Understanding Gross Profit Margin in Painting Businesses

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Hey, this is Daniel, the founder of Bookkeeping for Painters, and I'm here with Richard.

Hey, Daniel.

Yeah, I'm Richard. I am an enrolled agent and I am the tax director for Bookkeeping for Painters.

And today we're talking about the importance of gross profit margin as a key indicator in your painting businesses. Competitive advantage. So gross profit, right? That, that is like a big, uh, buzzword in the painting industry, is knowing your numbers, knowing your gross profit. Um, it's a big deal because, for good reason, it's, it's important. Um, and that's one of the main things I try to help folks understand is what their gross profit is, one, and then how can they improve it. And One of, I think, Richard, probably, I think you said is one of your kind of idols that you've kind of looked up to in the investing space is Warren Buffett. I know he had some things to say on gross profit.

Yeah, absolutely. Warren Buffett is probably arguably one of the best investors of the 20th and 21st century. And one of the most important things he looks for when he is deciding whether he wants to invest in a company and buy a business is what is their gross profit? A company that can make a lot of money without spending a lot to do it is a company that is very valuable to him, is a company that has an advantage, because when things start to get tight, that is a company that will continue to make money, whereas businesses with very thin profit margins they're the ones who are going to get squeezed out of the market when things start to get tough.

Yeah, absolutely. Yep. And, uh, he actually kind of broke down the numbers a little bit, um, when he— because he did something called, I guess, value investing, where he looked at holistically at a company's numbers. So he looked at a lot of different things, but gross profit was one of those things, of course. And His kind of general rule of thumb was, you know, if a business is over 40% gross profit, that's an indicator that they have a competitive advantage with that moat that you were saying. Like, it's an— and it over the, you know, over a longer period of time, not just like one month, of course, but like over a longer period of time. If they have 40% or, or better gross profit, that's a really good indicator that they have a competitive advantage in the marketplace. And basically if you're under 40%, you're competing. And then I think he said if you're under 20%, you basically, you're really struggling and probably not going to last that long in the marketplace. So he kind of, you know, big picture, he, I know he probably looked at different industries across the board or he definitely did, but that's the kind of the framework that I guess he used. When evaluating gross profit.

And you know what I really love about like Warren Buffett's investing style is that it's, it's simple. This is a great story about Buffett that he had, and it's probably not true, but it's fun to tell anyway. He's got a basket on his desk full of files and they ask him, well, what are all these files in the basket? He says, that's my too hard pile. Those are companies where it's just too difficult for me to understand what they do and how they make money. And so they're not companies I'm going to invest in. And if you look at like the Berkshire Hathaway portfolio, you'll see things like clothing manufacturers, candy manufacturers, fast food restaurants, things that are easy to understand and that he can look at and say, How much money do they make and how much does it cost them to make the product that they sell? And so you don't need to have a fancy investing strategy. You don't need to get on the latest tech bubble or be the next inside investor in Tesla. You can do a, you know, a so-called simple service or a simple product and do it extremely well. And make a lot of money at it. And that has been, been Buffett's, you know, style since the beginning.

