Financial Habits: Maximizing Profits in Your Painting Business

My promise to you today is I'm going to show you the habits to hit the numbers to be in the top 20% of the most profitable painting businesses. And I want to be clear, the numbers I share with you today have worked for hundreds of painting businesses. And I know they work because I've worked with over 300 painting businesses from startup to $10 million in revenue over the last 8+ years. So I know this works from experience, not theory. With that said, let's get started. So here's a quote from Marcus Lemonis, one of my favorites. If you don't know your numbers, you don't know your business. If you don't know your numbers, you don't know your business. And if you don't know your business, we can be pretty sure you can't improve it. And I don't expect you to take my word for how important this topic is. Here's some proof on why you should pay attention. It's helped Christian go from $650,000 to $3.1 million per year in revenue. It's helped Chris go from $4 million to $8 million. It's helped Brian go from $750,000 to $2.8 million per year, and dozens of others who work with us to know their numbers and grow. In fact, over the last several years, the painting businesses we work with on average increase net profit by $78,000 over the course of the 12 months after they signed up with us compared to the 12 months before they signed up with us. Additionally, they're cutting their tax bill by $44,000. Now, once you know the numbers you need to hit in your business, you don't need a ton of time to get results. You just need to do the right stuff the right way. But knowing the numbers and how to improve the numbers is the hardest part. Again, which is why I've dedicated a huge amount of resources to this mission. And the mission is to guide painting business owners to financial prosperity. Now, with that said, Let's dive into the numbers. So first, let's take a look at what the average painting business hits on their profit and loss. These averages are pulled from our internal benchmarking. We work with over 180 painting businesses across the US and Canada. And on the left, we have our typical profit and loss categories like revenue, gross profit, net profit. Then we have our revenue group between $500,000 and $1.5 million and the associated percentages of each pro— uh, profit and loss category. And then on the far right, we have our revenue group from $1.5 million to $5 million and the associated percentages of each profit and loss category. Now the average gross profit is 44%. For the revenue group between $500,000 and $1.5 million, and the average gross profit is 46% for the revenue group $1.5 million to $5 million. Now, just to recap, make sure everyone's on the same page, gross profit is equal to revenue minus the cost to produce the job. So the cost to produce the job is the paint materials and the painter's labor. So once you subtract those things out, that should equal your gross profit. And we often say gross profit as a percentage of revenue, so you take that gross profit margin and divide it by the revenue to get a percentage. And gross profit is the most important profitability metric for your painting business. Warren Buffett actually points out that companies with a competitive advantage have gross profit margins above 40%. And this is out of the hundreds of folks that I've worked with, this is usually the issue with their profitability, is their gross profit's too low. Now the next most important number that you need to know is your customer acquisition cost. And customer acquisition cost is the cost to find, acquire, and close those leads, turn them into customers. So your marketing costs, this would be your Facebook ads, your direct mail flyers, your door-to-door marketers, anything you're spending to get leads, that's your marketing costs. And then your sales cost is what you pay your salesperson for commissions or base salary to close those leads. So adding those two costs together gets your customer acquisition cost. Now customer acquisition cost average is 18 or 19%. It's 19% for the $500,000 to $1.5 million revenue group and 18% for the $1.5 to $5 million revenue group. So that's the average. Now let's take a look at what the average painting business owner actually takes home. And we call this discretionary earnings and discretionary earnings is a fancy Accounting term, basically meaning what's your bottom line net profit plus any owner's salary that the owner is getting. So this is all the money going to the, to the owner. The average discretionary earnings to the owner, aka cash flow to owner, is between 12% and 19% for these two revenue groups. Now the more roles you play in your business, the higher your discretionary earnings as a percentage of revenue. Should be. For example, if Average Joe from Average Joe Painting is the salesperson, the production manager, and the business owner, on average he's making between 19% and 22% of revenue going to him. Now that we have an understanding of the averages, let's review what the top 20% of painting business owners achieve. Because hopefully you're not just shooting for average, right? Now here are the margins for the top 20% of painting businesses. First off, gross profit is 50% or higher, and customer acquisition costs is about 15% of revenue, and discretionary earnings is somewhere between 19 and 29% of revenue. Now notice how you can slightly increase the gross profit by about 15% because we were at 45% gross profit and we went to 50% gross profit. So just a slight increase. And we slightly reduced customer acquisition costs by another 15% because we went from 18% customer acquisition cost down to 