Painting Profits Unveiled: Know Your Margins

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 .

So it's either mortician or tax planner , and I don't know if I picked the right one , but I used to get job security , yeah , yeah .

So we're going to go through some basic definition of terms , because a lot of times it can get confusing with a lot of different , a lot of different terms and people say them in a different way And's a lot of jargon associated with this stuff , like COGS and EBITDA , to make things more confusing .

So we're going to go through definition of terms , make sure everyone's on the same page , and then we'll go through what should you aim for in your margins ? We're going to give you basically what we've seen the best painting businesses , what kind of margins are they hitting , what their numbers look like for different stages of a painting business .

So hopefully this will be a good reference episode for you in your journey .

So you know , as crusty accountants , we tend to stick with the traditional income statement , but profit and loss , p&l income statement .

So , uh , yeah , so unless unless you're following GAAP strictly , it's going to be a profit and loss is the right . But yeah , you're right , it's all these different terms and so we're going to be talking about those definition of terms .

So if you're looking at your profit and loss or what you might hear other folks refer to as an income statement , the first thing you see at the very top is revenue , or even some . Depending on your software , it might even say something else , like total income or gross sales .

So even that term revenue might be substituted for a few different things , but it's basically the thing on the top . That's revenue , total sales , gross sales , total income that's the money coming in from your customers without anything taken out .

When they're talking about top line , quickbooks will say income . So , yeah , I mean again , it's whatever you feel comfortable calling it , as long as we , as we understand right , it's the top line there , the gross sales or the gross income .

So this is like your direct materials , your paint and supplies , and then your , your direct labor , uh , you know , employees or subcontractor crews working on the job site . That's the cost of goods sold section .

And uh , so that's the next section there and then right below that it should be gross profit margin or gross profit , and so gross profit is what's left over after you take your revenue and subtract out your cost of goods sold , or COGS . Some people refer to it as COGS . That's another piece of jargon .

Someone says what's your COGS Cost of goods sold , but anyway , so gross profit margin is revenue minus your cost of goods sold equals your gross profit margin , and that's a key number for painting businesses , and the average gross profit margin is 40% and that's the average across the industry that we see .

And again , that's your revenue minus your direct materials job site materials and minus your direct labor job site labor equals your gross profit .

Your cost of goods sold is $5,000 , $3,000 plus $2,000 . What's left over is $10,000 minus the $5,000 . The cost of goods sold equals $5,000 of gross profit . And so if we take $5,000 divided by what we charge the client , that's $10,000 . That equals 0.5 , which is 50% . So again the percentages .

Whenever we say percentages we're basically talking about taking that number and dividing it by their top line revenue .

When people are talking about what's your margin percentage or what's your contribution margin , what's your gross profit margin , people are usually using different words to mean different things and it can kind of get confusing . So gross profit , like I said , is what's left over after you pay for direct cost materials and labor .

Contribution margin is what's left over after the same thing , but also some other variable costs . So variable costs are usually things related to production , job site production . So these could be things like auto expenses , because a lot of times you're driving from making trips to the paint store going out to the job .

Those types of things are variable based on how much production you're doing to the job . Those types of things are variable based on how much production you're doing , and so that's a variable cost that you can include up above the line , which we'll come back to that phrase above the line in a second .

But you can include that in your calculation for contribution margin . And then payment processing fees might be another one . It's a variable cost because your payment processing fees are going to go up as you charge your clients more money Because Stripe or Square that they're doing .

So that might be another variable cost that you have that you include in the calculation of your contribution margin . And some people even include salespeople up in the contribution margin to basically use all those variable costs to subtract from revenue to get your contribution margin . So that is another term that folks use .

So it's similar to gross profit margin , just adding a few more of those variable costs in there .

Yeah , if I have to go down to Sherwin-Williams and buy paint , I have to pay whatever Sherwin-Williams is charging for that paint . You know , my guys , they get paid a certain amount per hour . I have to pay them to do the job .

These other expenses , like vehicle expenses and bank processing fees and things like that , they are tied directly to the job because we wouldn't have these expenses if we weren't doing the work . But maybe there's more flexibility in controlling them .

Like maybe I can , you know , choose to drive less or drive less expensive vehicles or maybe find a better payment processor with cheaper fees . Is that kind of the big difference between the contribution margin costs and the direct costs , or am I just thinking about it kind of weird ?

So those are direct costs and that subtracts out to get a gross profit margin , straightforward . And then contribution margin it's very subjective . What can you include in contribution margin ? Basically anything that's variable .

So you know , like you said , auto costs , paying your production manager , paying your salesperson , potentially , and people have a different definition of what they would include in contribution margin and it's somewhat based off preferences , whereas gross profit margin is pretty much materials and labor for the most part . That's what most people mean when they say that .