Yeah. And in painting businesses, I mean, most painting businesses are a simple business, kind of to your point, like you're providing a service and it's pretty straightforward, understandable. And a lot, a lot of folks can make a lot of money running a painting business. So like you said, you don't have to have a fancy tech startup to make hundreds of thousands of dollars or millions of dollars a year. Even you can have a simple business. So yeah. And the interesting thing is, well, let's— I guess before we get too far down the rabbit hole on that, let's kind of define gross profit real quick just to make sure that everyone's on the same page. Basically, gross profit is your total revenue minus any direct labor, so your painters, and any direct material costs. So this is how much is, you know, you price a job out for $10,000, let's say, a residential exterior repaint, and your direct labor, how much you're going to have to pay your painters, let's say, is $3,000, and then the paint materials, $2,000. So add those together, that's $5,000 total. So your gross profit on that job is basically the $10,000 minus the $5,000 of direct cost equals $5,000 leftover, which is your gross profit. So in this case, that is a 50% gross profit margin. So there's— in this calculation, there's no admin or overhead costs. Those are not included in this. This is literally just direct job site labor, direct job site materials. So that's, that's the definition. And when we say percentages, we're talking about the percentage of revenue. So like that, that example, if there's $5,000 left over of gross profit, On a $10,000 job, you, you, you take, uh, that $5,000, divide it by the total job to get the percentage, which is 50% in this case. So that is the gross profit there. The, the kind of the interesting thing is, you know, Warren Buffett was— he laid out those numbers, you know, 40% or more is indicating a competitive advantage. What I've seen over the years, and, uh, I'm going to pull up an example here in a bit, We pretty much see the, the average gross profit for painting businesses is around 40%. So, you know, if you want to know if you have a competitive advantage in your marketplace, look at your gross profit over, you know, the last 12-24 months and see, do you have a 40% or higher gross profit? That's going to be, you know, from what I've seen working with hundreds of painting businesses, Over the years, that's held true. The average is about 40% gross profit margin, and that's obviously something that Warren Buffett also saw in different industries as well.

So this doesn't include things like the owner's pay then, or advertising costs, or the cost of, you know, like vehicles or like you said, admin. Is this kind of the way to think of this? Is this kind of like, like the bare minimum cost to get the job done, the labor and the materials?

Right. Yeah. Basically providing your core service, you know, whatever that is. And you brought up owner's pay. If you're a smaller business, you know, if you're under $500,000, you might be still doing some of the under $500,000 revenue, if you're still doing some of the job site work, you know, if you're doing the painting, if you're still on the brush, when you look at your profit and loss, your gross profit will probably— well, hopefully it will be higher than— a lot higher than 40% if you're doing a lot of the painting, because you're, you're on the job site and you might be tracking your owner's pay or your officer salary in the overhead costs, but you're actually still on the job site too. So, um, or if you're a sole proprietor, you're, you're not even on— hopefully you're not even on the profit and loss because, you know, you're not paying yourself a salary in your business. So, um, that's a consideration for sure. Uh, and, um, when you're, you know, when you're smaller, when you're under— usually we see it a lot with businesses under $250K in revenue, um, they're still on the job site in some way. They're either painting on the job site still, maybe they're crew lead, whatever, um, their gross profit— if you're on a job site, so you should have a higher gross profit for sure. Once you've gotten out of the job site and you're, you know, you're just doing production management or you're doing sales or both and you have crews working on the job site, then that's when you kind of use that 40% as a guideline. Like, hey, I need to get over 40% gross profit.

So, you know, if I'm a painting business owner, how would I know what my gross profit is? Is there a way to kind of, you know, determine that?

For sure, yeah. Obviously having a bookkeeping system is super important.

And a lot better than guessing. Yeah, it's a lot better. Yeah.

Yeah, having a bookkeeping system that tracks direct labor, you know, your painters and your direct materials and categorizing those things under cost of goods sold on your profit and loss. When you're looking at your profit and loss in QuickBooks Online or whatever, you'll— the top line is revenue, you know, total, total amounts that you've collected from customers. And then there's a section called cost of goods sold, and that's where you should have your direct labor, your painters, your direct materials for whatever you're paying, you know, for all the paint. And then there's a total cost of goods sold, and then right under that is gross profit. So if you run your profit and loss by percentage of, of revenue, which you— if you have, um, if you're using QuickBooks Online QuickBooks Online Essentials, I think, has that functionality. QuickBooks Online Essentials or Plus, you should be able to run your, your, uh, profit and loss by percentage of income, and then you'll be able to see your percentage for gross profit margin, uh, and, uh, and, and that, and that's one way. Now there's also, you can track each individual job through some sort of job costing QuickBooks Projects can do that for you, or you can obviously just do it on your own with a spreadsheet or on your CRM, whatever the case is.