15% customer acquisition cost. So those two small tweaks and we're nearly doubling the profitability. So these are two huge levers we can pull to make drastic changes to our overall profitability. Now we know what the top 20% are doing. How do we actually achieve the same results? How do we improve our gross profit from 45% to above 50%? Now there are two main ways to improve gross profit. The first way is to increase your prices. In order to hit 50% gross profit, you need to charge the customer twice the amount it costs you to produce it. And I gotta say, this is the number one thing that people get wrong. When this painting business owners come to see me and I review their financials for the first time, 9 times out of 10, if their gross profit is off, it's because they're not pricing correctly. So this is a simple idea of twice charging the customer twice what it costs you, but it's often difficult to put into practice. So let's run through an example of how to do this correctly. So let's take an example. Let's say that you have a project that takes 100 labor hours and you pay your painters $25 per hour. Now, if you're paying employees $25 per hour, you have to factor in your workers' compensation, your benefits, payroll tax burden on top of that $25 per hour. And when we do that, it usually adds another 30% onto the hourly rate. And we call this our fully loaded labor rate. And we take our $25 an hour, multiply it by 1.3 burden to get $32.50. Now we take our fully loaded labor rate of $32.50 and multiply it by our 100 hours of estimated labor to get $3,250. Now additionally, we need to consider materials. Now let's say we have 20 gallons of paint, $90 per gallon, and some sundries, $50. And so we add all the materials together and determine that it's going to be $1,850 of materials. So we have our job site labor of $3,250 and then our materials of $1,850. We add those two together to get the cost to us of $5,100. That's how much it's gonna cost us to produce this job. So get— to get the price to charge the customer, we would need to divide by 1 minus the target gross profit. Now, if you want to keep it simple, you could take the $5,100 and just multiply it by 2, and that will get you a target of 50% gross profit. By just doubling it. But if you want to get a little more nuanced, if you want to maybe shoot for 55% gross profit because you want to build in some, some buffer just in case you can't hit— something goes wrong, something goes unexpected, you have that additional buffer, you want to shoot for 55%, you can use this formula, which is basically taking that $5,100 and dividing it by 1 minus your target gross profit, in this case 0.55. So it'd be $5,100 divided by 0.45 to get our price of $11,333, which we will charge the customer, and that will give us a target of 55% gross profit margin. And this reminds me of a story. When Warren Buffett bought See's Candy, the single thing he wanted to control was price. So he didn't care about anything else in the business. He let it all continue to run as is after he purchased. The only thing he wanted to control was price. And then he went on to increase the prices for the next 50 years in a row, and he 100x'd his investment. Now, to be able to raise prices like Warren Buffett did, you need to have a strong sales process, which is a completely separate presentation that I'm not doing today, but it is very key to understand how to get a higher gross profit margin. You need to have a strong sales process. So you can command higher prices. Now, the second way to improve your gross profit is improve efficiency. So the first way, like we said, is improve your pricing. Second way is to improve efficiency, or the way that you're paying for your labor and materials. Now, from what I've seen, the best way to improve efficiency is to generate budgeted hours with each estimate using production rates. Now there's software out there nowadays that allow you to do production rate estimating, like PaintScout or DripDrops. So those are some great options to allow you to do this. But just to make sure everyone's on the same page of what a production rate is, a production rate is a measure of how long it takes a painter to paint a given surface. So when you're doing your estimate, you add up the surfaces of all the different surfaces of the house that you're bidding on. So you measure out how long the fascia board is, the fascia and soffit. How many linear feet of fascia and soffit do you have? How much square footage of siding do you have? How many doors are there? How many windows are there? You add up those different surfaces, and then for each surface type you multiply it by a production rate. How long does it take a painter to paint a door? Or how long— how many linear feet can a painter paint, you know, 10 square— uh, 10 linear feet of fascia and soffit? Or how long does it take a painter to spray 100 square feet of siding? Those are your different production rates. And so you add up all those different budgeted hours to get your total budgeted hours for the project, and then you use that to generate your price. And then you provide those budgeted hours to your crew with the expectation they beat the budget. And then each week you're doing a weekly review of the job cost of projects with crew leads. So you're holding that expectation that they beat the budget, and then you review with them what went wrong or what went right. With each project. Now, some businesses have also successfully implemented a performance-based system such as ProTiv. And ProTiv is a performance-based system that integrates with your time tracker like QuickBooks Time or Busy Busy or ClockShark. And it also integrates with your