the salesperson, uh, so that should be about 8 to 10%, um, as a percentage of revenue. And then you're probably, if you're under $500K, you're probably also doing production management as well. So basically making sure that the job's getting completed, assigning crews, scheduling, maybe making sure the paint's ordered, making sure the customer's having a good experience. So production management, uh, That's usually 5 to 7.5% of revenue. So just to pause there, if you're, if you're doing, if you're the business owner, you're doing sales, you're doing production management, let's say you have crews, subcontractor crews or employee crews working on the job site, you should be making, you know, 15 plus, 15 for business owner plus 10% for sales plus 7.5 for production management. So somewhere around 27.5% of revenue should be going to you doing all those roles in your business. And then to take it another step, if you're still on the job site, maybe you're a one-man show, so you should be making close to, you know, 60, 65% should be going to you because you're doing everything. You're doing production, I'm sorry, you're doing on-the-job site labor, which is around 30 to 35% plus sales plus production management plus business owner. So that's a rough framework you could use to kind of piece together, okay, what do I do? Which add up the percentages to determine, okay, which would be my target, you know, take home from the business.

That's good. Yeah, that's really good. So just to reiterate, like let's say if you've got that business who's, you know, making $500,000 in revenue. So essentially half of that is going towards, you know, the labor and material and running that side of the business. And then if I understand what you're saying is the other 50%, that's part of the margin, 25 to 27% of that should be owner's compensation is what you're saying. And then the other, let's say 23%, is going back into the business.

So yes, just to— yeah, so half the job would go to direct costs. Let's say you're shooting for 50% gross profit. So half the job would go to direct costs. The other half would go to basically cash flow to owner. Cash flow to owner, meaning either you're— it's your paying yourself a salary if you're an S corp officer or it's just going to net profit because you're a sole proprietor, an LLC taxed as a sole proprietor. So yeah, about 27%, 27.5% is if we're doing sales, production management and you're the business owner. So 27.5% and that leaves, like you said, whatever it is, 22.5% to Marketing, accounting, software for, you know, estimating software, insurance, right? And whatever other miscellaneous things.

Sure. That's good. Anything else there?

Yeah, there's a lot.

You could go so deep, right, on that.

Yeah.

But yeah, I think that covers a good amount. Let's go on to the next question that I have for you. So, Um, as a bookkeeper, um, how exactly are you helping, uh, painting contractors to manage, you know, that side of their business? How are you helping them to manage their cash flow and, and doing that effectively, especially since, you know, you service, um, you know, the entire U.S. So you've got clients who are all over, you know, different states and things like that. How— what's your approach to serving those painting contractors all over the place virtually, essentially?

Yeah, absolutely. The first step is setting up a system that gets the data from your business to you to help you make better decisions. So the system is, part of it is your bookkeeping software. Another part of it is your CRM or your estimation software, your, you know, where you're buying supplies from, Sherwin-Williams, all these different pieces. You know, often when folks come to us, they might have some of this stuff, but it's not working together. The data isn't being collected and reported in their bookkeeping software. And they're not even if, and sometimes it may be some of it is, but they're not really seeing it because it's just sitting in QuickBooks Online and they don't maybe not know how to or don't spend the time to figure out how to run the reports in a way to actually get some insight. So Most of the time when we set up this, the system for folks, you know, we're tracking, you know, by service line. So maybe they're doing interior, exterior cabinets so we can see what their gross profit margin is on each service line. We're setting up tracking to get job costing information. So how much are they making? What's the gross profit on each job? Maybe we're also tracking marketing return on investment. So they have maybe multiple marketing campaigns going, Facebook ads, direct mail, whatever the case may be. So we can track a return on investment for those items. And so the first, first part is basically figure out what, what, what's your stack you're using, what's your tech stack, how do we get everything to, to, to talk to each other? What information do we need to pull out and tag appropriately to get you the information to, to make decisions to get your business to the next level? So that's step 1. Step 2 is implementing that and get basically setting up you, setting you up on a dashboard where it pulls in this information automatically from QuickBooks Online. We have some software that can basically update, you know, a Google Sheet dashboard in that, that updates every hour so they can see, okay, what their profitability is, what their marketing metrics are, what their liquidity and solvency is, what their cash flow is looking like, and custom reports. All that goes into a Google Sheet that they can basically— it gives them all that information to help them make decisions. And so that's the second step. And then the third step is once they're profitable and their things are working well, their biggest expense is going to be taxes. So, you know, if you hit any level of success, taxes is going to be your biggest expense. So we help protect your profits through tax planning. Tax planning is basically basically sitting down with you, figuring out, okay, how much are you going to owe? Doing a tax projection based off of how you're performing, how much you're going to have to pay in taxes. The first part. And the second part, okay, now that we know you're going to have to pay $80,000 in federal and state taxes, what are some specific things we can implement to reduce your tax liability as close to zero as possible? And so that's done throughout the year before the end of the year so that we can save as much money as possible, get your tax liability as close to zero as possible so that you can keep more of your, your hard-earned money. So that's generally what we do for folks. We have other services like payroll and, and things like that, but that's kind of the core of what we do.

