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“How in the world can you run a business when you're not actively looking at this information?” — Mark
“Revenue is important, but what you actually put in your pocket matters more.” — Scott
“Under 40% gross profit, you will struggle to pay your bills.” — Scott
“You can’t double your business because you heard someone online say it. You need a real plan.” — Scott
Host Scott Lollar is a 35-year veteran of the painting industry and founder of Consulting4Contractors. The 'Success Beyond The Brush' Podcast serves as a touchpoint to painting contractors who have hustled, sacrificed, and worked hard to get their business to where it is today. Now, you need the guidance, expertise, experience, and team to make it into the multi-million-dollar company of your dreams. You'll hear stories and interviews from "Brothers of the Brush" and "Sisters of the Sprayer" who have been where you are and are charting a new course for their company's success. Listen in and go beyond $1,000,000!
SBTB Ep. 3 | You Didn’t ‘Make’ $500K: Knowing Your Real Numbers as a Painting Contractor
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[00:00:00]
Introduction: The Importance of Understanding Your Numbers
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Mark: I run into business owners all the time that have almost nothing to do with their accounting or their bookkeeping. They have a person that they talk to quarterly, they don't really understand any of it. And my question to them is, how in the world can you run a business? How can you make good decisions when you're not actively looking at this information?
Welcome back to Success Beyond the Brush, powered by Consulting 4 Contractors. Today, Scott and Mark are taking on one of the most misunderstood topics in the painting industry, the difference between what your business does in revenue and what you actually make as the owner. They're gonna break down the truth behind that classic line, "We did half a million last year", and explain how to understand your cost of goods sold, your real labor burden, your expenses, and what your business is truly putting in your pocket. So if you've ever wondered why your [00:01:00] revenue is growing, but your bank account is not, then this episode is for you. Let's get into it.
Misconceptions About Revenue and Profit
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Mark: So Scott, it happened again this week. I'm talking to a contractor and, and he's a small business owner and I respect him and he's a nice guy. But it happened yet again where we got to talking some numbers. And of course it always comes up, how many guys do you have? How many trucks? But it got to actual revenue.
And he was saying, I made half a million dollars last year. And I said, well, that's wonderful man. That's awesome. But in the back of my mind, I'm also thinking, you have two helpers. What do you even mean by you made half a million dollars? I'd love to get your thought on this subject because we hear it all the time.
It's small business owners who don't understand the difference between revenue and profit and, and to me, [00:02:00] when you say I made X amount of dollars, you're talking about net profit. This is what I actually made after all expenses were paid. But we also don't know if they're thinking, is that what you personally took home?
Did you pay taxes on half a million dollars? It frustrates the bejeezus out of me when I talk to people who don't really understand their numbers. What are your thoughts?
Scott: Yeah, well, you know, hasn't it become that way with the internet age of people throwing around numbers that they don't actually need to prove or aren't accurate or don't even know if they're true? So I agree with you and I think it's also become a issue of people really holding onto their revenue number as that's the most important thing.
Well, it's important, but like you said, how much did you actually put in your pocket? And to even make it more complicated a person that is structured as a LLC, as filing as an S corp, they're [00:03:00] taking a salary of some kind in there as required. So did you take a lot of money in salary, and then so the net profit's skewed a bit. You know, I, so I talk a little differently about these things. First of all, I talk about owner's comp, or ROI, how much did you make out the door for owning this business? And so there's lots of things that are required more than just top line revenue. We really do believe that net profit or owner's comp, or ROI is really most important.
Now, if you take a big salary and you say, I took 20, 25% to the bottom line, well, you should be a business coach is what you should be. So you know, it's really oversimplified. On the other side, nothing happens without revenue, right? So it is important. It's very important.
Breaking Down Key Financial Metrics
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Scott: We like to look at four key numbers in your [00:04:00] income statement to help us manage a business.
And the first one is revenue. You need it. It's really the fuel that runs the whole engine. Without it, then we're all going home. The next one is cost of goods sold. How much did it cost you to get the work done, which then of course you have your gross profit. That's your next real important number.
The next one is expenses. How much did you spend to run the machine? And then the last one is net profit. Those are the four KPIs that I'm really looking at more importantly than anything else you ever said in that statement.
