Maintaining Healthy Cash Flow in Your Painting Business

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

And this is Richard Dunton. I'm the tax director of Bookkeeping for Painters.

And today we're going to be talking about maintaining healthy cash flow in your painting business. So I'm sure everyone's heard cash is king. That's a huge focus of business coaches talking about, you know, making sure you have enough cash in your business to keep it going. And one of the superstars in the business world, Jeff Bezos, he was a huge— he is a huge proponent of cash flow. And Amazon which is obviously a wildly successful business that we all probably do business with. They are, are kind of known for, for years going years without having much profit, uh, not showing much profit, but they are still huge and there are a lot of transactions and they have a lot of value in that business. And the reason why they're able to do that is because Jeff Bezos is super focused on cash flow. He's not focused on profit, like bottom line profit on your P&L. He's not focused on that. He's focused on making sure there's enough cash flow coming in, and then he's using that cash to reinvest it into Amazon to grow Amazon even bigger. So, so yeah, go ahead.

No, I just— because that's interesting because a lot of people will ask, like, I've heard that Amazon doesn't really pay that much in taxes, that they don't show that much in profit. How can they be such a large company that is constantly expanding? How can Jeff Bezos afford to send himself to outer space if they're not showing any profit? And you're saying it has to do— that, that cash and cash flow is different than profit, right?

Yes, cash flow is definitely different than profit. If you look at your profit and loss, it will show you, you know, income from your customers, what you've— if you're looking, let's say you're looking at your profit and loss on the accrual basis on— in QuickBooks Online, you go into your QuickBooks Online, you're looking at your profit and loss on the accrual basis, that means it shows you what you invoice your customers And then all the expenses, all the things you paid for the business to operate. And there are some non-cash things on the profit and loss, especially if you run it on the accrual basis, which a lot of QuickBooks Online defaults to. It shows you what you've invoiced your customers, but you maybe not have received the, the, uh, cash payments from them yet. So on the profit and loss, the bottom line is that it shows non-cash transactions.

So, so non-cash transactions would be things like depreciation. So, so like maybe you buy an expensive asset, a new work van or an expensive paint sprayer, and instead of just writing it all off the day you buy it, you spread the costs over a period of years. You know, for vehicles it's 5 years, generally speaking. So if you have a $50,000 van, you're depreciating it or expensing it's $10,000 each year for 5 years. And when you're looking at your cash flow, you're removing these transactions because it's not money that's actually leaving your checking account, right? It's just we're recognizing these expenses over a period of time, but no cash is leaving the business, right?

Exactly. There's all— in the accounting world, when you look at your profit and loss, there's all these things that are non-cash transactions, especially on the accrual basis. So there's a lot of confusion. Like, a lot of painting business owners will ask me, like, hey, I'm looking at my profit and loss and, um, it shows that I'm making a bunch of profit, but I look at my bank account and there's no cash in there. And the reason a lot of the times is the reason is because of what we're discussing, which is basically on the profit and loss there's a lot of non-cash things that happen that get recorded, and like depreciation, or when you invoice your customers but didn't receive cash from them yet, those things might cause you to show a higher profit but not necessarily a lot of cash flow.

So that's kind of the difference between like accrual basis and cash basis. On accrual basis, you're recognizing profit when it's earned and when it's invoiced, not necessarily when it's collected. Whereas on a cash basis, you're only recognizing the profit when you get paid. So you might have, you know, accounts receivable, people who owe you money that you haven't collected on. Hopefully you can collect on it soon. Sometimes these things drag on. So it might be, you know, showing that you have a lot of profit, but you don't have the cash in the bank yet because you haven't gotten paid.

Right, exactly. Okay. So, so obviously you have to have a good grasp on cash flow because that is what is going to keep your business going. So you can't just rely on a P&L on the accrual basis to give you insight into your your business, you have to look at your— an option is you can look at your statement of cash flows to give you an idea of where the cash is going. So you're right. Yeah, go ahead.

Oh yeah, right. Because, because you can't, you can't go to the bank and offer to pay your mortgage with accounts receivable. They only take cash. Right. So, so it's great that you've got this money coming to you eventually. But if you run out of cash to pay your employees and to pay your vendors, that's, that's going to be a tough spot.