estimating software like PaintScout or DripJobs. And so it pulls in the budgeted hours from your estimation software, and then it pulls in the actual hours from your time tracker, and then it allows your employees to check in when they're on the job site and see how they're doing against the budget. And it gives them real-time feedback on how much their bonus is going to be if they stay on track, which can be very motivating. Now, the bottom line for your job site labors, you got to know what business you're in. I had the opportunity to go to acquisition.com headquarters and spend the day with Alex Hormozi, and that was one of the things that he said that really had an impact on me. Because, you know, if I were to ask you, you know, what business are you in, you might say I'm in the painting business. But that's if you really think about what you're doing, what are the most important things you need to be doing your business? You're really in the people business because you have to recruit, hire, train people, and then price that labor appropriately, mark it up to your customer, and sell it to your customer. So it's really about the people in your business, not so much about the paint. Now, once you've consistently increased your gross profit above 50%, now you can shift focus to your customer acquisition costs. And remember, customer acquisition cost is your marketing cost plus your sales cost. Now the average customer acquisition cost, remember we said was 18, 19%. The top 20% are customer acquisition cost is somewhere around 15%. Now ideally your customer acquisition cost is one-third or less of your gross profit. So if your gross profit is 45%, you would want your customer acquisition cost no more than 15%, basically that 45 divided by 3. Now there are 3 ways to reduce your customer acquisition cost. The first is to evaluate your return on investment for each marketing source. So you, maybe you have Facebook ads running, but you also do door-to-door and you also send out direct mail flyers, you want to review the ROI for each marketing source. And this is basically comparing the revenue that you got for each marketing campaign in BookJobs and then evaluate how much you actually paid for that marketing campaign. So we would take, for example, let's say you had running Facebook ads and you got you made $10,000 of revenue from your Facebook ad campaign that you did, and then you would look at how much did you spend on that Facebook ads, and maybe it was $1,000. So if you get $10,000 in revenue but you paid $1,000 for Facebook ads, that would be a return on investment of 10x, a 10x return on investment on those Facebook ad costs. And this is usually what you want to shoot for, somewhere around 10x on those marketing costs. Now the second way to reduce your customer acquisition costs is to evaluate your salesperson compensation structure. Typically a good target is 8% of what they close. And this can be a combination of base salary and commission, or even just straight commission. Now a compensation package with a base salary might look something like this. The salesperson gets a $30,000 base salary plus a 3.85% commission. Now if you have a compensation package with commission only, it might look something like this. The salesperson gets 6.15% of what they close. Now notice I said you wanna pay them around 8%. But if they're getting straight commission, you're not paying them 8%, you're paying them below 8% because you have those payroll burden on top of whatever you're paying them if you're paying them as an employee. So you want to make sure you account for that payroll burden even with the salesperson commission or salesperson pay. Now either way, the end state is that you want their commission package to be 8% of what they close with fully loaded burden. Now the third way to reduce customer acquisition costs is to improve your sales process by improving the set rate, the show rate, or the close rate. Now your set rate is basically when you get a lead, how often are you converting that to a scheduled estimate. Now, depending on the type of marketing you're doing, you're going to have a different set rate, or you should expect different set rates. If it's a website lead where they went to your website and filled out a form on your website, you should be setting those leads at a very high rate, like 90% plus. If it's a Facebook lead ad or a Facebook ad lead, you'll have a lower set rate. You probably won't have a 90+ percent set rate, but you should at least have above 50% set rate for Facebook ad leads. The next thing to look at is your show rates of the folks you scheduled estimates with— how many actually showed up and didn't cancel. This should also be a very high rate. This should be 90% plus. And then we have our close rates. Of the estimates you went to and did your proposal, what percentage did you close and get a signed proposal from? This should be somewhere around 30 to 45% typically. So to improve your sales process, you look at each step of the sales process and say, can I improve this? Now, if you're looking at your set rate, and you have a 30% set rate, that might be something to focus on. Or maybe your close rates are 10% or below, that might be something to focus on. Or maybe your show rates are 50%, that might be something to focus on. You take the one that is the worst part of your sales process and focus in on that and see where you can improve. And by improving your sales process, you're gonna get more out of your leads. So without actually decreasing your customer acquisition costs, without actually decreasing your marketing, you can get a better return on your investment by doing more with the leads you