Mastering the SCALE Framework: Building a Thriving 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. Welcome to the Profitable Painter Podcast. I'm your host, Daniel Honan, CPA, former painting business owner, and your guide to mastering the numbers that drive success. I'm super excited to be here today with Richard Dunton, enrolled agent. How's it going, Richard?

It's going really well, Daniel. Happy to be here.

Yeah, so today we're going to continue our kind of review of Profitable Painter, the new book that, um, releasing here on September 9th on a book launch. If you want to join us on September 9th, you can go to profitablepaintercpa.com/webinar and register to join us at 12 Eastern, 9 AM Pacific on September 9th, where we're actually going to go through the, the full book in detail. And then also everyone who goes will get a free copy of Profitable Painter as well as a bunch of other cool prizes. That, that we'll announce that day. So we're going to pick up where we left off from last episode. And we're going to talk about the second framework in the book, which is the SCALE framework. So this is, this is like the meat of the book, most of the content of the book is this second part of the book, the SCALE framework. And this is basically what you need to use the SCALE framework to ensure that your, your business is financially healthy at any point in time. So you're using this framework to make sure, check in with your business to make sure you're on track to scale profitably. And so let's break down real quick what SCALE, uh, what the acronym is. So the S stands for Secure Profitability. C stands for control cash flow. A stands for avoid overleveraging. L stands for leverage customer dollars. And E stands for execute with confidence. So we'll go through each of these to get kind of give you a high-level idea of what goes into each. So First off, we have S for secure profitability. So this is basically when you look at your profit and loss, what should you be seeing to ensure that you have a healthy and profitable business? So in the, in this part of the book, we talk a lot about the gross profit to customer acquisition cost ratio, which is kind of like the most important ratio when it comes to overall profitability. If you can dial in this ratio, the gross profit to customer acquisition cost ratio, then in most cases, your profitability will be good to go. And so, uh, the book really covers that in detail, and we've covered it on, um, previous podcasts. But basically, it's looking at your gross profit, which is what's left over after the job has been— all the materials and the labor has been paid for, what's left over in profit. Compared to how much you're spending to get the customer. And that's marketing costs and salesperson compensation. So there's that ratio you want to maintain at a minimum, a 3-to-1 ratio, but ideally maybe like a 5 or 6-to-1 ratio. And so the book kind of goes into, into detail on what you should be looking for on that ratio. And there's several other things with securing profitability. You want to look at like your compensation packages to your team, the key roles like salesperson, production manager, and then looking at your overhead costs as well, making sure you're not overspending there. So that is the secure profitability portion of the framework.

Yeah, I think that's such an important part too, because sometimes we get so focused on trying to get the jobs. And then we're focused on completing the jobs that we wonder, did I make any money on that? And the only thing worse than not having enough work is having too much work and not getting paid for it. So having these numbers down, knowing what you're spending on advertising, knowing what you're spending to complete the work and pay your key people, that's key. Because if at the end of the day you are not putting enough into your own pocket, then it's, it's not working. And, and you may have a ton of business, but you don't have a profitable business that's going to support you.