But , uh , you know , even then it can be a little subjective , but it's a little bit more straightforward than contribution margin . Gotcha , um , and the other thing that you might hear is above the line or below the line . So above the line , the uh . So this is a different line than the top line .

So the top line refers to revenue or total income , total money coming in when someone says above the line or below the line . This is actually a different line that we're referring to .

This is the line that is below the cost of goods sold . It's basically the line between your cost of goods sold and your gross profit margin , or your cost of goods sold and variable costs and your contribution margin , depending on who you're talking to and how they're tracking this portion of their P&L . That's where the line is .

It's either basically where contribution margin is or where gross profit margin is , and so when they say above the line , they're talking about the costs , the variable or direct costs involved . If they say below the line , they're talking about overhead costs , and so overhead costs are basically anything that's not job site related .

So that's another piece of jargon that you'll hear . A lot is above the line or below the line , and so the next .

It's somewhat dependent on how big of a company you have , but for the most part throughout the year , a single year , it's not going to change substantially . Or accounting costs is a semi-fixed . You have an agreement with whoever you're working with .

They're probably charging you about the same If your services don't change you about the same amount per throughout the year , but obviously as you grow a lot larger , that will change the value chart . So it's like semi fixed . But yeah , those type of costs not associated with a job or somewhat fixed are going to be in overhead .

And also positions that are not applicable , not have to do with not any specific job . Like , obviously , your crews that are working on the job site are not going to be in overhead . They should be up in cost to get sold .

And then your office worker would be an overhead salary , like we said before , production managers and salespeople they can be an overhead , but some people do track them up in contribution margin to derive that . So those are dependent on who's setting up your chart of accounts . You can do it either way .

I think for comparability purposes , if you want to compare your numbers to other painting businesses , gross profit margin is the safe way to go because it's for ease of comparability . If you know your margins really well and you know exactly how much you should be paying , maybe contribution margin would be a good option .

And you know exactly how much you should be paying , maybe contribution margin would be a good option . But so overhead , not job specific , and usually fixed or semi-fixed .

Some people say EBITDA is a very similar concept here . Basically , what's left over after paying for your direct costs and your overhead , what's left over before any kind of interest or depreciation , that's your net operating income . Some people say EBITDA , which is earnings before interest , taxes and amortization depreciation . So that's the net operating income .

So then we get into the last couple of ones , which is other income and expenses . Other income might be like credit card rewards , or other expense might be interest depreciation , those type of things .

A lot of folks that are listening to this are working in the business , and if you're an S-corp , you're required to run a reasonable officer salary and so you're probably running , or hopefully running , a reasonable officer salary and your , your salary is , on the income statement , probably an overhead , uh , you know , as officer salary .

So to really calculate what you're making in the business , you would take your net profit and then add your salary together to get your discretionary earnings , or cash flow to owner is another way to say it . Basically , what do you , what do you make in the business as a business owner ? So discretionary earnings or cash flow to owner is another way to say it .

Basically , what do you make in the business as a business owner ? So discretionary earnings ? You'll hear that , you'll hear cash flow to owner , and that's basically what your net profit is plus any salary that you're taking .

Piece we're going to go into is what should you actually aim for in your margins , and so I'm going to do a a screen share so if you're listening to this , you can go watch the the youtube version of this and actually see the screen , but we'll try to explain it for the folks that are just listening .

So we have a growth model that kind of gives a recommendation for what you should be hitting in your margins for each stage of your painting business . We have four different stages .

We're going to cover probably the first three just for this episode , and the different stages is basically foundation , which is zero to 500K in revenue , growth , which is 500K to 1.5 million , and then expansion is 1.5 million to 5 million . So those are our three different revenue levels .

Each one of these we have recommended margins that you should hit and recommended percentages that you should be paying out for a particular expense category . So , for example , for direct labor , your direct labor should typically run around 35% of revenue .

So , to use an example again , if you have a ten thousand dollar project , you should be paying around thirty five hundred to your , your painters that are painting that house with fully , fully loaded with a payroll and workers comp . So thirty,500 should go to that direct labor and that's 35% . That's typically where you would want to shoot for .

So we'll go through three different models . So we'll stick with the first one , which is foundation first , which is the zero for 500K . So this is typically a painting business owner that is wearing a lot of the hats , and so we'll say that this painting business owner is the salesperson , the production manager , the office worker and also the business owner .

So with those different roles , their discretionary earnings , what their cash flow to themselves , is going to be a lot higher of a percentage than as the business grows . So let's start with what should this person make , to kind of illustrate what we're talking about here .

So if the paying business owner is , you know , the salesperson , production manager , office person and also the business owner , what should they be making ? So if we take the net profit of this business , recommended percent to hit is 11 and a half percent . Then we add in a salesperson eight and a half percent .