Exactly. And that's why Jeff Bezos was super focused on cash flow, because he wanted to make sure the cash was coming in. He didn't care about the profit as long as he was collecting quickly from his customers and delaying payment to his vendors. He could get— keep a lot of positive cash flow each period and keep Amazon growing. And also for tax purposes, as you mentioned, that can be beneficial if you, you're reinvesting into the business and getting those tax deductions. You can show little, little or no profit and still be growing, and you'll, you'll have— your wealth will be growing because if your business is, is larger, you know, you have a bigger asset, you know, to your name as a business owner. So being, being cash flow is a key piece that you got to understand, and we're gonna cut, dig into how can you improve your cash flow in your business. So if you're looking at your, your bank account, it's not increasing, and you're constantly have having to worry about are you going to be able to make payroll, uh, you're looking at your profit and loss, it's profitable You're showing that you're profitable, but you're not seeing the cash coming in like you would imagine. We're going to dig into some things you can do to try to resolve that.

Yeah, that's a good point. I mean, I've had clients come to me and say, you know, I can't understand my books. My profit and loss says this, but when I add up the cash in my bank and I figure my distributions and whatnot, they don't match. And that's because, like you said, you know, cash flow is not the same thing as profit. There may be things on the profit and loss that aren't cash items, like depreciation. I was going to mention amortization is another one. That's kind of a fancy word that's similar to depreciation. But if you have a franchise, so there's, you know, a lot of our listeners, they bought painting franchises and those franchises come with a franchise fee. That fee does not get expensed in the first year, but it gets amortized over 15 years, at least for tax purposes. So you might be showing, you know, that year's portion of your franchise fee, you know, as an expense that's reducing your profit. But that cash has not actually left the bank account. Mm-hmm.

Yep. All right, so let's jump into some of the elements that affect your cash flow. Now, the first one is, is kind of obvious, is your profitability. Your overall profitability is going to impact your cash flow. So we'll— we, in our separate episode, we talked about gross profit and, uh, and discretionary earnings, or what you should be taking home as as a painting business owner, which are tied to profitability. So first thing, when we're looking at what's going on with your cash flow is, one, are you profitable? So we will look at the profit and loss for this. You know, are you charging your customers enough? Are you being efficient on the job site? Are you, you know, you have a 50% gross profit margin or thereabouts? Are you making a good amount of net income? And discretionary earnings for yourself. So that we look at the profit and loss. Now let's say that, uh, your profitability is good because you listen to our prior podcast episodes and you have that nailed down. Um, so the next thing you need to look at is collecting cash from customers. So this, this is a common thing where you look at your profit and loss, it says you're doing awesome, but you don't see any of the cash in your bank account. It might be because you've invoiced a lot of your customers but you haven't received payment from them yet. So you want to pull an accounts receivable report either in QuickBooks Online or your— whatever you're invoicing your customer out of, whether it be Drip Jobs or Pain Scout or whatever. You want to pull an accounts receivable report to see who owes you money and try to get paid as quickly as possible. And that's a big lever to improve your cash flow, is to get paid faster. And it can just be in a matter of days. You know, if you just decrease the amount of days that you have outstanding accounts receivable, collect that a few days quicker, that's going to drastically improve your cash flow over time. And then, well, so that's, that's the second thing. The third thing is paying your vendors is another lever you can pull to positively impact your cash flow. Basically delaying, delaying your payments to vendors where you are able to. So you might have different vendors like Sherwin-Williams, Dunn Edwards, Benjamin Moore, and you also have credit cards. That you might have for lines of credit, you need to look at those different vendors that you have to pay each month and see if you can either delay payment without getting hammered with like late penalties and stuff like that to kind of manage your— to actively manage your cash flow. You know, don't— and also look at for sure not paying it before it's due, if especially if you're suffering from cash flow issues, but paying it right when it's due, or even negotiating with your vendor to say, hey, can I pay this, you know, 15 days later, to hold on to your cash so you can pay your payroll and things like that. So, so profitability, gotta look at that. Number 2, gotta look at your collecting quickly from customers. And then number 3, being able to delay payment to vendors.