Yeah, absolutely. And, and this is from, you know, you know, you and I have worked with hundreds of painting businesses on these numbers, and we've seen the same thing over and over again, uh, in terms of compensation packages and Margins and ratios. So we really give it all away in terms of what you should be looking for on your numbers and how you can be in the top 20% of profitability and for painting businesses. So that is the S for secure profitability. Then the next one is C for control cash flow. And as the saying goes, cash is king. You can't run a business with no cash in it. You gotta have cash. That's the one thing you need to really keep your business going. You can, you can get away with not having any profit for a long time, actually, but you can't get away with not having any cash. So this is almost really more important than profit, at least in the short term. And, you know, a lot of the times when painting business owners are coming to us for the first time, they have profitability issues, but they also have cash flow issues. And this, we actually address the cash flow issue first because that is the most dangerous thing for a business is when you have cash flow issues. You can, you can get away with kicking the can down the road a little bit on the profit side to focus on the cash. But obviously, both need to be addressed. But you want to— if you're having cash flow issues, that's the first thing to fix. And so that's what we really dive into deep in the book for cash flow is how do you improve cash flow. And to give it away a little bit, it basically can be boiled down to get paid faster, and slow down payments to other people in terms of cash. So that's the short, the short answer. But of course, there's a lot of details in there that we go through in the book. But if you'd like to hear more about how to control your cash flow, join us on September 9th at 12:00 Eastern, 9:00 AM Pacific, where we're going to go through this framework and also the other two frameworks. In the book, and everyone who attends live on Zoom will get a free book, Profitable Painter, as well as a whole bunch of other goodies. Looking forward to giving that away. So, um, yeah, so that is control cash flow. Now the next piece is A for avoid overleveraging. Basically, don't get too much debt, you know, be careful with debt. And I'm not one to say that all debt is bad. I know some folks come to us and they listen to Dave Ramsey, who I also really like. I think he provides a lot of great, great information. But the difference is, I would say, and he might disagree, but when you're talking about your business, you should, you should look at that a little bit differently than, than on the personal side. So on the personal side, I tend to agree that you probably should avoid debt pretty much at all costs. But on the business side, you can, you can use it as a tool, but you got to be really careful with it. And you don't want to over-leverage or take on too much debt. Because a lot of the times when this happens, people are just— business owners are kind of just trying to plug the holes in the boat. You know, there's— they have profit leaks that need to be addressed, and they're just trying to plug it with debt. And that doesn't— it works for a while in terms of you can have cash in the business, which keeps the business alive, but then you're just racking up a bunch of debt over the years. And we've seen this happen where the profit issue is ignored for years and years, and then the business just has, you know, a ridiculous amount of debt that needs to be handled because they've just been ignoring their profit issue and just taking out more debt to keep cash in the business.

Yeah, I would agree that there's, you know, there's good debt and there's bad debt. And good debt is debt that makes you more money than the interest that you're paying on it. And so if that debt is going to be directly invested into your business and you're seeing a strong return on investment, then that's when debt is a powerful tool in your advantage. But if you're taking on debt and you're not getting an ROI on it because like you mentioned, Daniel, you're— you've profit leaks and you're just kind of throwing, you know, good money at overloading with that.

Yes, sir. Now, it should be noted that residential painting businesses and commercial painting businesses will have to have different amounts of debt. Like if you're a residential repaint business, your long-term debt should be pretty low. However, if you're doing commercial, you will often need to take out more debt than a residential business because of those payment schedules that are payment terms that commercial painting businesses have to deal with that are not as favorable. And so they often need some additional debt that maybe, uh, the residential side don't really need. Um, but again, you still need to be super careful and make sure your, your books are set up in a way where you understand that the debt you're taking on is being used and you're, you're profiting off of it, and you're not just using that debt to keep your cash in the business because you're hemorrhaging and you're just taking on a bunch of losses. So that is the quick overview on the control cash flow portion of the book for C, for under the SCALE framework. The next part of the SCALE framework is the A for— I'm sorry, we just, we just covered A for overleveraging. We already did that one. Sorry. So that's the S for secure profitability, C for control cash flow. A for overleveraging, avoid overleveraging. Now the next one is L for leverage customer dollars. So we, we know we want to avoid taking on too much debt, but what does that leave us with? We still need cash, right? We, we need to get cash from somewhere. So basically we need to leverage our customers' money to grow the business, meaning you know, for example, taking a deposit and using that money to grow the business. And so that's kind of where we dig into on this portion of the framework is using how to use your customer's money to grow the business. And it really comes down to is get paid faster, you know, take a deposit and use that deposit to pay your team. 'Cause you can't put payroll on a credit card, right? So you gotta have cash. So when you can get that cash down, that gives you more flexibility. Additionally, doing progress payments when needed. If you have a longer-term project or if you're in one of those states like California, Nevada, Massachusetts, and I think Maryland, if you're limited on how much you can take as a deposit, doing a progress payment on the first day of the job. Because you want to keep that cash going, coming in as quickly as possible and leverage that, that, that money to not only pay your team, but also to, um, grow your business by reinvesting it into the marketing so you can get another customer. So that is the L for leverage customer dollars. And then the last portion of this framework is the E. It stands for execute with confidence. And this really gets into as a business owner, understanding how much should you be making in your business based off the roles that you do. And that's a common question that we get is like, how much should I pay myself? How much should I be making? And that this chapter in the book and this part of the framework really dive into looking at, okay, what are your roles? And then what should you be expecting in terms of money being made in your business. And understanding this is key to also understanding your margins and what you should be hitting in terms of your, your gross profit margin, your, your net profit margin, and your how much you should be compensating yourself and other people for particular roles. So it kind of brings everything together. So you, you know, for example, if you are a painting business owner that is the salesperson and the production manager, and you're doing $1 million in revenue, how much should you be making in your business? It goes and it walks you through how to arrive at that answer. And to take that example, it would be, you know, 15% is kind of like the benchmark for what you should be making as a business owner if you are completely absent in the business, like you are on the beach sipping Corona and your team is working without any of your input, you should get 15% of the revenue going to you as a business owner without you having to do anything additional. Now, if, if you're also the salesperson and the production manager, you should be getting money to to cover for, for those roles that you're providing that value to the business. So salesperson is usually about 8% of what they close, and then a production manager is somewhere around 4 to 7% of what they produce. And so roughly speaking, you should be getting about 30% profit margin if you are that business owner that does sales, sales, production management, and you're also the business owner. So this, this is a quick overview on that portion of the book, the, the E for Execute with Confidence.