Mark: I agree with your statement, revenue is important, but it's equally as important to understand that what you took in is not what you made. And I think many small business owners, especially as they're trying to grow and scale they get confused about that all the time. And I think it's especially dangerous because they start to over evaluate themselves and they say, no, I am worth a half a million dollars.
It depends on how you [00:05:00] look at it.
Scott: Yeah, exactly.
Mark: I'm thinking if a person is generating $500,000 worth of revenue, your actual salary, your actual take home, your personal compensation is probably closer to $80,000.
Scott: It might very well, it might be. A small company like that where the owner is literally doing everything except the in our case painting. They might be able to squeeze out 150, maybe a little bit more. But where there'll be stifled is how do you grow and what we, sort of subscribe to here at C4C is in our day and age,
and Mark, you and I are, have actually painted before, so we're not, the new age of, let's just jump into this with no painting experience, which is fine too. But we just did this by hustle, right? We painted, the word spread that we were probably cheap is probably the widespread, but... and then we hired a helper and then we hired a second helper.
Then we hired more helpers, and then we stopped painting [00:06:00] so much and then we stopped painting all together. But we were wearing all the hats and we were still growing mostly by word of mouth. That's the way it happened. Then we got a little bit smart, hopefully from something through an association of some kind or through a group and you realized you need to raise your prices. But we always felt that you could probably get to around, say, $750,000 just with hustle and that there wasn't a lot of money left over to hire people until about then. But then you could hire one and you could take some of your profits and pay that person.
Now, if you stayed there, you just diluted your personal income, your profits, right? Because you just took some of the money that you used to have and gave it to this new person, 60, 70, 80 grand, whatever the number is, whatever the position was, and you just diluted your income and that's all you did. That's why we suggest then you have to grow. Now, we've never advocate growth, just so that you can stand up on stage and say, you know, Hey, I'm, I'm, I'm a big shot.
No the goal is something different than [00:07:00] that. Is it your lifestyle? Is it your days off? Is it your travel? Is it cash? But eventually, if you're not growing, you're probably shrinking. So the idea of at $750k, going ahead and grabbing an overhead position, an office manager, a project manager, or even an estimator, if you don't prefer to be the estimator.
We think you need to blast through what we call Death Valley to $1.2M $1.25M just to get on the other side of it. Otherwise, you're going to stall out and you might die in Death Valley because your expenses are going to start rising, right? And we know that by our experience and we know how it measures out.
It's another reason why at C4C we always talk about break-even. Break-even isn't just to get to zero, break-even includes what's the owner's draw that you're expecting or demanding from this company? What's the debt payment that you have because you have vehicles or some kind of loan or something.
After you pay those, then you might [00:08:00] have zero. That would be your break-even. So this idea of what does it take to get you to your personal financial goals, that's as critical as anything. Now, if you can do that at 500,000, so be it, but most people, it's not going to work. You're going to have to get much bigger than that in order to meet your financial goals and your lifestyle goals as well.
Mark: And so from what you just said going back to my friend at the beginning who doesn't really understand his numbers, so he has a lack of knowledge or understanding about what he means by, "I made half a million dollars," it sounds like he doesn't really understand his expenses. He doesn't know what he's spending and likely is going to continue to spend more as he scales up even higher and gets busier.
Scott: Yes.
The Cost of Goods Sold and Labor Burden
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Scott: So even before expenses, I see a lot of people don't exactly have a well-defined chart of accounts and they don't know what their cost of goods sold or it's not accurate. So cost of goods sold are the things that you spend money on for one job and one job only. Now, there's some [00:09:00] variances here.
We see people put some things like commissions, which would be reasonable if you wanted to, and even variable expenses like field vehicles and et cetera. In the simplest form, I think of cost of goods sold is labor. The cost of that labor in benefits in taxes, insurance, the subcontractors that you may need to do that work.
All the materials of course. And any, yeah. And any equipment you need to rent. And even, I would think it would be safe to put in small tools and equipment. Stuff that you buy for those projects that would be the bulk of what I would consider a good cost of goods sold. Now the other thing that people that have employees, W2 employees, this word burden gets thrown around and I think a lot of people don't capture the burden.
So just the same. If I paid someone $25 an hour. You think that's how much it costs? Well, no, it didn't cost you $25 an hour. It cost you much more than that [00:10:00] depending on your, burden or your benefits load. So if you pay, of course we all pay half of the Medicare, Social Security. There's, some small component of unemployment insurance, both federal and state.