Nice. Let me ask you this. What do you think is one of the most important things for business owners to be looking at you know, as they put all of this data in, like, let's say they're using QuickBooks Online, when they're running a profit and loss and balance sheet, what do you think are some of the most important things to look for on those profit and loss and balance sheets? And what is that telling the customer? Like, how is that, you know, communicating to these business owners how to operate and run their business better?

Yeah, absolutely. The first thing is to make sure the data is accurate. So typically what I do, I guess, and anybody can do this, so you just get a sense of if things are accurate or not. You can pull up your balance sheet if you run a report, a balance sheet report in your QuickBooks Online, and you just scan down the balances there. You shouldn't— with— there's a couple exceptions to this. But for the most part, you shouldn't see negatives, negative balances, because this balance sheet should show you the balance as of a particular date, whatever date you ran at the top. It should show you a balance of all your accounts, so your bank account balances, your credit card balances, your Sherwin-Williams balance should be on there. Often don't see that when folks come to us. Should show the, you know, balance for how much people owe you your accounts receivable, how much you owe to other folks in the next 30, 60, 90 days for accounts payable. So all those balances, with the exception of a couple of things like depreciation, they should all be positive balances and they should be accurate. So that's the first step, making sure you have accurate books, accurate information to work off of. Next, once that is determined that you're you have accurate books for the profit and loss. Like to run a profit and loss and then show— there's a way you can toggle the profit and loss to show a percentage of income, which basically we're talking about like what's your, your gross profit percentage, which, which did you make as a percentage. If you run a profit and loss, you can sort it so that it shows you the percentage of all your account items And so, you know, first thing I look at a profit and loss is gross profit because that's kind of the biggest lever you have to your own, your profitability. So hopefully that's near or over 50%. And then from there, if, if the gross profit is good, then look at your bottom line profit. If it's, um, if your bottom line profit is not where it needs to be, it's probably your overhead. If your gross profit's good but your bottom line profit's not where you want it to be is probably you have too much overhead costs. That's not as common of a problem, but it does happen. And this gets down to, you know, you mentioned Profit First. I think they cover this in Profit First, but basically you want to run your business with exactly what you need to run your business. Like you don't want to pay for things you don't need. So developing a budget you know, is really helpful for that. And so if your gross profit's good but your profitability is not where it needs to be, it's probably your overhead costs. And then, you know, marketing is like usually a huge part of overhead costs, or it can be, it's not always, but, you know, making sure you're getting at least a 10x return on investment for marketing. So, Basically, your marketing should be about 10%, 5 to 15%, 15% being really aggressive as a percentage of revenue. So that's the biggest part of overhead. So those are some things I look on the, the profit or loss. Going back to the balance sheet, you know, we already reviewed it for accuracy, but what you would want to look at for liquidity. Liquidity just means what is your ability to pay debt in the short term. I look at, you know, what your current assets are. Current assets is just like, what's your cash, what is your accounts receivable, what, what people owe you, and compare that to your current liabilities, which basically what do you owe in the short term, like your Sherwin-Williams account, your credit card bill. And so the ratio between your current assets and your current liabilities should be ideally somewhere 2 to 1, 2 to 1 or better. So that means you have $2 of current assets compared to $1 of current liabilities. So that just gives us a good feeling that we're going to, you know, be able to make our— be able to pay our bills in the near future. And then the last one is solvency. And this is just basically, is the business able to pay its debt in the long term? So liquidity is ability to pay in the short term. Solvency, ability to pay in the long term. And if you— an easy way to do this is just make sure that your equity is positive. And that's not to get too detailed, um, your equity needs to be positive. If your equity is ever negative, that's not a good sign because that basically means your, your business is better dead than alive, which is not good. So, uh, yeah, so those are just some things that I would look for on, on your financial statements.