Yeah, we talk about paying yourself and your business. One thing I like to remind folks is kind of understand where in your business life cycle you are. If you're just starting out, you might choose not to pay yourself until you get a higher, more steady cash flow going. We don't want to starve our business when it's brand new. But yes, eventually, if you do that, if you feed the business when it needs it, you will get to that point where you're sitting on the beach collecting your 15% passive income. But just try not to pull that trigger too soon. If your business needs the cash, keep it in the business.

Yeah, and that's a good point. And that's something that we look at under the C for control cash flow portion is, you know, some, some owners have the tendency to, to pull money out when you really should have kept in the business because you do want the business to be prepared for some sort of unforeseen expense or downturn in the economy. You, you want to have some reserves for the business, uh, set aside. All right, so that is a rough overview of the SCALE framework, which is basically the framework that you should use to evaluate the financial health of your painting business. And in the book Profitable Painter, we go through all the tips and tricks to ensure that you are set up financially. And we'll actually go through this in detail on the book launch on September 9th at 12 PM Eastern Time, 9 AM Pacific. We'd love to see you there. If you go to profitablepaintercpa.com/webinar, you can register for free. And for all attendees that join us on that live Zoom event, they'll get a free copy of the book, Profitable Painter, plus several other surprises that I'm excited about giving out as well. So definitely go over to profitablepaintercpa.com/webinar to register.

Yeah, it's gotta be like going to a taping of Oprah, right? Everybody goes away with the gifts.

Yeah, exactly. That's, that's, that's what I want it to be like. Exactly. Trying to provide as much value as possible. But yeah, it's, it's, you know, over the last 9 years, I really didn't hold anything back in this book to try to make it as valuable as possible to put everything I know in the book, which is kind of hard, like, to distill it down into 269 pages, but also to make it accessible. So I obviously didn't put everything I know, but try to put it in a way that is accessible. That was put into some memorable frameworks that, that could really help people be more profitable and scale to the next level.

Awesome. Well, I'm looking forward to the book launch. I know it's going to provide a lot of value for everybody there, and it's going to be a really exciting way to launch your new book, Daniel. So I hope everybody listening can make it. Yeah, even if you're not going to be giving away cars like Oprah, it'll be even better if you're a painting business owner.

Yeah, I mean, with these resources, hopefully you can make more money than a car's worth with, with the content that I put in into the book and also into the gifts as well. But yeah, we look forward to seeing you there. If you, if you're interested in registering, go to profitablepaintercpa.com/webinar. And register. Just plug in your name and email, and, uh, we'd love to see you September 9th. And with that, we'll see you next week.