Mastering Overhead: Unlocking Profitability 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 decision. This is Daniel, the founder of Bookkeeping for Painters.

And this is Richard, the tax director of Bookkeeping for Painters. And how is the founder of Bookkeeping for Painters doing today?

Doing well, doing well. I can't, can't complain. Um, we, we have a retreat coming up, which is gonna be cool, in a couple days, going to Orlando. Well, I'm already here, you're coming to Orlando. Uh, so that, that will be fun, and I get to see the team, go through the numbers for the previous year and what the numbers should look like going into the next year. So that, that's always fun.

Absolutely. I am super psyched. I don't know what I'm more excited for, traveling to Orlando and getting to see everyone or getting to go through last year's numbers. Probably, probably the first. Like, I am an accountant, so I'm not going to lie. Like, looking at the numbers does kind of do it for me a little bit. But traveling to sunny Florida and seeing everybody in person, and I think we've got some cool team building stuff we're going to do. and, and definitely have some good meals. So I'm, I am super psyched. I'm really looking forward to it.

Yes.

Yep.

So if you, if you're a client and you're getting a later response next week, that's, that's, that might be why we're gonna still keep our response times fast, but we, we have a good portion of the team out, uh, the last week of June. So, uh, which is usually a good time cuz usually Painting businesses are super busy right now. Uh, we have like the mirrored or reverse, uh, busy seasons. We're really busy when painting businesses are not busy and we're not as busy when the painting businesses are super busy. So this is like the time where we do this kind of stuff, but, uh, we will be going through the numbers and it's a good segue into our topic for today, which is your overhead costs. Um, gross profit is, is like the most important metric for profitability for painting businesses, and typically you want to have your gross profit 45% or higher. And we've gone through this on previous podcasts in depth, and that's usually the problem with painting businesses that come to me and where I'm reviewing their their numbers, usually gross profit is lower than what they need it to be to hit their overall profitability goals. However, that's not always the case. Sometimes it's their overhead. And just to— Yeah, go ahead.

Should we remind everyone what gross profit is real quick? Just in case it's the first time you're tuning in.

Yeah.

Yeah. So gross profit.

Go ahead.

This is a test, Daniel. I'm going to define gross profit and you tell me if I get it right, because— all right, cool. So gross profit is what's left over after you have paid for all of your materials and you have paid for all of your labor. So these are the things that we would call like direct costs or cost of goods sold. But basically for painting businesses, it's all the paint supplies, materials, and all of the labor. What's left after that is gross profit. So it's not what goes in your pocket necessarily. It's just what you have left over after the fixed direct costs are done.

Right. I would, I would say just to be clear on the labor, it's the direct labor. So this is the painters painting the house, not, not the salesperson who booked the job, not the production manager who might be scheduling and coordinating for the job, or the office person that's answering the phone. This is the— these are the painters on the painting on the job site. That, that labor is the direct labor. And then, like you said, the materials, the direct materials, the paint going on the house, the drop cloth, the caulking, those are the direct materials. So you take your whatever you charge your customer, that's your revenue, you subtract out the materials and the direct painter costs, and then that leaves you with your gross profit. And typically a good gross profit margin is at least a 45% gross profit margin or higher. The average is 40%, but Typically, we recommend to hit at least 45% or higher. And now, so that's gross profit. And then everything else, if it's not a direct materials, not direct labor on the job site, it's overhead. So this would be things like advertising, your salesperson, your production manager, your office manager, your, your insurance, your liability insurance, your auto costs, like if you're, if you have vehicle, company vehicles, your accounting, your legal fees, all that stuff is overhead. So what, so that's, those are the things that are overhead. Now, how much should, should your overhead be? And that's a question that you'll need to figure out that will hopefully give you some guidance on how to answer that. And then if your gross profit is, is, is, you know, you're hitting your target 45%, 50%, 55%, but you're still hitting profitability issues, it's, you know, probably something going on with your overhead costs. And so there's a way to look at this. Your overhead is the rule of thirds for your overhead. It's basically you split your overhead into 3 different buckets. The first bucket is your advertising and marketing. The second bucket is all the other overhead costs, like production manager, office person, accounting, insurance, office supplies or software, auto expenses. That's your second bucket. And then your third bucket is your profit. And so about a third of each— of, of your gross profit. A third of your gross profit should go into each bucket. So, so just to take the example, let's say your gross profit is 45%. Approximately 15% should be going to advertising, marketing, and your salesperson. About 15% should be going to your production manager, office person, accounting, insurance, software, office software, and then the last 15% should be going to profit.

