Mastering Cash Flow: Proven Tactics for Painting Industry Success

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 .

Like you know , downward slide might be the wrong word , but you know , into the cooler months , yeah .

So , figured , that would be a good topic for today .

And it was actually like I remember watching a uh , jay leno late night talk show and jay leno had jeff bezos on , and this is back when jeff bezos was like nerdy , he's not like . He wasn't like ripped and cool looking like he is now . He was like a nerdy looking guy and he and jay leno was like asking him like uh , so you guys lose money every year ?

Uh , he's like , yeah , we lose , lose money every year .

But the thing with amazon and why it was so successful is that , um , they're really good at managing their cash flow , making sure that they're always positive cash flow going , and they would take that cash flow and reinvest it into the business and that's why they showed a loss all the time , because they were constantly growing very quickly , as we've seen over

the past 30 years , and so they really focused on cash flow and one of the big things that they did that I think we can learn a lesson from is getting that payment upfront from their customers and delaying payments to vendors , which we're going to talk about more in depth here .

And so you can be like Amazon and be losing money and still have cash flow , and you can have the opposite problem , where your company is making money , you're paying taxes on your income but you're out of cash , and that can be just as damaging . So it's a little weird in my brain sometimes , but we have to decouple cash flow from profit .

We have to pay attention to both of them .

The first thing you should make sure before we get into the cashflow management stuff , it's just making sure you're charging enough money . That's usually the number one reason why folks don't have cash flow in their businesses because they're not charging enough . They're not pricing correctly , especially for the smaller businesses like below $500,000 .

So , before you even get to the fancy strategies that we're gonna go through , make sure you're just doing the basic thing of charging enough money for your services .

We've had a few podcasts on this already , but just to give you the quick notes on it , you should mark up your labor and your materials 100% , meaning you basically charge the customer twice what it costs you to do the work , and that's going to set you up to target a 50% gross profit margin and that's going to put you on a good path to make sure you're

pricing enough , because if you're not pricing enough , you're going to have cashflow issues . So you got to fix that first before you start getting into the stuff we're about to talk about .

Mentally it can be difficult to do that sometimes because we may have come from , we may not have had a lot of money growing up and we may have a bit of a scarcity mindset and we might think that no one's gonna be willing to pay me what I wanna ask for . Or we might be afraid , like what if our clients or our customers tell me that's too much ?

That would be so embarrassing for me . Or what if they don't wanna pay it ? These are like mental hurdles that we have to get over as business owners , and it's not simple . Sometimes it can be difficult . So it's , you know , charging it up . It's simple in concept , but it's not always easy to execute and it might require us , you know .

So this is a little exercise that I've done myself to kind of understand my worth . I've sat down with a spreadsheet and I've written down all of the investment I have made to be the accountant that I am or , in your case , the painter that you are . How much money do you have in tools , equipment , vehicles ?

How many years did you work to hone your skills and become the craftsman that you are and try to assign a dollar amount to that and it's amazing , when you get done , just how much of an investment you have in building your trade . And at least for me , it kind of helped understand that yeah , I'm worth what I need to charge .

Sometimes I forget that and it might mean working with a business coach too to kind of help you understand the importance of charging what you're worth and understand that you're not here to please everybody and it's OK if a few of your potential leads tell you no . So we can do a whole podcast on that topic alone .

I won't go any farther in the weeds , but I just wanted to say it can be a challenge to charge what you're worth .

And it reminds me of a story with Warren Buffett . When he purchased See's Candies , the one thing that he wanted to maintain control of was the pricing . So he would set the pricing every year for the candy and that was the only thing that he had control over Everything else .

They ran the business like they were running the business , but he was like , hey , I need to control this one thing , and he would set the price . He was increasing it every year , of course , sometimes as much as 17% in a single year , raising those prices , and so that's a huge lever in the business for profitability , for cash flow .

So that's the first place you start to improve your cash flow . Make sure you're charging enough , and then we'll move on to the next thing here .

So the next two things , you can put them in two different buckets . Basically , to improve your cash flow , you can either speed up your payments from your customers , or you can slow down the payments to your vendors . Those are the two basic ways to improve cash flow , outside of the profitability pricing thing we just talked about .