Cool.

Yeah.

So, you know, if we're out there bidding a job and we figure that this job is going to cost, you know, X amount to perform, Is it just simply a matter of, of, you know, dividing that out and figuring out, you know, that would be 40% of what, and then, or 60% of what, and then bidding out the job? Is it, is it that simple?

So when you're doing estimates, you know, if your gross profit, you're looking at your profit or loss and it's your gross profit is low and you need to figure out what's going on. Because this is a big thing. It— gross profit is a big lever to increase your overall profitability. That's why Warren Buffett was interested in it. Uh, Alex Hormozi, he's, um, a business guru on social media right now. He's talking about gross profit a lot. It's a big lever to increase your overall profitability, so it does need your attention. When you're doing your estimating, basically you'll need to to use production rates and to make sure your inputs, what you're using for your labor hours, are priced accordingly, that you're charging your customer enough for the labor that you have to pay for, and then marking up your materials appropriately. So if you're shooting for, You know, here's a way to do it. There's many ways to do it, but let's just say shoot for a gross profit margin of 50%. It's easy to kind of conceptualize this. Basically, you need to charge your customer twice the amount of what it's going to cost you to do the job, right? So if it's going to cost you $5,000 to pay your painters and pay for the paint, you need to charge your customer $10,000. And so that's going to set you up to hit a gross profit margin of 50%. Now there's going to be things, things are going to go wrong, you know, people are going to go overtime, it's more paint than you thought it was going to be, whatever. And so you might end up at, you know, 45% gross profit. So that's one thing to kind of consider. The other thing is using the production rates that I mentioned. So production rates are basically where you, when you're pricing, when you're doing your estimating, you are actually measuring each surface that needs to be painted and calculating the budgeted hours. You know, if I have a bunch of siding, I measure it out, square footage of siding, the soffit, the fascia board, the deck, you know, railings, all those different surfaces are gonna take different amounts of time. So there's something called production rates where you say, okay, how long is it going to take my crew or the average painter to paint this set of 10 feet of railing or 100 square feet of this type of siding? So these production rates are— you can develop them internally to say, okay, how much time does it take my crew to paint these different types of surfaces? So that I can come up with a budgeted hours, you know, so you do all those measurements when you're doing the estimate and you come up with, okay, it's gonna take my team 200 hours to paint this project. From there, you would take that 200 hours and multiply it by your loaded burden labor hourly rate. So what does that mean? You know, you may pay your painter $25 an hour, but there are payroll taxes on top of that. There's workman's comp. It's not just the $25 an hour. You have to add in that additional burden and then multiply that burden times 200 hours. So, you know, if you're paying them $25 an hour, it might actually be $30 or $35 an hour when you look, add in all the burden into that. So you take that, you know, $30, $35 per hour completely loaded and times it by the $200, or I'm sorry, 200 hours to get, okay, this is gonna, how much is it gonna actually cost me to produce this in terms of hours, but also how much money do I have to pay my painters? And then from there you mark it up 100%, you double it basically. And then for the materials, it's the same thing. This is a way to do it, of course. Um, you— how much paint you're going to have to buy based off the square footage of coverage of the paint, how many gallons of paint you're going to have to purchase, um, add in, you know, whatever, uh, caulking or, uh, you know, drop cloths, whatever else. And then add that up and then double it, 100% markup. And so that's gonna set you up for a 50% gross profit margin. But of course, you know, that does give you some buffer to get over 40%. So that, that's, that's a way to, to kind of think about it and to kind of do it.

So the idea is, is shoot for 50, but even if you fall short, you'll still land around 40. And 40 is the goal. Yeah, it sounds like it's, you know, simply a matter of just raising your prices. Is that all there is to it? It's just to charge more? I mean, I think naturally people are gonna be a little worried that if I raise my prices, then I won't have as many customers and I won't have as much work. Is that something that we need to worry about?