So if you're putting too much of your gross profit into bucket 1 and bucket 2, there's not going to be anything left in that bucket 3 that has your profit. And so if you're not making enough money, but you are making your gross profit, that's where to look, right? You're putting too much in these other categories and not enough for yourself.

Correct. Yeah. And, and just to be clear, sometimes, you know, maybe you're doing some of the roles, uh, you know, maybe you're the salesperson and you might not have that on the, on your profit and loss because maybe you're a sole proprietor, taxed as a sole proprietor, and you're not really running a payroll to see that as a line item on your profit and loss. So maybe you're the salesperson, the production manager. So you'll need to, you know, take that into account because that will matter, you know, as you try to scale, you'll need to have those margins still built in so that you can hire people at the appropriate pay.

So this net profit bucket that we're talking about, this 15% net profit, this is your profit for being the business owner. It has nothing to do with the work that you do in the business. If you're also working in the business and by working, I mean doing, you know, tasks in the day-to-day operations as production manager or salesperson or whatever, that should be getting paid on top of the 15% net profit that comes to you. If you, you know, took off to Mexico to drink margaritas on the beach, but you still own the company, that 15% should be coming to you. If you're in the thick of it, you deserve more because you're carrying on these roles that eventually one day when you scale high enough, you might be able to hire out.

Exactly. 15% profit should— that's the business owner profit. Who's completely passive. Exactly. And, and then, you know, if you are taking an active role in your painting business, which you likely are, you would, you know, be paying yourself a reasonable officer salary if you're— if you have an S corp, which is a whole other topic. We've done a podcast on that. But, uh, you know, that 15%, if you have 45% gross profit, you split it into thirds, you should be trying to hit about 15% in profit there, and that should be going to you even if you weren't working in the business. Um, so let's, let's look at each bucket individually. So we, we said there's a— for your overhead, you have your advertising and marketing, your all your other overhead costs, and then your profit bucket. Those three different buckets. So the first bucket is advertising and marketing, and this is roughly split, um, 50% of it, of the 50, of, of, uh, half of this bucket should be filled up with marketing costs, like going out and paying for Facebook ads, paying for direct mail flyers to be sent out, paying for cold callers to knock on doors, whatever, whatever, uh, money needs to be spent to get the leads in, right? That's half of the bucket. The other half of the bucket needs to be filled out, filled up with your, your sales costs or paying people to close the sale and to get a new customer. So changing the lead into a customer. So that, that's the other approximately other half of the bucket should be filled up with that. So, you know, a third of your gross profit should be going to marketing and advertising. And of that third, half of it should be going to getting the leads and the other half should be closing the leads and turning them into customers. So to put numbers to that, if you're— if you have a 45% gross profit, about 15%, no more than 15% should be going to marketing and advertising, uh, or advertising and sales. And so usually it's about 7% going to getting leads and about 8% going to, uh, the salesperson. So maybe slightly more to the sales, um, the sales side of things, but roughly there's a split down the middle. So that, that would be the first bucket there for overhead costs. So if you're looking at your profit and loss and you have 45% gross profit, take a look at your advertising costs, you know, getting leads, um, that needs to be somewhere around 7% ideally. And then for your salesperson, whatever you're paying them, a lot of folks do commission, or at least a lot, mostly commission, and they're paying them somewhere around 8% of whatever they close in revenue. Got it. All right.