Yeah, that's a lot of really good information. And, you know, I think this, you know, just as I'm listening to you, I'm like Wow, there's, you know, so much, you know, depth of understanding, right, of that, of the finances that you understand because it's what you do. Now, I remember when I first started my painting company almost 7 years ago, I had a mentor and his mindset was like, do as much as you can by yourself to save money. And, you know, he had a painting company. He had done all of his bookkeeping and accounting himself and, you know, didn't hire anybody. And his whole, like, mindset was like, why would I hire someone else when I can do it myself and save money? So, um, initially when I first started out, I was doing it myself. And then for the first time ever, I got this big tax bill and I was like, what in the world? Like, what is going on? I was like, I have got to hire somebody else because at the end of the day, this is— it's costing me money because I don't know what I'm doing. So, you know, just for those people out there, is there any kind of like data that you know of that shares what the average person trying to do their own bookkeeping you know, just from common mistakes, how much money could possibly be on the table? Kind of, can you put like a, you know, monetary value on like what those mistakes could be costing people?

Yes, I can. It's a great question. I— we track how much we save folks on from when we do tax planning. The average client saves about $29,000 in taxes when we do tax planning. For them. So, but yeah, it's little mistakes, um, or, you know, simple mistakes can, can be pretty devastating. Uh, I just, I just got off a call with someone today, actually. They have an S corp, which, by the way, you know, if you're a smaller business, be aware that, you know, electing S corp taxation might be, might be in your benefit once you hit $60,000 or more in, in, in profit, in bottom line profit, bottom line profit. Not in all cases, but in a lot of cases. But anyway, I was talking to an S corp owner. He had a painting business. He was the S corp owner. And he, as part of being an S corp owner, you have to run salary. The problem was he was running a very high salary. He was running like $100,000 of salary, which is very high, especially what he did in the business and the, the, and the size of the business. Um, you know, they were only doing, I want to say, $500K in revenue, which, you know, is decent, but it, it's not a super large painting business. So he was running a $100,000 salary. And we do some compensation reports. Basically, we take, you know, where you live, we look at the roles that you perform in the business, and then we calculate, okay, based off of the available salary data in your area, you should pay yourself a reasonable salary of $50,000 or whatever it is. And so we did that for him and he was around $50,000. So he had basically overpaid himself through payroll by $50,000 because he was paying himself $100,000. He probably would have got away with paying himself $50,000 and that would have saved him, I think it was like $6,000 or no, $7,000, $7,500 in, $7,500 in payroll taxes that he overpaid because he just ran too much through payroll as the S corp. S corp officer when he could have paid himself half that amount and saved that $7,500. So that's just a simple example where you think you're doing the right thing running payroll, but you just run a rate way too high of payroll and it costs them thousands of dollars. So yeah, it's—

yeah, it's, it's, it's interesting, like, just to hear you say that because that's a lot of money on the table. Right. And that You know, that savings that you could be getting could be making a night and day difference in your business. So I, you know, I think one of the smartest things that I ever did was, you know, outsource bookkeeping and accounting. And, you know, you think you could be saving yourself money, but you're really costing yourself big time. Is there any other details that you want to go into on the importance of you know, the, the bookkeeping side of things and how you're saving your customers money.