It could mean that. I mean, it could mean You raise your prices and, uh, it means less work for you for sure. That's where you gotta start looking at your sales process. Are you, are you presenting yourself and your business in a way that is compelling? Are you putting, you know, a good offer for your clients together? Because you don't want to be race— you don't want to price yourself and just race to the bottom, um, you know, because anybody could, you know, pick up a paintbrush and throw some paint on a wall. It's not going to be good, but they're probably not going to charge very much. So you don't want to compete with them. You want to distinguish yourself from that. And that kind of goes into the sales type, making sure your sales process is super strong so that you can command higher prices and be profitable. But yeah, when you raise your prices, of course you're going to have less people signing up with you. But it's a question of, would you rather be really busy and not make any money, or be like just kind of busy and make more money? Kind of question. Like, when you, when you have higher prices, you're not as, you know, crazy busy. Sure, maybe, you know, but you're actually making— you're, you're being profitable and you're actually earning. Because I see a lot of folks, especially, you know, under $250,000 in revenue, um, where they're just underpricing themselves like crazy. They're super busy, they're killing themselves, but they, they're not making any money. And it's just, you don't want to be in that, that position. So first step, identify that you're in that place if you are. And then second step, take a look at production rates, understanding, you know, your burden, labor burden, pricing yourself correctly, looking at your sales process to get your, your gross profit where it needs to be.

Yeah, I've heard it said that if, you know, 25 or 35% of your customers don't push back a little bit on your pricing, it probably means your pricing's too low. And it can be intimidating, like, right? Because you have to know your worth and you have to feel confident that you are worth more than these other painters who are trying to lowball you. But, you know, you've worked hard to build a business that's based on quality, it's based on good service, and you know you have a good product. And you don't, yeah, and you, the type of customers who are just looking for a cheap deal to just kind of slap it up there and I don't really care what it looks like. Those really aren't the type of customers you want to be building your company around anyway. They're always gonna be looking for the lower price. And I think you said, Daniel, it's a race to the bottom, right? We can't all just keep cutting our prices until nobody's making any money at all. We have to distinguish ourselves in our quality and in the products that we produce. But besides just, you know, raising our prices, is there a way to maybe reduce some of our costs so that we are hitting those 40% gross margins?

Yeah, absolutely. The most successful painting businesses I know, they're using production rates, number one. And by the way, if you, if you're not sure about production rates or you don't know, you don't have production rates for your team, your crews yet, if you go to the Painter Contractor Association's website, they do have an estimating guide that gives you production rates for the average skilled painter. You have to buy the guide, but it gives you all the things, all of it, and you can load that up into your PaintScout or whatever you're using for estimating. But going back to my initial point, all the painting, all the most successful painting businesses I know, they're using production rates and then they are giving the budgeted hours of the project to their crew lead to, and saying, hey, this is budgeted for 100 hours or whatever. So I expect— the expectation is that you hit 100 hours or below and kind of keep them, hold them accountable to those budgeted hours for each project. So it starts with the estimate. You have to use production rates to give them the budgeted hours. Then you got to give them a work order and software like PaintScout does this. I think Estimate Rocket does, you know, so there's softwares out there and drip jobs. There's softwares out there that, you know, you do your estimate and then it generates a work order and you can plug in your production rates and all that good stuff and gives you, spits out a work order that you can give to your crew lead with the budget hours and then hold them accountable to that. So what this is doing is making you more efficient. So Part of it, part of the, to get to your question, raise your prices. That's one thing you can do. The other thing is you can be more efficient, which is basically accountability, making sure your crew leads know what the budget is, one, and then two, holding them accountable to that budget. Some painting businesses I work with, they use a performance pay system where they're, if the crew gets under, they come under budget, they get a portion of the labor that they came under budget on. So that's a common strategy to kind of incentivize crews to go under budget. But yeah, so those are the— I like that. Yeah, those are the two basic things.