So speed up payments from customers or slow down payments to vendors . So to start with speeding up payments from customers , the easiest way to do this is to take a down payment or deposit .

When you close work , when you book a job , get money from that new customer as a down payment , and most of the folks that we're working with are taking like a 50% deposit , 50% down , half down to get on the schedule . Now there are a couple of limitations here .

If you're in California or Massachusetts , you do have some limitations , legal limitations on you , for in California it's like 10% of the total job price or $1,000 , whichever one's higher and then Massachusetts is , I believe , 33% of the total project . You can't take more than that as a down payment .

So the workaround is there as you take the maximum legal amount and then you do a progress payment once you start the job . So just to take an example , in Massachusetts , let's say you take that 33% deposit and then when you start the job , then you can take another 33% and then you take the last 33% when you finish the job that way .

Finish the job that way , you , you're getting that cash flow . Uh , you know going , and whenever , sometimes especially for newer painting businesses or even some that are doing a million um , they're sometimes hesitant to take a deposit or even , uh , or they , they're afraid to take more of it . You know more than 20 deposit or something like that .

And just working over the last eight years with painting businesses , every time someone's increased their deposit , I've never had anybody come back and say , okay , we had to lower it because our close rates were really impacted . I think , especially for residential repaint , homeowners are expecting to pay a deposit and I don't think they're for the most part .

Obviously there's exceptions out there , but for the most part they're expecting to pay that deposit .

And it's not about , you know , trying to get as much out of the customer as possible , but we need to keep our lights on , we need to be able to buy materials and pay our guys and if a client does or a customer does , you know , kind of push back on it . That's a very I think it's a very good reasoning to use with them .

It's like you know , hey , I got a lot of expenses that I have to put out so I can get your project started . So we need that deposit so we can buy the paint and the materials and whatnot , and I think most customers will be , you know , understanding of that .

So that that's that's the biggest reason , um , and it can also help if you're trying to grow quickly . Taking that money down will help you have money to get the next customer . So , um , definitely look at taking a deposit if you're not .

If you're , if you're taking a low deposit , definitely recommend increasing it to 50% or the highest that you can legally , especially if you're struggling with cash flow issues , because that one thing if you're struggling with cash flow and you're profitable , but you're just struggling with cash flow that one change will probably just solve the problem .

We'll probably just solve the problem . Another note with speeding up payments from customers would be to take progress payments for longer-term projects . This is especially true for commercial work that might span weeks or maybe even months making sure you're getting paid on a regular timeframe .

So for commercial projects , you probably need to make sure your contract states something that you're going to get those payments on a whether it's weekly , bi-weekly or monthly basis , the more frequent the better for you .

Obviously , the you'll have to negotiate that with your , your commercial customer , but you want to make sure that those progress payments are happening . The more frequent the better , because , again , it's all a timing thing with cash flow the more you get paid , the faster you get paid , the easier it is for you to run payroll every week or every other week .

So just to do an example , let's say the terms on the contract were two bi-monthly payments , meaning two payments per month . But if you can negotiate to get it bi-weekly payments , payments every other week , which is a little bit faster , that will make , even if it's only by a few days , that can be a significant improvement to your cashflow .

So don't overlook those details there . All right , so the next piece . So we talked about speeding up payments from customers taking a deposit , doing progress payments , getting paid faster . That will improve your cash flow . The next piece is slowing down payments to vendors . So this is especially true with your Sherwin williams account , your benjamin moore account .

You know wherever you're getting your materials from . Well , step one is making sure you have an actual account set up with them . Some folks make the mistake of not setting up an account with sharon williams and it comes from a good place , because I am a fan of Dave Ramsey and he's very against debt .

But he's also very focused on debt from a personal perspective and not from a business perspective and I don't know what he would exactly recommend to a painting business owner in this situation .

But I think some folks come to approach of opening up a credit line with Sherwin-Williams and some folks have said well , I don't want to take on any debt , and I agree with that sentiment .

