Key Performance Indicators - Painting Business

Hi, this is Daniel with BookkeepingForPainters.com, and this video is about key performance indicators for your painting business using Fathom. So the purpose of this video is to discuss key performance indicators and then review how Fathom, which is a software, can help you track key performance indicators in your painting business. So first of all, why key performance indicators also known as KPIs. So KPIs basically are metrics that track certain facets of your painting business, usually stuff like profitability or cash flow, and they give you insight and understanding to help you make better decisions in your painting business. There's a software called Fathom, it integrates with your bookkeeping software. So maybe you use QuickBooks Online or Xero. Fathom integrates with your bookkeeping software, pulls the bookkeeping data into it, and it runs these— this analysis and these reports to give you the KPIs and graphs to give you a better understanding of your business. The other thing it does is something called benchmarking. If you have benchmarking data. I have benchmarking data that I provide my clients. So basically benchmarking data is data that shows you how your competition is doing. So it shows other painting business in this case, what their financials are looking like. So you can compare your financials to other painting companies' financials to see where you stand in regards to the competition. And Fathom does a good job of integrating this benchmarking data to give you a good understanding of where you stand in regards to the competition. All right, so now since we discussed what, you know, why you should use KPIs, and what they are. Now let's talk about Fathom specifically, um, and I'm going to jump into Fathom here in a second and review KPIs in Fathom. I'll review, uh, 3: gross profit margin, operating profit margin, and quick ratio. And then I'm going to review a, uh, cash flow analysis tool and a goal setting tool in Fathom as well. So jumping into Fathom, first we're going to go to KPI. So once you set up your your business in— when you first set up your business in Fathom, you're gonna choose which KPIs you want to track in your painting business. You definitely want to track profitability and cash flow, those are the big ones, so we'll review those first. So once you set your painting business up, you'll have all your KPIs listed, and let's click on one, gross profit margin. So basically gross profit margin is your profit margin, your profits after you subtract out your direct cost. So your direct costs are your job site labor, your job site materials, anything it costs to do a job. What's left over is your gross profit margin. And just to give you an idea, some benchmark data for the painting business, painting businesses that have revenues of $500,000 to $1 million their gross profit margin is 46%. So in Fathom, you have— it gives you a chart of month to month what your gross profit margin is, and then it compare— on the bottom here compares on what— where you stand compared to your peer group, your benchmark group, how you stand compared to your competitors. Alright, so that's gross profit margin. Operating profit margin, very similar, it's what your profit margin is after all expenses to include the direct cost I spoke about and also your overhead costs. So basically all your expenses, you take your revenue, subtract out all your expenses, get your operating profit margin. For a painting business from— that has revenues of $500,000 to $1 million, the average operating profit margin is about 7%. And this is a demo company, by the way, it's not a painting company. But, you know, the software will track month to month as well and compare you to your benchmark group. Alright, and the last one you might want to look at incorporating into your business something called a liquidity ratio or quick ratio. And quick ratio, it's a ratio that tells you if you have cash available to pay off upcoming expenses in the near future. So basically, current liabilities, anything that's due within the next 12 months, do you— it answers the question of do you have the cash to cover those upcoming expenses. Usually in the painting business, you want to have at least a dollar of cash available to pay off a dollar of current liabilities coming due in the next 12 months, or a 1 quick ratio. The average painting business has about a 1.3. So basically for every dollar that's coming due in the next 12 months, a painting business, the average painting business has $1.30 to cover that dollar. Alright, so this business has a 0.58 quick ratio, which is basically 58 cents for every dollar that's coming due, which in the painting business wouldn't be a good ratio to have. You want to have enough money to cover your expenses. According to this benchmark group, this is average, so every industry is a little bit different. All right, so those are 3 KPIs to look at. I'm going to show you the KPI Explorer, which gives you a snapshot of how you're doing. The red indicating bad, green is good. So you'll set targets, um, once you, you'll establish your KPIs and you also set targets target goals on what you want your gross profit margin to be, what you want your operating profit margin to be, and what you want your quick ratio to look like. And you'll say, you know, whether these KPIs are critical, high, or medium, or low. And, and this tool gives you a snapshot of how you're doing on those goals, and it organizes them accordingly. Next tool I'm going to show you is Cash Flow. So a big thing about this is you want to make sure you have enough cash going around your business to cover your expenses. And this shows you, you know, a month, a quarter, or a year timeframe and shows you all the incoming— this green bar at the top is all the incoming cash and then the red is the outgoing cash. So the red here, this First red bar is cost of sales. This would be all your direct costs, so all your job site material, all your job site labor. So, you know, you paid that all out, and then it shows you all the different overhead costs that you paid out as well to give you a net cash flow. What was the net amount of cash that came into your business over January of 2015 in this example? Alright, so that's a pretty useful diagram to look at. And then the last one I'm going to go over is a goal-setting tool. It's called Goal Seek. And in this example, let's just say that right now your profitability ratio, which is basically all your revenues minus all your expenses, what are you actually bringing bring into the business after everything is taken out. So your profitability ratio currently is 12.36, and you set a goal, you want to go, you want to increase it by 2 percentage points. So how are you, this tool basically helps you determine how you're going to do that, how are you going to, increase your profitability ratio by 2 percentage points. So there's a few things you can do. You can increase your price. You see, as I slide the bar to the right, it gets me closer to my goal of 14.36% from the 12.36%. So let's say, you know, I wanna increase price by 1%. So I'm gonna start, I'm gonna add that into my markup. Additional 1% increase on price to get me closer to the higher profitability ratio goal. And then another thing I can do is I can reduce the direct cost, so I can reduce materials on the job site. An example might be you implement a policy that your employees have to buy and maintain their own brushes to— because you've noticed that you've been paying a lot of money for paintbrushes recently and you want to control that. So you say, you know, not buying any more paintbrushes, you're a painter, you have to take care of your own paintbrushes, and you think that's going to get you another percentage point. After doing the math and all the paint, after looking at historical data, you've been paying for a paintbrush every job site and you think this would help you reach your goal of more profits, so another percentage point there. Still not quite to the goal, as you can see you're at 13.18, or I'm sorry, 13.81. Maybe you also look at fixed expenses, so you renegotiate with Verizon Wireless on your cell phone bill to decrease the cost of your plan or whatever the case may be. So you decrease it maybe by another percentage point lower, a lower cost there. So the— it got me close to the goal, not quite there. You know, after the analysis you realize, okay, well, maybe I do need to raise my prices a little bit more. To get me all the way to my goal. So this is a tool you can definitely play around with and figure out how you're gonna meet your profitability goal in this case, but you can obviously choose different KPIs listed here. So really useful tool. So that kind of gives you a snapshot of, you know, what KPIs are. Why you should use them in your painting business, and then reviewed, you know, Fathom, which is software that integrates with your bookkeeping software and can give you some good insight on your KPIs. If you're interested in getting some more bookkeeping and tax tips for your painting business, make sure you go to bookkeepingforpainters.com/free-ebook to get your free report on Bookkeeping and Tax Tips. Hopefully this video was useful. Appreciate you watching. Have a great day.