Welcome to the Profitable Painter Podcast. The mission of this podcast is simple. We'll see you next time. Hey, this is Daniel, the founder of Bookkeeping for Painters, and I'm here with Richard. Hey, Daniel, how's it going? It's going well. It's going well. I can't complain.
Good, good. Yeah, I'm Richard Dunton. I am an enrolled agent, and I am the tax director for Bookkeeping for Painters.
And today we're going to be talking about how... Do you determine the appropriate amount of take-home profit that you should be making in your painting business based on the roles that you play within your business? So the goal of this episode is to provide you the guidance for you to actually calculate what's your ideal take-home profit. Now, what do I mean by take-home profit?
Really, the technical term in accountant land is discretionary earnings, which is basically your net profit from the business plus any salary that you are running for yourself. So take-home profit, take-home pay, cash flow to owner. That's what we're talking about. It's basically what are you getting, extracting from your business? What is the ideal amount you should be making in your painting business? And I think a good starting point to understand this is to take a look at the benchmark data.
What does the average painting business owner take home in their painting business? So the average, when we look at prior years, we have access to benchmark data for the painting industry. Taking a look at that data, the average painting business owner takes home between 15% and 19% of their revenue as profit and salary for themselves. So that's just the average. And hopefully, anybody listening to this is not just shooting for average.
Hopefully, you're shooting to be in the top 15% or top 10% of painting business owners. So that's what we're gonna be kind of discussing is what we've seen the top 10 and 15% of painting business owners, what do they actually take home in their painting business?
I think this is such an important topic, Daniel. One of our clients said to me the other day, he said, revenue is vanity, Profit is sanity. And I thought that was so smart because it's true. You could be making a ton of revenue, having all sorts of money coming into your business, but that doesn't really matter. What really matters is what are you taking home? What is going into your bank account? And that's the sanity part.
So if we can set a benchmark, if we can understand how much profit we should be taking home in comparison to how much work is flowing through the company, that's going to set us as the business owner up for success, probably more so than any other specific metric.
Absolutely. I agree.
And determining how much you should be getting out of your business is really you got to start with what are you doing in your business you have to identify the specific roles in your painting business to to determine okay what should i actually be making and this is important because hopefully at some point you're going to have someone else take some of those roles from you especially if you're a smaller painting business under 100 under 500k let's say If you're doing under $500,000 in revenue
per year, you're probably wearing a lot of the hats at that point. So at some point, as you grow to be a million-dollar business, a $2 million business, you're going to have to put those hats on different people.
And so having a firm understanding of what each role should be making is important, not only to understand how much you should be ideally taking home as take-home profit to yourself or cash flow to owner, but also when you hire that person to put that hat on that person, how much should you be paying them? So you're
talking about assigning a certain amount of revenue to these individual jobs. And if you're the entrepreneur just starting off and you're wearing all those hats like you're talking about, then there might be multiple percentages that get assigned to you because you're doing multiple roles in the company.
Right, exactly. And let's just take under, if your painting business is under 1.5 million in revenue right now, there's a lot of hats, but there's kind of four main ones. There's the business owner. You're wearing that hat. You're the salesperson. A lot of the times you might be still wearing that hat. The production manager, maybe you're still wearing that hat. Maybe someone else is. The crew lead, the admin person. If you're under 500K, you're probably wearing all those hats simultaneously.
If you're at 1.5, you might have one of those hats on someone else. But the first step is to identify, what are the roles that I'm playing in my painting business? And from there, from what we've seen looking at the data, we kind of have a good understanding of what each of those roles gets paid on the open market. And so thus, that should drive what you should be... Add on to what you should be making in your ideal take-home pay. So let's start with the business owner.
Now, the business owner, the way that we're defining it here is just the person that owns the business that doesn't do anything else in it. So there's no active participation in the business. They're literally just owning the business. And maybe that's your goal and you're... business someday to own it. And it's just a passive income that you have a team that's running it, which is an awesome goal.
Now, if you're in that position, how much should you be extracting from the business if you're not actively participating? And the general rule of thumb for this across many industries is 15%. So that's what we're going to use here is 15% of revenue should be going to the business owner.
Well, that is an excellent return on investment. I know we were talking beforehand. If you buy into a company through a traditional equity, say a stock, or you're a shareholder in a company, if you could get 15% return on your money, people would be buying the stock all day long. It would never stay at that price. I think on average, the S&P 500...