get. So those are the 3 ways to improve customer acquisition costs. You improve your ROI on marketing costs, you dial in your salesperson compensation, and you improve your sales process. Now, once you've improved gross profit and customer acquisition costs, your net profit and discretionary earnings will increase in most cases. However, if you're still not hitting profitability targets, develop and implement a budget to evaluate your budgeted versus actuals. And what does that mean? Basically, you can develop a budget by saying, okay, this is how much I want to spend on my cost of goods sold, or my marketing, or my insurance, etc. So you come up with a number for each one. Maybe you refer to previous years and, and come up with that number. And then you can plug that budget into— QuickBooks Online actually has a budgeting tool. And then as you move through the year, you can do a budgeted versus actual report in QuickBooks Online that compares what you budgeted versus what actually happened. And then that will show you the variance on where are you overspending compared to your budget. And this is helpful for identifying where you can potentially cut costs. It reminds me of a story. Walmart founder Sam Walton, he was relentless about cutting costs. And during a visit to Brazil, he was actually arrested because the police found him crawling around on the floor in a store, and he was measuring the aisle widths. So the police were like, "This is a crazy guy, we're gonna throw him in jail." But what actually was happening was Sam Walton was just gathering ideas on how to improve Walmart's layout and improve its efficiency. So he was always looking for ways to cut costs, and that's what you have to have, that same relentless mindset in your own business. Now, in some cases, painting businesses are hitting their profitability targets, but they're struggling with cash flow. They, they struggle to pay payroll or make payments on debt. Now, to improve cash flow, there are two levers that you can pull. And to look at these two levers, let's take a look at what Jeff Bezos did to maintain high cash flow even when his profitability was negative for years. I remember watching Jeff Bezos on The Late Show with Jay Leno. This is back in like 2000, before Jeff Bezos was super buff. It was back when he was like a nerdy small guy like me. And Jay Leno was making fun of Jeff Bezos. He's like, hey, you have— Amazon hasn't made money for years. You guys are just negative profit, negative million-dollar profit every single year. What the heck is going on over there? Now obviously we know today Amazon is hugely successful, and the reason why Jeff Bezos was able to have negative profits and still survive was because he had very strong cash flow and he paid very close attention to cash flow. And, and what he did was basically when customers would go to Amazon, they would pay him quickly because they would have to pay for something as soon as they bought it on Amazon. They would have to pay in full. So he was getting paid quickly from customers. And then on the other side of things, he had favorable payment terms with vendors. He didn't actually have to pay a lot of his vendors until 30 days after he used their stuff. So he was paying others very slowly. And the most successful painting businesses that I work with, that are especially— that are looking to grow quickly, they take a high deposit, and this allows them to get paid quickly so that they can use that money to grow their business. And so most folks are doing something like a 50% down payment when customers sign the proposal. Now there are some limitations depending on where you are in the United States. Maybe you're in Massachusetts or California, you have some limitations on how much you can take as a down payment. But definitely I would recommend taking as much as you can from— as you can legally. And then, and then do an actual progress payment once you start the job. So for example, in Massachusetts, you're limited to a 33% deposit. So I would take that full 33% down and then do a progress payment when you start the job, maybe another 33%. And that way you've collected 66% before the job is done. And then you can take the last 33% on that once your job is completed. Now what this does by collecting that, that money as quickly as possible is oftentimes it'll cover your labor costs so you can run payroll without having to worry about it because you know you've, you've captured that labor cost. And then also you can capture that customer acquisition cost up front so it can allow you to grow quickly with your own cash. So if you're taking a 50% deposit, you know, typically 35% is— covers your labor cost, and then 15% usually covers your customer acquisition cost. And 35% plus 15% is 50%. So that 50% deposit can allow you to, to grow quickly because you're covering your labor costs. So you can run payroll each week or each— every other week. And then you can also use your new customers' money to finance the next customer acquisition, put more money into your marketing machine so you can grow quickly. So getting paid quickly from customers not only helps your cash flow but helps you grow without debt. Now the other part of the equation to improve cash flow is to slow payments down to vendors. Slow payments down. And you can establish a credit line with your paint store and put your materials on credit when you are producing the job. Now, pro tip here: you can actually get another 30 days of interest-free credit if you use a credit card to pay down that vendor balance, because you get 30 days interest-free with your, your paint store. Then you can get another 30 days if you use your business credit