But in this case I think it is a wise business move to have that credit line available , because you're extending credit to your customer by doing a project for them before you're getting fully paid , so you're essentially financing their project .

You need to open up a line of credit with Sherwin-Williams so you can put some materials down on credit and get that 30 days interest-free and then pay off the balance when that bill comes from Sherwin Williams .

And that's going to significantly again help your cash flow because you can hold on to your cash for an extra 30 days so that you don't have to worry about making payroll , for example .

So I definitely recommend using your credit lines with Sherwin-Williams Benjamin Moore stores and waiting until the due date to pay it Because , again , the longer you hold your money , your cash , in the bank , the better your cash flow will be .

You know debt that makes you money a business loan that allows you to start a business that generates cash , a mortgage on a rental property that generates monthly income , or a line of credit with your supplier so that you can get the materials you need to finish the job and produce income .

You know , if used carefully , I think that that is , you know , a good form of debt . I mean debt is . You know debt's powerful . It's like a loaded gun , right In the right hands . It's a very useful tool , but it needs to be respected , and I think using a credit account with your supplier is a way of respectfully and responsibly using debt .

One thing you could do to extend your credit even further and this is especially useful for long-term commercial projects where maybe you're working on a job for 30 , 60 , 90 days and maybe the payment structure is not favorable to you which hopefully it is because you followed the first step we talked about , which is getting favorable payment structures to you for

those long-term projects . But let's say you're already set in a contract with somebody .

What you can do is put your materials on credit at Sherwin-Williams with 30 days and then use your credit card to pay down the balance and then that extends another 30 days , basically moving that balance to your credit card , and that gets you 60 days of interest-free debt instead of just 30 .

And another idea for slowing down payments to vendors would be , if you use subcontractors , to make sure you have an agreement in place that states that they don't get paid until you get paid .

So that is an option to set up your subcontractor agreement so that they understand that you're not going to pay them until you get the final payment from the customer and then you'll pay them .

So that's an option that I've seen some folks do and that really helps your cash flow because you're basically having the subcontractor finance the project instead of you paid every payday .

If you want to be a business owner and you want to get higher prices , then you can have more expectations of these folks , and so you know , obviously your sub-agreement needs to be fair , but having payment terms of 30 days or , you know , 60 days or whatever , whatever you need to do , that could definitely be part of the agreement .

If you've done all the things that we've talked to at this point , where you've looked at your pricing , you're profitable . You're taking a deposit , you're doing progress payments , you have a Sherwin-Williams account set up , you're doing the stacking credit with a credit card payment .

You have a favorable agreement set up with your subcontractors , favorable agreements set up with your subcontractors . Another option is to pay your employees less frequently .

I think by default , a lot of people pay their employees every week and that can be very hard on your cash flow Because , again , the more frequent you're paying something , the harder it is on your cash flow . The ideal situation is that you're paying your employees once a year or just as infrequently as possible if you're looking to maximize your cashflow .

So , especially if you're starting out , I would try to at least do bi-weekly payments or pay every twice a month or something like that , where you're not paying your employees so frequently , because a weekly frequency for payroll can be very , very hard on your cashflow .

I will say , daniel , you mentioned paying your employees once a year . I know it was kind of in jest . Try to pay them at least once a quarter . Just from a tax standpoint , the state kind of freaks out a little bit if they don't get payroll reports at least once a quarter yeah , yeah , don't .

But you know , prepare for the state to kind of wig out when they see you know a payroll report with only , um , you know , prepare for the state to kind of wig out when they see you know a payroll report with only zeros on it , because those do get filed every quarter .

So I usually recommend at least once a quarter and I think there might even be some state laws requiring you know once a quarter or more frequently .

Move to getting paid faster from your customers , taking a deposit , progress payments and then slowing down payments to vendors , getting a credit line set up with your pain store , using that credit and paying that bill on the due date , not before possibly leveraging a credit card and looking at how you're paying your subs and your employees and the frequency that

you're doing that . So those are the big levers that you can pull in your business to improve your cashflow . Love to hear your thoughts on any of those items . If you'd like to join the conversation , go to Facebook , type in Grow your Painting Business and join the group , and we'd love to hear from you .