So the key is to keep it to that 15% total, correct? That bucket.

Yep, exactly. Cool. Yep. So if you're having to pay for advertising and sales is more than a third of your gross profit, you need to— something needs to change. It's not going to give you much room for profit and for the other things that you need to pay for. So it could be a fact, it could be a thing like, oh, I just need to increase my gross profit and You know, maybe instead of 45% needs to be 50% gross profit, so you have more room. Um, or it could just be you need to be more efficient with your marketing dollars, uh, and dial in my— your return on investment for your marketing costs. Or it could be you're overpaying your salesperson. Um, so there's a few, a few things to look at there.

Those are all— yeah, those, those are great. No, I'm glad you're able to go over those.

The second bucket is everything else, everything else you're paying for that's not advertising and marketing. That's an overhead cost. So this would be your accounting, your general liability insurance, your, your office supplies or software that your team is using. Like if you're using a CRM, your auto expenses if you have company vehicles, maybe you have a rent on an office. So that's everything else. About a third of it, a third of your gross profit needs to go to all the other things. Oh, and I didn't mention, um, your production manager and your, your office person if you have, if you have those roles. That would be good.

I think this is— as I say, it's interesting. So the production manager, right? He's in this overhead bucket here. He is not in the direct costs area, even though he may be on the job site overseeing the work. His salary and his costs are not part of the direct costs of when we talk about labor to get the job done.

Yeah, yeah, the way that we're defining it, no. People track things differently, so, uh, you might—

I just want to clarify.

Yeah, there's many ways to, to track things, and some people might do something called, um, looking at a contribution margin, which is your variable costs are going to be above the line, what they call it. You have your margin, your gross profit margin, or your contribution margin, and things like production manager or maybe even a salesperson would be part of those variable costs. So some people might track it up there, but for purposes of this, this methodology that we're going through, yeah, production manager would be overhead cost. Because they're not, they're not direct, they're not directly painting the business or painting the house or whatever the thing is. They're managing the crews, you know, scheduling them, coordinating for the materials to be delivered to the location, you know, doing performance reviews or whatever it is. They're, they're managing the team. So they're, yeah, they're not a direct cost in this scenario. they would be considered overhead. And so they're in that second bucket with the— maybe you have an office person that's answering calls or, however you're delineating, maybe sending off invoices, that sort of thing. That, that, that office person's in there. And then, you know, accounting, like I said, accounting, auto costs, insurance, office supplies, and software. So that's another— that's the other third should be going to them. And so the way to break this down further, you know, typically a production manager, depending on the roles and responsibilities, somewhere around 5% of what they produce, you know, it could be a little bit more or less depending on how you're splitting the roles between the production manager and if you have an office person as well, you know, it might be a little bit different, but around 5% in the office person around 3 or 4%. And again, it matters on what, what this rules and responsibilities of that office person are on, on how much you would pay them. But that's like a rough number there. And then accounting, typically, you know, somewhere between 1 and 3% depending on what you're having your accounting team do. It's like accounting is a pretty big thing. You can have them doing just your tax returns, or you can have them doing your bookkeeping and your taxes. In tax planning. You could have them do your accounts payable, accounts receivable, a whole bunch of different stuff. So it's a wide range of what you could be paying an accountant. You know, 1 to 3% of revenue is a rough guideline there. And then for your auto costs— oh, go ahead.

Oh, I was just gonna say, like, and, and if you are having your accountant do a lot of this, like accounts payable, accounts receivable, things like that, then you're going to have less probably office expense because you're outsourcing a lot of this stuff. And that can be a really good strategy sometimes, you know, to outsource some of this stuff. It's cheaper than having to hire a full-time employee who then you have to pay FICA and you have to pay benefits and, you know, the things that go along with that. So I could see like, you know, if your accounting costs are a little bit on the— because we've gotten this question before, like, well, my accounting costs are a little bit on the higher side. Well, if it's able— if it's enabling you to lower your office costs, then you're still within that 15% bucket there.