Yeah, I think we sometimes underestimate just how important cash flow can be. And it kind of makes me think of, you know, the insurance industry a little bit. You know, Warren Buffett, we've talked about him before. He's a big fan of insurance companies. So you've probably heard of GEICO. That is, you know, little green lizard with a British accent. He is, he works for Warren Buffett. He's animated. GEICO belongs to Berkshire Hathaway. And What's interesting is a lot of these insurance companies that make a ton of money actually pay out as in, in claims as much money as they bring in in premiums. But there is a period of time between when they collect the money from their customers, the premiums, and from when they pay out the claims that the cash sits in their bank accounts. And so profitably, they don't have a lot of profit at the end of the day, but they have tremendous cash flow. And now they'll turn around, they'll invest that cash flow in, in, you know, short-term bonds and things like that. But that's how they make all their money. They don't actually, you know, sell anything at a profit. They just manage cash flow and they've got it down to a science. So I would say don't underestimate the importance of cash flow. multi-million dollar businesses are built on this concept.

Yes. Yeah, that's, that's awesome. Actually, I didn't know that about— they're basically shooting for break-even, but then they're just making interest on the cash that they collected from the premiums. And generally speaking, yeah, that's, that's, that's funny. All right, well, let me, let me dig into some specific strategies that that folks could use in their painting business to make their cash flow better. So profitability, we're going to set that one aside. You got to look at your profitability, make sure you're profitable. So we talked about that in other podcasts. Let's look at the collecting quickly from customers. If you're a residential repaint customer, or I'm sorry, if you're a residential repaint painting contractor, you should be collecting as soon as the job is finished. You should have a process where your crew lead or production manager, whoever it is, does a final walk around with your customer and collects the payment. Maybe you have a checklist going through, okay, making sure they're 100% satisfied with the job. And you go through that checklist with them and then you say, okay, great. Super happy that you're satisfied with the services we provided. Are you going to be paying with cash or credit card or whatever they're supposed to say? And from there, you get the payment right after the job is done. That's the best-case scenario. Obviously, things happen. Folks are out of town when you finish the job and you have to invoice them. But that ideal situation is you're collecting it right after the job is done. And I've seen a lot of successful painting businesses, they'll incentivize their crew leads to do a final walk around with the homeowner to get that payment. And if they get that payment, they get a bonus, you know, $50 bonus for collecting the payment right after the job is done. So doing like small bonuses to your crew leads might be a way to incentivize it. And, you know, it might be worth it to you to pay your crew lead $50 if it's going to save you and your admin team time to following up and getting that customer, that homeowner to pay you that final payment.

Yeah, yeah. It's nice to have the finality on that too, so that you're not, you know, like you said, admin, you could spend hours of admin time trying to follow up on the invoices, following up on the communication. With the customer. If you can get paid before you leave the job site, that would definitely be the best case scenario.

Mm-hmm. And another, so we talked about at the end of the job collecting payment. Another thing you could consider, seen a lot of folks do this, is before the job even starts, when you book them, you, you, they sign your proposal, obviously we recommend you need to take a deposit. That's a big, a big, uh, opportunity to get some cash flow in. And most states allow for the taking a deposit, uh, upfront before you start any work. California is kind of strict on their rules, um, so you have to be careful there. And there might be a couple other states, but for the most part, you know, I'm not a lawyer, But for the most part, most states you can take as much deposit as you want. And typically we see between 20% and 50% deposit once the proposal is signed, you know, 20% to 50% of the job price to get on the schedule. So definitely leverage taking a deposit because one, that's going to, that's a good amount of cash. Coming in. If you take a 50% deposit, that should cover your labor for doing the project, you know, so you'll be able to pay payroll using the cash that you collected from the customer up front. And then there should be some cash left over to get your next customer, you know, so you can take that additional money and put it into your marketing channels and get your next customer. So that's, yeah, taking a deposit up front can improve your cash flow but also help you scale.

I would imagine it helps reduce your risk too. You mentioned taking a deposit to at least cover your, your wages on the job. If everything falls apart and you don't get paid, at least you've been able to take enough to cover your overhead costs, and that way you won't have to pay those wages out of your own pocket.

Right. Yeah, definitely. So a couple— so we, we talked about, you know, collecting payment as quick as possible after the job is done, collecting a deposit up front from the customer, you know, 20-50% is typically what we see. We also see, uh, you know, sometimes even splitting it into 3 payments, like 30% when they— 33% when they sign the proposal, 33% when they on the first day of the job and then the rest at the end of the job. So that's another way to hack it.