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Uh, I mean, we, we talked about knowing your numbers in terms of how much you should be making, your gross profit margin. Uh, the thing we didn't talk— we, we talked about marketing should be 10x return on investment, um, and some, some key numbers, and we talked a little bit about tax planning. Those are the basics. Obviously, we could go deeper on—

Let me ask you this question, and you may not have an opinion on this one way or the other, but when my business started to really take a downturn last year, you know, I was, you know, you talked about marketing costs. I was paying for leads. Have you seen, and like I said, I don't know if you'll have an answer to this or not, but have you seen any businesses that are successfully using lead services like, you know, whether it's Angie Leads, HomeAdvisor, you know, CraftCheck, there's a ton of them. That have really healthy profit margins and are doing really well in business? Or do you see that there's like a correlation between paying too much, you know, for leads and spending too much money there and it not really being worth what they're, they're getting? Do you have any insight on that?

Yeah, I've seen, I've seen businesses that are very successful using Angie's Leads or whatever, um, and then I've seen businesses that are not successful using them. So I think you could do it either way. Just an example, and there's a— I'm working with a $2.5 million business, they use Angie's Leads and, um, I want to say CraftJack or something like that. And I mean, they get, but they get leads from other places too. Like they do customer reactivation, direct mail. So it's just one of the sources. So they, what we do for them is we track the return on investment for each individual marketing campaign. So they know that they get a, you know, a 9x return on Angie's Leads in a, you you know, a 7x return on direct mail, but then they get a lot of customer activation, which is super cheap, and they get like a 20x return. So they, uh, we track all the, the return on investment for each of those marketing campaigns so that they can, you know, if things start going weird, you know, south, they, they might allocate money from one place to another. But, you know, I, uh, For paid leads, I think people, I think the leads can work. I think the issue often is the folks that are really struggling is they're probably not pricing. It goes back to what we talked about in the beginning is probably not pricing high enough or they're trying to compete on price. And so they don't really have the budget to really pay for the paid leads because they're, you know, they're not, They're charging so little, right? Because, you know, we call it the customer acquisition cost, which is your— how much your lead or how much does it cost to close a sale is the customer acquisition cost. So how much do you pay for marketing and how much do you pay your salesperson? Now, you might be the salesperson, but, you know, to use the numbers we used before, your salesperson should be getting about 10%. And then your— how much you're paying for a lead is 5 to 10%. So your customer acquisition cost might be— is usually somewhere around 15% or so. So that's just something to keep in mind, that if you— if your average job size is, is $5,000, then your customer acquisition cost, that the cost to close a sale should be around $750. So you have $750 to get the lead, pay for the lead and then also pay your person, your salesperson, to close it. Um, now obviously having a higher average job size is going to give you more money to work with. So if your average job size— we work with somebody out of California, he's killing it. He has like a $15,000 average job size. He's doing residential repaint. His average job size is off the charts. We usually see $5,000 to $10,000 average job size. He's doing $15,000, so he has a lot of marketing budget to capture, to acquire these jobs, you know, because it's just a really high, um, average job size there. So yeah, um, marketing definitely needs its attention for sure, and understanding, you know, how much should you be paying for a lead. I think some people don't understand that you should be willing to pay, you know, if you have the correct margins like that, again, that gross profit margin built in there, you should be willing to pay, you know, 5, 10, maybe even 15% in some cases to get a customer. Another rule of thumb for how much should you be willing to pay for a lead is, uh, for your customer acquisition costs, I should say. So your customer acquisition cost would be paying for the lead plus your, your, uh, your salesperson to close it. Your customer acquisition cost shouldn't— should be no more than 1/3 of your gross profit. So if your gross profit is 45%, your customer acquisition cost should be no more than 15%. So that's just a rough rule of thumb there. But yeah, marketing is definitely something to pay attention to on that return on investment.

Nice. Let me ask you this. Obviously, you're working with a lot of painting contractors. You know, I've heard different opinions on this, but based on revenue, what are some good metrics that a painting contractor business owner could have for knowing when to hire, you know, additional employees? You know, let's say whether it's like an admin role, you know, painters, project manager, a sales rep, can you give some like standard, you know, metrics that a painting contractor might want to hit before considering those things?