Yep, exactly. And so the next piece, auto costs, this, this is dependent on whether you have— maybe you may or may not have vehicles in the business depending on what type of model you're running. But, you know, this is somewhere around 2% if you have vehicles. And then for insurance, general liability insurance is usually under 1%. And then you have like your office software. Again, that's somewhere around 1% or lower. So all adding up all those things, somewhere around 15% of revenue. And again, if it's more than 15% of revenue, maybe you need to make sure that you have a higher gross profit margin to support, support this stuff. So that's the second bucket. Is, is everything else besides sales and marketing. And then the third bucket is your profit. And this should be about a third of your gross profit. Once again, a third of your gross profit. So that, that is the rule of thirds there. You basically take your gross profit, split it into three. Third goes to marketing and sales, a third goes to all the other costs, and a third goes to profit.

And I love that you are prioritizing profit because that tends to be the thing that we kind of skimp on when money gets tight. We figure, oh, there's enough money to, you know, increase this cost or increase that cost, or maybe I didn't bid that job high enough. That's okay. It won't be that big of a deal. Well, it trickles down, and where it hits you is that, that profit, that 15% profit bucket. And maybe you look in there, it's like, oh, there's only like 3% in there and there should be 15%. And, you know, ironically, that's the most important bucket, right? I mean, be honest, we're not running a charity. We're doing this to provide for ourselves and our family and try to build a certain measure of comfort and security. So if we're not prioritizing that 15% profit bucket, then we need to make some changes and kind of remember why we're doing this and what the goals are here. That can be a little bit motivating sometimes.

Yeah, absolutely. So you're looking at your profitability and it's not what you want it to be. Uh, first, first place you'd look is your gross profit. If you're good there, if your gross profit's at least 45%, then you would want to look at your overhead costs. And look at those 3 different buckets, you know, advertising, marketing, everything else, and then profit, and see if, if you're lining up with what I'm describing here. If your overhead is just a lot higher, it might be a factor that you— maybe you're just— your revenue is too low. This might happen in the, in the slower periods, you know, during the winter where you're not getting as much revenue because you're maybe having mostly exterior business. It might just be a revenue issue where your overhead costs are higher in the slower period. But then once you ramp things up in the spring and the summer, it will even itself out. That could potentially be a thing. It's something you need to consider and factor in.

Yeah, when we do our projections, we do a lot of like rolling 12-month projections to help kind of smooth out those peaks and valleys. in the revenue. So I, I appreciate what you're saying there. You know, if, if it looks bad this month or this quarter, let's maybe take a little bit higher view, maybe of like a rolling 12 months, because that gets the entire, all 4 seasons, the slow season and the busy season, uh, and see if, if we're hitting it then. And if that, and if we are, then that's okay. Um, but if we're not, even after that, then we might need to make some adjustments.

Yeah, good point. Yeah, looking at your, your financials at a rolling 12 to, to consider the, the high season and the slow season to kind of get an overall look at where your numbers land is a good method. So, yep.

Yeah, and we might have some like one-off things too. Like, I mean, sometimes, um, we have to make heavy investments in software or equipment or advertising, and these are not things that we're going to be doing on a regular basis, but we have to take that, that kind of one-off hit, that, that rolling 12 months helps smooth it out. And you can always, you know, adjust here and there. But as long as we're staying focused on making sure that we have that 15% in the profit bucket, then we should be okay.

Yep. All right, cool. Well, that— I think that about does it for this episode. Love to hear your thoughts on overhead if you have any other tips or strategies on tracking overhead or what your numbers you try to keep it at. Love to hear from you. If you go to Facebook and type in Grow Your Painting Business, love to hear your thoughts. But with that, we'll see you next week.

All right, thanks for listening, everyone.