Then we pay work comp insurance. We pay liability insurance. You might have some insurance like health insurance. You might have a retirement plan. You might have PTO, you might pay holidays. On and on and on and on, right? In addition, there might be some other unproductive time like we do training, a lot of training, right?
So we pay them for training, but we don't bill that to a job. So all these things add up. So that $25 an hour you pay, that person might cost you 30. Well, that's $5 more than you realized. So understanding that burden's really critical in your job costing. Now, I find a lot of people don't do very accurate job costing either.
They say, well. I I charged 10 grand and we had a little of this little that, and I made 50%. I'm like, eh, I don't like, could [00:11:00] you prove that? And they're like, eh, no, actually I can't. So having that data really clear, and we do that through our bookkeeping system and our book bookkeeping partner, right?
Bookkeeping helps our clients have really accurate numbers where they can get that very clearly. So that's the first component. Now we have the gross profit. Now 50% is kind of an industry standard. You'll see that bantered around a lot. I agree that would be nirvana. What I do tell people is under 40%, you will struggle to pay your bills and make any money.
So 45% to 50 is pretty important and standard. So I would agree with those numbers. The next section is your expenses, like you just said. What did we spend money on to do that work that wasn't directly a cost of goods sold. So marketing and overhead personnel, like admin and, and salespeople and on and on, on. Your cell phones and your computers and, and your travel to conferences and you know, there, there's they're almost [00:12:00] endless, right?
So then you have an expense section. Then whatever's left over is your net profit. And so understanding those components is important.
Strategies for Growth and Managing Expenses
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Scott: Now, it's another important part of understanding your bill rate is what your expenses are. You hear a lot of people say, well, I charge this or I charge that. And then I also hear people saying, well, how much should I charge or do I need to charge?
Well, that's a component of your expenses. I can't just tell you the magical number everybody in US should charge. It really has to do with what you need to recover to be profitable. And the worst thing I ever hear is people talk about, market rate or being competitive, I don't think being competitive with other people is very good business model.
You need to charge what is required to pay your team, pay your, you know, cost of goods sold and have some money left over after you pay your expenses. And I don't know, I can't say that's the same for [00:13:00] everybody. It's not, and you would need to figure that out. You can do that through projections and budgeting, and we do that with our clients every year.
But you can't just look at one component and say, okay, I'm done.
Mark: No, that's exactly right. And, and I love what you were just saying. When I'm training salespeople in our business, I often tell them our goal is not to tell them what this job is worth. Our goal is to tell them what this job is worth to us. What is it going to cost our company to produce this work?
It doesn't matter what it's worth to the market or to any other company who doesn't look like us.
Scott: Yeah. And I, and you hear that all the time where say well, they people just not paying my, paying my rate. Well, I just find that to be ridiculous because every day we make little decisions, micro decisions about what kind of a, a hamburger we're going to buy a McDonald's or a whatever, a Red Robin, right?
They're different, they're different strategies. And so I could go to Red Robin and say, hey, this is ridiculous price. I, this is over double [00:14:00] what I could buy at McDonald's dollar menu or whatever, right? That would be a ridiculous statement. And yet that's what people are telling you.
Now, the challenge is we're selling a $10,000 paint job, not a $1 hamburger. So I get that the analogy is not perfect, but my point is I am a customer service snob. I will hire the person that I think will give me the best experience. But going back to our chart of accounts or our financials, that's the way you should charge and that's the model that you have, and that's the people that will deliver that, and that costs money.
That's why it is, but that's why it's more expensive. But you wouldn't know that if you don't monitor your numbers and don't know them intimately.
If today's conversation is hitting close to home and you realize your numbers might not be as clear as you thought, now is the perfect time to get some help. Consulting 4 Contractors specializes in cleaning up your bookkeeping, setting up a [00:15:00] smart chart of accounts, and helping you track those KPIs that actually matter.
They're gonna walk you through break even planning, owner's comp, cost of goods sold, everything you need to make confident business decisions instead of guessing. Learn more and book a call with Scott at Consulting4Contractors.com. That's Consulting4Contractors.com. Let's get back into the episode.