So, you know, an index, a consolidation of all the big companies, the top 500 companies in the U.S., and this is for over, you know, the past 60 or 70 years, I think on average has returned about 10%. Some years it will be higher, some years it will be lower, but overall 10%. So, you know, that's, and that's generally considered, kind of like the gold standard for investing. Bonds are going to be well below that, half of that.
Even with interest rates being very high right now, putting your money into a certificate of deposit or a savings account is going to only yield maybe 2% or 3% at best. So if you have a business where you are getting a 15% return on investment, that is an incredible investment and an excellent return on your money.
Right. Like you said, the average on the S&P 500 is like 8% to 10%, which again is average. We're using 15% because this is where you ideally want to be. This is the top 10% to 15% of painting business owners that are passive, can get that 15% return on their business by just being passive.
And that's just for contributing the money to the company, setting the thing up, and then... then walking back
exactly
yeah
that's that's awesome right that's not even being the ceo because you can have which we'll talk about later have a ceo in place and pay him a salary to actually integrate make sure things are working business owner is completely passive the next role is salesperson and so this is for painting businesses under 1.5 million 4 main roles. Business owner, which we just talked about, salesperson, production manager, crew lead. They also have admin person. So it's 5 roles, really.
So those are the 5 main roles in a business that's under $1.5 million. You obviously have more roles. There's a painter. You might have a contract with a marketing person or something like that. Just kind of the main roles that we see any business owners have. Those are kind of the main ones that we see. So once you've identified which roles that you are doing in your painting business, if you're listening right now, one, you're probably the painting business owner.
Maybe you're doing sales still, but you have a production manager. So maybe you're not wearing the production manager hat, but you're still wearing the salesperson hat. And you're not doing crew lead. stuff anymore because you have subcontractors that take care of that. But maybe you're still the admin person. So you have three of the roles. Let's just set an example.
Okay. So now that you've identified your roles, let's go through and calculate the compensation, your ideal compensation that you should be getting from your business. So you can put together your goal for discretionary earnings or your goal for take-home profit. So for the business owner, we already said this one. It's 15% of revenue as cash flow. to you. For the salesperson and production manager, this is generally around 7.5% of revenue for each role.
So about 7.5% for salesperson, about 7.5% of revenue for production manager. For an admin person, at the high end, it's 5%, but it can even be lower depending on what kind of tasks, how streamlined your processes are. how much automation you're using. At the top end is 5%, but it could even be lower 2% or 3% of revenue. And then for a crew leader, if you're at $500,000 or higher, you're probably not doing crew lead stuff anymore.
If you're under $500K or maybe even $300K, you might be still doing crew leader stuff. And the main thing that you'll need to keep in mind for this project portion is really what should the crew be taking away from the job? And that's the labor, the direct labor on the job. That's 35% of the job should be going to the crew as a whole. Now, the split between the crew lead versus the painters on the job site, it matters. How many painters do you have working on the job site?
How long did they each work on the job site? So it gets kind of complicated. So just start with If you just start with 35% of the job should go to direct labor, which the painting crew is included in that, obviously. And the crew lead is in charge of that. So let's just run through an example using these numbers real quick. Let's say you're a smaller painting business. You're doing $300,000. You're still doing some of the painting, and you're the crew lead as well. You're doing the admin stuff.
you're doing the salesperson job, you're doing the production manager job, and you're also the business owner. So you're wearing pretty much all the hats. So we said 15% for the business owner, plus another 15% for the salesperson and the production manager. So that's 30%. And then the admin person, 35%, because add five on there. And then another 35% for the direct labor, if you're doing all the labor If you do all the painting, that would be another 35%.
So that gets you up to 70% discretionary earnings. You should be making 70% or whatever you charge to the client should be going to you if you're doing all those roles. Now, if you're doing 300K, you're probably getting some help. So it might be 60% discretionary earnings, 65% discretionary earnings, depending on how much help you're getting on the job site. But that's an example for a... if you're kind of a smaller painting business wearing all those hats.
Okay, yeah. So if you're doing everything, like let's say you're a one-man show, right? So all the sales, all the operations, everything, and you're just starting off, maybe you're doing $100,000 a year in gross revenue. If you're expecting 70% to you because you're doing all the work, that's $70,000 a year. That seems to make sense. As the company grows, you mentioned this, Daniel, you're going to have to start getting some help.
And if you hire a production manager, I think that's generally the first thing that people tend to hire is a production manager. You can figure about 7.5% of that revenue going to him. So you might need to adjust your revenue goals. Because now less profit is coming to you. You still want to make sure that you're getting paid. A lot of our clients are very concerned about that.