card to pay down that paint store balance. So you get 60 days of interest-free credit, and all that is doing is just delaying the cash going out from your business. So to improve your cash flow, it's a timing game. Get paid faster and then slow down outgoing cash. So let's recap on how to run a 20% top 20% painting business. First of all, you have to improve gross profit over 50%, and you do this by increasing prices and improving efficiency. Then you need to reduce customer acquisition costs to 1/3 of gross profit. You evaluate your return on investment of marketing and dial in salesperson compensation And then improve your sales process by looking at your set rate, your close rate. Then next thing you want to do is implement a budget to get desired discretionary earnings. You can do— develop that budget and run your budgeted versus actual reports throughout the year to see how you're doing. And then finally, implement cash flow tactics to improve your cash flow, get paid faster. Slow down payments to vendors. Alright, so these are the things we want to do. Now, how do we actually change these things to regular habits that we can do each week, each month, each year? So here are the habits broken down to run a top 20% painting business. So first, let's take a look at improving gross profit over 50%. On a weekly basis, we want to be job costing. And reviewing the job costing with our crew leads to see where they did well, where they didn't do well. And so you're identifying those issues. And then on a yearly basis, at least, we're reviewing our paint prices and our average labor rates, and we're changing that in our estimation software to make sure that we have proper pricing in our system. Now let's take a look at reducing customer acquisition cost to 1/3 of gross profit. We wanna evaluate our marketing return on investment monthly by each marketing campaign. On a monthly basis, we'll take a look at our Facebook ad revenue, how much do we get from Facebook ads, and then how much did we spend on Facebook ads. And then we do that ROI calculation. And then look at, you know, direct mail and door-to-door marketing, we evaluate that each month to see are we hitting around 10x return on investment for each marketing campaign. And if we're not, digging into that deeper and seeing, is it just an off month? Or is this a continuing trend where we might need to allocate our money somewhere else? Because this marketing is not working for us for whatever reason. Or maybe it's just we need to get better at this, this type of marketing, and looking where— how you can improve that marketing campaign. The next one is verifying your salesperson compensation at 8% each month. So when you look at your profit and loss, you should have salesperson split out, and you should be able to see after the payroll's run. And you can run your profit and loss by percentage of income and see, is your salesperson compensation at about 8% of what they've closed? And then review set and sales rates monthly. So you want to review your, your, your numbers at least monthly for your sales process, your set rate your show rate, your close rate. Review each of the— review each of those things each month to see, you know, are you, are you hitting those benchmarks? Is your set rate, you know, 90+% for website leads? Is it over 50% for Facebook ad leads? Are your show rates 90+%? Are your close rates, you know, above 30%? And if they're not, try to dig into them and see what's going on. Next, implement a budget to get desired discretionary earnings. So you want to develop a budget each year. So this can be done around December, January timeframe. And basically what you'll need to do is identify what is your goal. Maybe your goal is, let's say, $2 million. Now from there, how do you actually achieve $2 million in, in sales? You will have to generate a certain amount of— close a certain amount of work at a certain average job size. Then you'll also have to, to get those, that closed work, you'll have to schedule a certain amount of estimates. And to schedule a certain amount of estimates, you'll need a certain amount of leads. And so you do that back work to determine how you're going to achieve your sales budget. And then from there, once you know how much you have in sales, then you say, okay, how much— how many crews is this going to take to produce? So you can develop your production budget. How many crews do I need? How many production managers do I need, etc.? And then from there you can develop your overhead costs. And you can use your prior year profit and loss to develop as a, as a baseline to see how much you need to spend on each category. And then once you have your budget put together, you can plug it into a tool like the QuickBooks Online budgeting tool. And as you move through the year, compare your budget versus your actuals each month and take a look at, are you on track or off track with your budget? And then finally, we have our cash flow tactics to improve our cash flow. So one thing you'll need to do is immediately increase your deposit. If you're not taking as much deposit you can as legally possible, review that immediately. That's the number one action item for cash flow. And then each month you can review your vendor payments and see how can you delay vendor payments. So this just might be as simple as, for your Sherwin-Williams bill, just use your business credit card, get another 30 days, and then making sure you're paying off your, your business credit card so you don't get hit with interest. All right, so did I keep my promise to you today? Hopefully I did, and hopefully this was helpful for your business. With that said, I'll see you next week.