Yeah, absolutely. It's actually a good question. It's related to that question when you talked about how much should I be making, you know. So it's a similar question, just on the other side of the flip side of the coin. So often the first major hire is the production manager. It can be the salesperson, but for most folks, you know, obviously you're going to hire your crews first, like Hiring crews, that, that's a thing. And you basically need to hire crews and then run jobs profitably, obviously. But the first kind of major hire is, is your production manager, usually somewhere around $750,000 or higher. And to understand if you're ready to hire that person is basically going back to your, what are you doing in the business and what is your margin? So as we talked about before, if you're the business owner, the salesperson, and the production manager, you should be, cash flow to owner should be 27-30%. So that's what you should get your margins to before you hire a production manager because a production manager is gonna take 5-7% of revenue to, for to allow you to, to, to pay somebody full-time to do that. And usually the revenue level for that one is, like I said, somewhere around $750,000 or higher. Because if you do $750,000, uh, times 0.077%, that's about a little over $50,000 a year salary. So, um, so that would be A good rule of thumb. And then for the salesperson, usually if you bring on the production manager first, um, and obviously you could bring on the salesperson first too. Some people, um, don't like doing sales. They want to get somebody else to do that first. But for the most part, some people are doing production managers first. And then the next major hire is your first salesperson, or maybe even first two salespeople, because some people want to hire salespeople in twos. For competitive reasons, keep them competitive. But again, for the salesperson, they should be getting 10% of what they close, 8 to 10%. I mean, you can pay them in that range, 8 to 10%.

Um, and so do you recommend commission or like a salary plus commission for sales reps?

For the most part, the, the, the painting businesses I work with that are really successful They're paying their salespeople almost either completely commission, 100% commission, or just like a very low base salary or a, you know, initial training hourly rate that's very low because the thinking is, you know, you want your salespeople driven, right? And they want— you want people who are hungry and they want to make money. So you, you give them as high of a percentage as, as is feasible, you know, 8 to 10%, uh, and you basically don't pay them much else other than that because you want them hungry to close sales for you.

Yeah, that's good.

Uh, the production manager is usually more, uh, salary, and folks do, um, do bonuses though, or commission type, type with like production manager. Yeah, like gross profit tied to gross profit and tied to NPS, net promoter score, or some sort of customer satisfaction metric. So that they're getting evaluated on, are you bringing in profitable jobs for gross profit? And then are you making sure that customers are happy? And so tying their their pay to that as well. So maybe doing, you know, 50% salary and then the other 50% bonuses based off of their performance with gross profit and customer satisfaction.

Gotcha. We don't have much time left, but I have one more question for you really quick. You know, one thing that I hear a lot of times is obviously, you know, people say it's hard to find great help. What can I offer? And you have people questioning like, do I need to offer, you know, different things like healthcare or, you know, a 401(k), Roth IRA, whatever benefits for their employees? For those who may be considering that, asking that question, do you know if there's any type of, you know, metric for painting contractors to reach as far as revenue to even consider offering those things to their employees? And if so, what is that?