We add in a office worker , because oftentimes with the smaller businesses you're also doing the office work too , along with everything else , and you're also the production manager . So with those four different roles , production manager is 7.5% , salesperson 8.5% , 8% Salesperson 8.5% . Office workers 4.5% . And then net profit is 11.5% .

The discretionary earnings for this painting business owner would be 32% . Should be going to them in the form of net profit and any salary that they're running , if they're running that Another key number to know . So that's what you should be making . But what should your gross profit margin be Like ?

We said before , the average is around 40% , but you should be shooting for around 50% . So we have 47.5% gross profit margin for this level . It's a little bit lower than the other levels because when you're getting started it's usually harder to . You don't have as much authority to charge as much .

It's a little bit harder getting started maybe newer in the industry , so you're not as well known . Maybe you don't have as many Google reviews , so it's harder to charge as much as someone that's been around for a decade plus .

So that's why the gross profit margin is a little bit lower , but you should still shoot for 50% , and then maybe you'll end up somewhere around 47% .

And as you , as you grow and you learn these things , then the costs of your direct labor and direct materials will start to shrink as you become more efficient .

Now there's some other key numbers here for this level which we'll cover here at the end . We'll go to the next one , which is the growth stage , which is the 500K to 1.5 million . Uh , and they're often at this point they've most , or a lot of them have a production manager at this point .

Not all of them , but many , many , you know , end up getting a production manager in place . Uh , and they often also have a , an office worker helping them as well , and so they're doing sales still and they're uh , they're , making a profit as the business owner . Now , of course , this might be slightly

different depending on your situation . Obviously , someone closer to 500k and the stage will likely be doing production management as well and maybe even the office work , and then , if you're close to 1.5 million , you're probably doing maybe less things , maybe just the salesperson role and the business owner .

So let's say they're the salesperson , the business owner , at this stage you should be getting 8.5% for your sales role and then about 14% in profit , bottom line profit . We add those together , that's 22.5% in discretionary earnings going to you . We add those together , that's 22.5% in discretionary earnings going to cash flow , to the owner 22.5% .

And then you're paying your production manager around 7% , you're paying an office worker somewhere around 4% of revenue , and then your margin , your gross profit margin , you should be shooting for 50% at this stage as a recommendation , and so that is the growth stage . Then the third one we'll cover here is the expansion . This is 1.5 to 5 million .

So at this point a lot of painting business owners actually get out of sales as well . They have a sales person or even a team of salespeople , and they have production managers . And so really there's a new line item that pops up here , which is the C-suite . This is your CEO , coo , cfo , cmo .

So chief executive officers , chief operating officer , chief financial officers , chief marketing officer , your C-suite . And so we have a nice .

So if you're at this level , you're probably , if you're doing around 2 million , you're probably doing all those roles , you're probably the full C-suite , so you might have 5 offices with great views , and so that 3.5% is probably all going to you and you likely have your salesperson , production manager , covered at least a lot of folks do at this point and then

you are the business owner . So you get that 15% profit and so that's 18.5% . So you'll notice that the percentages are going down as you're growing , but that's okay because the overall pie is growing . So you're getting a smaller percentage of that pie , but pie is growing . So you're getting more overall in terms of dollars in your pocket .

So 18.5% discretionary earnings , which is 3.5% for the C-suite roles that you're playing , and then your bottom line profit and at this point your gross profit margin target we recommend to shoot for . Try to improve a little bit over 50% . At this point you've probably been around a while .

You probably have a strong sales process that you can command higher prices , so you can start getting a little bit over 50% , and so we recommend 53% gross profit margin . And so those are the three scenarios to give you an idea of what you should be shooting for your numbers .

There's other key numbers here that are kind of the same across the different stages , which we talked about direct labor for the most part , it's somewhere around 35% . Direct materials , you know , somewhere between 12 and 15% . Obviously , as you get more experienced and bigger you can usually start .

You have better negotiating powers with your vendors , that sort of thing , so you should be able to drive those costs down . A smaller as a smaller percentage of of revenue uh , auto expenses somewhere around two to three percent for the most part across all levels .

Marketing uh , marketing includes the cost to do marketing , either pay someone to do it or hire an outside firm to do it . Somewhere around 7% is what you should aim for , or at least we recommend somewhere around 7% of revenue . Your accounting you might hire this out or you might have someone in-house doing it or a combination of that .

So you're probably to do all the things that you need done , which is your bookkeeping and your taxes and your invoicing and your accounts payable all that stuff somewhere around 3% , and then we have a couple of smaller items there . So those are some recommendations on what you should be hitting for your numbers and the margins .

You should be seeing as you move through your journey as a painting business owner .

You type that into Facebook , uh , ask for an invite to the group and we will let you in . Definitely , let us know what your thoughts are on on margin , what you shoot for . Love to hear your thoughts and with that we will see you next week .