They're doing profit first or other similar fields of study where they are prioritizing making sure that they get paid first. So as you start to field these jobs out, we want to consider how is that going to affect my bottom line? What am I going to be able to take home? But yeah, even... even if you filled out both the salesperson and the production manager and the admin, 15% of $500,000 a year is $75,000 a year. And you're probably going to be doing more than that.
You're probably going to be doing more than just 15% because that's kind of like the bare minimum, just getting that return on investment.
Yeah, and we can take another example. Maybe you're at $500,000. in revenue right now, and you're doing the sales and production, but you do have an admin, you do have a painting crews that are doing everything, you're the business owner. So you're just doing sales, you're doing production management, and you're the business owner. So in that example, you should be taking home 15% for business owner, 7.5% for the salesperson, 7.5% production manager. So that would equal 30% altogether.
And so 30% of $500,000 is $150,000 per year.
Yeah, and that's a pretty good profit. I like this because it kind of helps you understand how much you have to sell to hit your profit goals. And at what point in your company can you afford to start fielding out some of these jobs? What it's actually
going to cost you, yeah. Yeah. Exactly. If your goal in your business is to make six figures, that can be accomplished as we just went through the numbers here by hitting $500,000 in revenue and wearing that business owner hat, obviously, the salesperson and the production manager hat, well over $100,000. So I guess now we can jump into the what you should be making for if you have a larger painting business, if you're over 1.5 million.
A lot of it's the same, but there's another role that kind of comes in, which is the role of the CEO. And so the CEO is basically integrating the sales, the marketing, and the operations, making sure the salespeople and the production manager are doing what they're supposed to be doing, and overall in charge of the company. So this is an active role, not to be confused with the business owner, the CEO is an active role.
So the role of the CEO should, generally what we see is they get paid around 5% of revenue. So this role isn't really gonna come into play until you're over 1.5 million, maybe even two or 3 million. at least you won't be able to hire out for this role. You probably won't be able to get a very good CEO unless you're paying them six figures, which you wouldn't be able to while maintaining your margins until you hit about 2 million in revenue.
So just to take an example, if you're a little bit larger painting business, let's say you're doing 2 million, you're still the business owner for sure, making 15%. You're maybe not doing sales or production anymore. You've already passed off those hats. And you're not doing admin anymore. Obviously, you're not on the job site. But you're still doing that CEO role. So 15% plus the 5% of the CEO is at 20%. 20% of revenue should be your target.
Yeah, no. When you start looking at the CEO role, you mentioned it is an active role. You're not selling. You're not running the jobs anymore. But your duties, they fall under more of a coordinator, it sounds like, because you are managing the people you've put in place to manage your business.
Yeah, I'm a big fan of the book Traction by Gino Wickman. And in that book, they call the CEO role the integrator. And the integrator is basically in charge of making sure the operations officer, the marketing officer, and the chief financial officer are doing their part in the business. So he's integrating those different roles. So it's really just a strictly a management role. You're just making sure people are doing what they're supposed to be doing, making sure they're taken care of.
and responsible for the bottom line of the business.
That's really one of the most important roles in the company, kind of setting the course that the company is going on, making sure you're doing the accountability, you're making sure that people are not just doing their job, but you're providing them with the tools and the training that they need to succeed and kind of setting that You're navigating the business, you know, to kind of use like a sailing metaphor, you know, you're pointing the direction of the ship and you're making sure that your
crew has what they need to succeed. So, yeah, you know, it feels like almost like a little bit less active role because you're not out in the field anymore. You're spending most of your time in the office. But I don't think that diminishes the importance of the role at all. And it doesn't diminish the amount of work that you're going to do. You're just kind of shifting it. to that 30,000 foot picture. You're seeing everything at once.
Exactly. Yeah. So hopefully this kind of walking through the numbers here gives you, the listener, a better idea of what you should be ideally taking home in your business. And I'd like to ask everyone who's listening to share what What framework do you use in your business to understand how much you should be hitting? What challenges you're facing in determining your take-home profit? So feel free to definitely submit questions to us on the Grow Your Panty Business Facebook group.
And we'll definitely take that into consideration for future episodes and interact with you for sure.
Yeah, I'd love to hear what kind of hats are you wearing right now? Are you wearing all the hats? Have you been able to kind of hire some of this out and how that has affected your business? So yeah, please drop us a line. We'd love to hear from you. You know, we'd love to get your questions and be able to provide some more information on our Facebook group.
All right. And with that, we'll talk to you next week.
All right. Thanks for listening.