Now I'm thinking to help yourself in that situation, you wanna be sure that you can accept your customer's payment. You know, 20 years ago everybody wrote checks and now most people prefer to pay with credit cards or debit cards. So it would probably be smart to have some kind of credit card processing system available and they're fairly inexpensive. I think you can even get some of them for free. There are companies like Square and Stripe that will let you process credit cards from your phone. They might even send you a little credit card reader you can plug into the bottom of your iPhone or Android and have the customer swipe their credit card right there. Yeah. And yeah.

Yeah, absolutely. And I know a lot of painting businesses are kind of hesitant to take credit cards. Even if you don't want to take credit cards, you can still use the ACH function. So like QuickBooks Payments, which QuickBooks Payments is basically the like Square or Stripe built into QuickBooks Online. It's their own merchant account that you can set up within your QuickBooks Online account. So QuickBooks Payments allows for ACH, which is a bank transfer. So it's the equivalent of getting a check. It's just a bank transfer and it can be done electronically. And it also allows for debit cards. So if you don't want to do credit cards because of the fees, you know, you could still do an invoice that is turned on for ACH bank transfer but turned off for credit cards within QuickBooks Online. And you can also automate that deposit when they sign their Paint Scout proposal or their Estimate Rocket proposal. You can have it automated to send off an invoice to get that deposit and have it only pay, you know, allowed to be paid with an ACH bank transfer or credit cards and ACH. But yeah, exactly. You want to make this as easy as possible for your customers to pay you. So a lot of folks will, you know, they'll make it when I set up because we set up auto invoicing for the deposit. And so we'll make it possible for their customers to pay the QuickBooks Online invoice with an ACH, but not a credit card. But have a note on there that says if you want to pay with credit card, just reach out to us. And then the folks that want to pay with credit card, they can still email you and then you can just toggle the invoice to allow for credit card payment. But the bottom line is getting your customer invoice as quickly as possible and making it as easy for them to pay you.

What do you think of the idea that, you know, because they might write you a check and is it possible? I mean, it's technically possible you could use a payment processor like QuickBooks Online or Square or Stripe to run the check as an ACH deposit right from your truck using your phone or your iPad that way. And a lot of big businesses do this. They'll say, if you give us a check, we're going to run it as an ACH. And you're basically using the, the account numbers that are on the bottom of the check to process that payment before you've even left the job site. So just in case you get a rubber check, something bounces, you haven't left yet and you can get things figured out. Now that might be taking it a little too far, but you know, getting paid right away might be, might be a tool in your arsenal there.

Yeah, no, that's a great idea. Just run it as an ACH. It also saves you time having to go put the check, do a mobile— I guess some folks have mobile deposit, some folks don't, where you can just take a picture of the check and have it deposited into your bank relatively quickly. But if you don't have mobile deposit, that might be an option is process it like an ACH. Yeah, you know, so that'll save you a trip to the bank having to drop that off and/or the check getting lost. You know, if you have your crew leads turn in the check to an admin and then the admin has to deposit into the bank or something like that, it, you know, the more time, the more time that the check is not in the bank, the more likely you are to lose the check. So All right, so that is collecting as quickly as possible. We talked about collecting soon as quickly after the, after the job's completed, doing a deposit before the job starts, and some ways you can set up some electronic ways to capture payment from customers. Now let's talk about the other side of things, which is delaying payments to your vendors. So with this, you're looking to keep a hold of your cash as long as possible. So step 1, which we just talked about, is getting paid as quickly as possible. Step 2, hold on to your cash for as long as possible before paying your vendors. And with a caveat of, you know, don't burn bridges and get hit with a significant amount of penalties or anything like that. You want to be respectful to your vendors and everything. So I'm not advocating, you know, just not pay people, but sometimes you do have some wiggle room. You can work with certain vendors.

And I think terms like net 15 days or net 30 days where you have, you know, 15 or 30 days to pay once you've been invoiced, I think that's pretty standard in business nowadays. Not everyone's going to offer those terms, but it's not uncommon for people to, or for business owners to ask for those type of terms with their bigger vendors.