I'm sorry. Yeah, kind of share the wealth, right? It got to incentivize efficiency. And if you're doing well, your employees are doing well, Uh, it's a win-win for everybody. So I, I gotta say, I, I love this idea of gross, gross profit because so often I think we look to see how busy we are as a metric of whether we're being successful. Is my phone ringing off the hook? Do I, am I working 60 hours a week? Uh, and being busy is wonderful, but being profitable is what really is, is a good measure of success. So I mean, who wouldn't want to work a little less and make a little more? That should be everyone's goal, right? And so I love this idea of gross profit giving you this metric to shoot for. And it really is so easy to kind of figure out, you know, when you're doing that 50/50, you know, it's going to cost me X amount to do the job. So I'm going to charge double that. That is a very simple, easy-to-remember shortcut so that even if we don't have— maybe we don't have a fancy estimator, or maybe we're not at the point where we're using— what's the word I'm looking for? Production rates or whatever. Maybe we're just starting out. We still kind of know what it's going to cost us to do the job. And, and we can just double that. And if you're doing the job yourself, if you're on the brush, factor in your own time as part of that cost and still try and shoot for that 50% profit margin.

Yeah. Yeah. I know we, I mentioned software and stuff like that, but really it can be done on the piece of paper, you know, to, to make sure you're, and folks are doing that and that's fine. You, you're, making money. It saves you more money if you don't have to, you know, software is good for, you know, codifying your process and delegating it and, and making things a little bit more automated. But you totally don't need those tools to, to do what we're talking about, the core concepts here.

Um, just go, go do it old school, right?

Yeah. And then the, some of the most profitable painters I've worked with, they didn't have all the fancy software. They just had a spreadsheet that they used and they knew what their team, how long it took them to do whatever type of job, and, uh, and they could hit their numbers without the help of fancy software. So cool. So I think what I was going to do really quick is kind of, I was gonna do a quick screen share, um, and if you're just listening, um, you can watch this on YouTube, but we're going to talk through the numbers as well to kind of give people who are just listening an idea of what we're, we're talking about here. But, uh, basically what we do, um, obviously Richard and I work at Bookkeeping for Painters and we work with a lot of painting companies across the US and Canada, about 150 I think right now. And so what we do is we pull in like basically everyone's numbers and kind of aggregate them to kind of see how— what should folks be hitting at different revenue levels, or what's the average, uh, painting business hitting at the $0,000 to $500,000 range, or the, the $500K to $1 million, or the over $1 million range? What are the— what do their numbers look like? Um, and, and then what is the top, you know, 10%, uh, what are they hitting? So what I'm sharing with now, sharing my screen with right now, is basically that breakdown. So we have 3 different categories: $0,000 to $500,000, $500,000 to $1 million, and $1 million and over for gross profit numbers. Um, and they're ranked out here, and there's some, uh, some averages that we have. So Going back to what we were talking about, you know, like Warren Buffett was saying, uh, 40%, over 40% is indicating a competitive advantage. Um, this is data collected in the first quarter of 2023, so it's, it's one quarter. You can see here that the total average across the board is about 40%. It's a little higher between 0 and 500, and that's because of what we're talking about, like owners that are on the job site still, and they're, they're tracked under either they have their sole proprietor, they're not on their profit and loss, or they're, um, or they're under officer salary and overhead. So the $0 to $500 average gross profit for Q1 of 2023 is about just under 44% gross profit. The average for $500,000 to $1 million is 40.11% for the first quarter. And then the over $1 million group is 40.45%. So it's, it's basically like spot on what we would expect to see.

Yeah, I like that because even the smaller businesses are still not— you don't have to compromise just because you're a smaller business. You can still shoot for those margins. And then as your business grows, of course, the amount will grow because the margin stays the same. And so gross profit would mean more profit for you as an owner. It also allows you to do more with your business. You might be able to do more for your employees, might be able to do more to grow your business. So yeah, keeping those, those gross profit numbers in mind is really key.