So there's actually low— there's no-cost benefits, there's low-cost benefits, and then there's high-cost benefits. So most folks, when you say benefits, they think, like you said, healthcare, 401(k), those are kind of the high-cost benefits. But there are, you don't want to forget about, there are some no-cost benefits and low-cost benefits. So no-cost benefit would be something like advances. You could put in your job description or your job ad that you do advances, you know, up to a certain amount, you know, whatever the constraints are with the advance. But that is a real benefit to employees that are, especially if they're living paycheck to paycheck, the ability to get an advance, that could be a huge benefit to them. And obviously there's sort of a cost there, but it's an advance, as you know, you take it out of their paycheck on the next paycheck. So that would be an example of a no-cost. A low-cost benefit would be something like QSEHRA, which stands for Qualified Small Employer Health Reimbursement Arrangement. And so what this is, instead of offering full-fledged healthcare, you can do a reimbursement arrangement where you set up a policy saying that you do QSEHRA and you establish a cap of, you know, let's say $200 per month per employee. They can submit health costs, whether that is premiums that they had to pay or hospital bills. They can submit that to you for reimbursement and you reimburse them up to a certain amount, you know, $200, whatever you want to set as the, as the, as the cap there. And so you reimburse them tax-free because again, usually when you give your employees pay, you have to run it through payroll and pay them, you know, pay the payroll taxes on it. But this would be a tax-free reimbursement to them. So it's tax-free to you and to them. So they just get that. If they put, you know, $200 in hospital bills, they would get that $200 right back to them with no taxes applied to it. So it's a— it's— and plus you have control as a business owner. You have control where you can set a cap where, you know, it's, it's, it's something that within your budget. That you can put in, and it's a health benefit. Um, so that's an example of a low-cost benefit. And then you have your, your high-cost benefits like 401(k), um, healthcare, 401(k)s, retirement plans. Um, that can often be, depending on what your tax strategy is, you can often offset the cost of a retirement plan by having a tax by being a part of your tax strategy for your personal taxes. So the cost can often be offset with, with some tax planning in place. So for that one, it's dependent on your situation, how much you're willing to put into retirement and everything like that. But even with the 401(k), there's the 401(k), which is the most expensive, but there's other ones like the SIMPLE IRA is a lot less expensive. And then the SEP IRA is, I mean, essentially free, but you might need to have someone help you file, file things for it, but it's pretty inexpensive. So there's even different costs for those retirement plans.

That's good. You know, one thing that, you know, I've realized as a, as a business owner with employees is that You know, surprisingly, you don't necessarily have to offer like, you know, health insurance and, you know, retirement accounts and things like that to retain great employees. A lot of times it's setting an expectation and delivering on it is what I found. And then having great culture and, you know, we do offer some things like paid time off. Which our guys really appreciate. But, um, yeah, for myself, I just haven't really seen that that's 100% necessary, but I appreciate you giving some feedback there. Um, so we just have a couple more minutes left. Obviously the theme of this podcast is, is helping guys get off the ladder, out of the field, um, so that they can run a business. Uh, what I'm really big on is building a business that, you know, I could eventually sell one day, or it's operating without me so that I can focus on things that matter the most to me, like, you know, focusing on my, my faith and my spiritual life, serving my community, um, you know, spending time with my family, having a healthy marriage, um, being a great father, making time for hobbies and having fun. How, just as a real conclusion, how important is it for these painting contractors with these businesses to really understand their numbers and what are going to be those things that they need to pay attention to, to be able to get out of the field and to, you know, get off the ladder and run those businesses where they don't have to be you know, present 100% of the time. What would be your final feedback on how all of the pricing jobs right, profit margins and all that plays into that for these painting contractors?

Right. Yeah, for, for in order for someone to get to the place where they can get a team in place and grow it to their business to a size that, that will allow for that. They have to know their margins because if you don't know your margins, then you don't know your business. So you're not going to be able to accomplish that. So if you want to accomplish what you just described with having, you know, getting a team in place, having time to pursue other things, you absolutely have to get this dialed in. Otherwise you will, you will not succeed at that because it just requires you to know this.

That's really good. So if somebody wants to reach out to you for your expertise, your services, what is the best way for someone to get in contact with you?

You can go to bookkeepingforpainters.com and schedule a free consultation to talk to me to see what opportunities you have in your business. Or you can— I also have a podcast, The Profitable Painter Podcast, which you can go find on any podcast platform, um, or you can, uh, friend me on Facebook or Instagram. Um, I'm, I'm on all the socials.

Awesome. Well, thank you so much, Daniel, for your expertise and diving into this topic. Um, you know, maybe in the future we could have you on again and do some deep dive into some specific topics, but thank you so much for your time. And, um, yeah, Uh, thank you to my audience for watching this podcast. If you found— find value in it, please, uh, like it, uh, comment on it, share it, and subscribe— subscribe to my channel, as well as check out, um, my other socials. And I'll see you next time for the next episode of the Off the Ladder podcast.