Yeah. And some common ones where you might have some more wiggle room is vendors like Sherwin-Williams or Benjamin Moore, those paint stores where you might be able to delay payment a little bit and without getting hit too hard with interest. Whereas with credit cards, you're more likely to get hit with interest, or lines of credit, depending on what type of line of credit it is, they might have stricter terms. But, uh, and another strategy you can look at is, is using your credit card to pay down your vendor accounts like with Sherwin-Williams or Benjamin Moore. So that will add another 30 days that you're, you know, you can hold on to your money. So just to take, take an example of Sherwin-Williams. So you put your, your materials on your Sherwin-Williams credit account, your charge account at Sherwin-Williams. So you're, you're doing the job and you don't have to put out any cash for the materials because you're putting it on your Sherwin-Williams charge account. And so 30 days goes by, Sherwin-Williams sends you a statement And then what you could do is take your credit card, pay down your Sherwin-Williams, uh, balance, you know, right, right at the, the due date, the final due date. You pay it on the final due date, and that extends your cash another 30 days. You can hold on your cash another 30 days because now it's on your credit card and without paying, you know, interest. And so now you, you bought the materials 60 days ago and you haven't put any cash out yet because you put it on your Williams for 30 days and you put it on your credit card for another 30 days and you haven't really paid any interest. So that's a, a hack you could use to extend your, your cash as long as possible without paying significant amount of interest.

Yeah, it's kind of a numbers game, and I, I think, you know, it's not just about keeping the cash in the bank as long as possible. It's deploying your cash or your capital in the most effective ways. So if you're able to get an extra 60 days before having to pay on the materials and you're able to take cash and pay off, say, higher interest debt, higher interest credit cards that you can no longer extend, that's a good deployment of cash. You've paid off debt that's going to be very expensive to hold, and in exchange, you've held on to debt that is free or very cheap to hold until you have the cash for that. And that's kind of the role of an executive officer. How are we going to deploy our company's cash? What's the best use of capital? So, yeah, I think, you know, Whenever I try to decide like how I'm going to pay a bill or how I'm going to invest, it's all about what's gonna give me the most return on my investment.

Yeah, good point. That's— we, we talked about cash flow. How can you positively improve your cash flow? You can increase your profitability. You can accelerate payments from customers. You can delay payments to your vendors. Those are the 3 main things that you have at your disposal to improve your cash flow. And it's— if you can do all those three, those three things simultaneously, you're gonna have a lot. You're gonna see big changes, even if a little— it's just a little bit of an improvement on each of those. So if you're improving your profitability a bit, if you're collecting— if you change your process to collect more quickly from customers so that, you know, instead of on average you're waiting 10 days to get paid from an invoice. Now it's 5 days to get paid on an invoice. And then you also extended, you kept on, held, held onto your money for paying for vendors, you know, from, from 30 days to 40 days on average. That added additional 15 days of overall between getting paid faster and holding onto your money longer. And that's, that's, you know, could be a payroll cycle or two that would, you know, allow you to, to hit payroll. So these things definitely add up when you're implementing these strategies.

For sure. It's, it's usually not one big lever that you pull, but it's consistently making, you know, smart, small decisions every day. The little things, they all add up. And that's how you end up getting like, like big savings or big profits is, is, you know, plugging the little holes before the boat starts taking on a lot of water.

Yes, absolutely. All right. Well, I think we can go ahead and wrap this episode up. I definitely like to hear the listeners' questions, comments. Definitely join the Grow Your Facebook I'm sorry, go to the Facebook group, uh, Grow Your Painting Business, and ask your questions. Let us know how you manage your cash flow, what strategies you've done in your painting business. We'd love to hear it.

Yeah, absolutely.

Yeah, go for it, Richard.

No, I am so glad you remembered the name of the Facebook group because you know that you can't rely on me for that, right?

I really struggled with that portion though.

No, it's really a— it's a great Facebook group, even if you can't remember the name, because we've bookmarked it so we don't need to remember the name. But no, ask, by all means, please ask your questions. Talk about your business. What challenges are you facing? Do you have enough cash each month, each, each month, or could you possibly use a little bit more? What do you think of these strategies about delaying paying your vendors? Possibly using generous terms on a credit card to pay off one vendor and get yourself some more time. And where do you, where do you like to deploy your cash first? You know, for some of us, if we have anything extra, we want to invest it. Others are focused on paying off debt. What works best for you?

And with that, we'll see you next week.

All right.

Yeah.

Thanks for listening. And we'll see you next time.