Yeah, um, the next set that we have up here is the top 10%, um, average. So this is taking the top 10% of each group and seeing what their average is instead of just looking like the overall average. What are the top 10% of painting businesses in each revenue category? What are they actually hitting? Now, from the— for the $0 to $500K, again, some of these, especially in the top 10%, a lot of these are owner-operators. They're working on the job site and they're doing a lot of the painting still. So the top 10% average for $0 to $500,000 is 82% gross profit, and that is, it's basically because of a lot of the owners that are still working on the job site. So basically, if you're out there, you're still on the job site, you should be hitting gross profit of like 80% to be in the top, top 10%. you know, in, in, in that revenue group, for killing it. Yeah. Which it makes sense. Like, uh, if, you know, cause your materials should be about 10 to 15, maybe 20% of, of the job. Usually we see around 10 to 15% of the job. Um, so for, for residential repaint or even commercial repaint, that's where it lands. If you're doing all the work on the job site, like you're just an owner-operator and you're painting, you're selling jobs and you're going out and painting maybe with a helper, your gross profit should be super high, should be like 70, 80%. For the $500,000 to $1 million, so at this point, if you're in between $500,000 and $1 million, you're probably not on the job site directly. You might be doing production management. In sales or sales or both, uh, you're probably not on the job site. So the top 10%, uh, average, um, is 61%. So it's, it's lower, but that's expected. Uh, but it's still pretty really strong. I mean, 61% gross profit, that's, uh, that's really strong. And then for the over $1 million it's 58% for the top 10%. That's the average gross profit for the top 10% of over $1 million revenue group— 58% gross profit. So, um, you know, these are larger businesses and they, they're doing a lot of volume and they're still— you can still maintain gross profit and, and help a lot of people. So, so it's definitely possible, um, if you're listening, you know, and you're thinking that I can't hit 40% gross profit or whatever, you know, definitely know it's possible. There's plenty of penny businesses that are doing it. And, um, and it kind of comes down to the things we were talking about, I think, from what I've seen.

Awesome. Well, congratulations to all of those businesses. Uh, they're doing a great job. Um, they know their numbers and they've got that profit dialed in. That's awesome.

Yeah. All right, I think the next part here was, is just, you know, assessing your gross profit. I think this is one of the key numbers that you'll need to know. You know, knowing your numbers and what they mean is super important in your painting business. Um, and so this one is, if not the, the first one you need to understand, it's, it's one of the first ones. Um, there's other things involved, of course, But gross profit is a big thing. And so getting, getting a handle on what your gross profit is, you don't need to do job costing necessarily. I mean, that's a little— if you just know your overall gross profit, you can kind of have a good, a good feel for, for things overall, you know. So getting on a bookkeeping system that can give you that information, you know, will be pretty important to doing that. I think at this point we can kind of wrap it up.

If any of our listeners— oh, I guess if anyone has questions, right? Like, like, how do I get my gross profit up? How do I measure it? Um, can they, can they email us? Can they go, uh, join us on Facebook?

Yeah, we, we get, uh, Grow Your Painting Business, um, Facebook group. It's a private Facebook group. Just request access and we'll let you in. But definitely, um, this podcast episode is going to be posted in there. Um, but yeah, hit us, hit us up with your questions. Let us know what your gross profit is or what challenges you're facing on improving it. Um, and let us know your experiences with that and any ideas for future episodes. We'll definitely take a look at those and consider those for sure.

Yeah, we'd love to hear how you're doing. How, you know, are you, uh, you know, what's your, what's your revenue? Are you in the, in the $0 to $500, $500 to $1 million or over? And then how does your gross profit compare. And what are your goals? If, if you're not— maybe your goal is more than 40%. I'd be— I'd love to hear, uh, what your goal is and, and how you maintain those margins.

Yeah, absolutely. All right, cool. Well, I think we're going to sign off here. Everyone have a great week, and we'll talk to you next week.

Yeah, thanks for listening.