The Role of Accurate Bookkeeping
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Mark: You used the word chart of accounts. I run into business owners all the time that have almost nothing to do with their accounting or their bookkeeping. They have a person that they talk to quarterly. They don't really understand any of it and my question to them is,
How in the world can you run a business? How can you make good decisions when you're not actively looking at this information? So you talked about the way that C4C possibly helps with the bookkeeping and [00:16:00] maybe sounds like you have a very particular way you want that chart of accounts set up.
Why is that important?
Scott: Yeah, so we have a way that we set up the chart of accounts that we think really makes sense for this industry or for service industries, and it helps organize it in categories that really help us plan and then manage that plan. And what we find is that often people will just open up a QuickBooks online file, for instance and just sign up and put their credit card in there.
And QuickBooks will take you through a onboarding and tutorial and give you some names and the names will be correct, like insurance or bank charges or interest or whatever. But just as a big chart of, words, they're not bundled correctly, I guess is the way I would say it.
So what we like to bundle them in sensible ways, in a sequence that takes us through the whole cost of doing business, starting at the revenue side all the way through the cost of goods sold, all the way through expenses. And so that it's really easy to [00:17:00] catch these highlights because like you said, people that don't ever look at their financials or believe, that things are rosy, but they're not, your income statement and also your balance sheet will tell you actually things aren't rosy, they're very bad and there's lots of bad habits that people have that get them there. We see clients all the time that new clients that come in and their books are just cooked.
I can't even imagine how they run a business and they owe money. But it's misclassified and they think they made money and they're on social media channels talking about all this wonderful stuff that they've done and accomplished, and yet their books bear out that they're actually operating at a loss because they took owner's draw but they didn't pay the vendor or they didn't pay their taxes, or they borrowed money from deposits or what have you, and they really don't have any kind of acumen or intelligence towards understanding the [00:18:00] financials.
That's really where it starts. You can be the best salesperson in the world, you think, but your operations department or your delivery of those services can be totally creating an insolvency for your company because you don't know how to look at the data. So the data's critical and analyzing the data, even with a good bookkeeper, because the bookkeepers are putting things in places that they believe they should be or they were referenced before.
But, you know, it's still up to you to verify there's no mistakes and we should be looking at that at least monthly, if not more frequently, just to understand and you can catch things. True story: a client uses a vendor that has their credit card attached to their credit account, and somebody else came in and bought a floor grinder for epoxy floors.
They charged their credit card
Mark: oh my.
Scott: and I was able, I caught that and I'm like what is this charge? They're like, ah, I don't know. [00:19:00] They, the store had mistakenly used their account to charge the equipment and had charged their credit card and it got through the office people.
But those are things you catch. Why did we buy this? Why did they get charged twice for that? At when I was working at Precision, it was semi common that we got charged for paint that was not ours because Precision Painting was somewhat of a common, there was more than one Precision Painting.
There shouldn't have been. And there was, so this idea where we'd get the Sherwin Williams or the Benjamin Moore receipts, and I'd be like, We didn't buy that paint. There's no PO that represents our company. And those things are important and you can't understand that until you spend time in the numbers, and it's going to be hard to find if your numbers aren't organized and clean and precise.
Mark: Yeah, and small business has always been dangerous in that way, that you can play that shell game for quite a while with cashflow. And, I can move this money to pay that and that money to pay that e [00:20:00] eventually it runs out. But that could be a year, a year and a half worth of damage. If you don't truly understand your actual profitability. Hearkening back to what you said earlier, I just want to make sure our listeners are clear.
You were saying gross profit then is our total revenue minus our cost of goods sold. And that gives us our gross profit. And so on a $500,000 revenue business, let's say he hit that kind of magic goal of 50%. And so his gross profit looked like he was at 250,000 in gross profit, but that's still not what he made, right?
Because we still have to subtract expenses.
Scott: Yes. Now using your example, the 500,000 is pretty modest amount of revenue, right? So I'm not going to suspect he has a massive office with a fleet of vehicles and a big, a bunch of anything, right? It's a pretty modest business. So that example, if they came and said, Hey, I only had $75,000 in expenses, that would come [00:21:00] off the $250k, he would have 175,000 in, if he was a simple LLC, he would take $175k right to his bottom line, assuming he has no debt payments. In other words, there's no truck payment, there's no nothing else. He would, technically, that person would technically have 175,000 in net profit.
If you're a, if you're a LLC filing a sub chapter S, you have to take a paycheck out of that. So let's say he took a hundred thousand dollars in pay. He would have 75 to the bottom line because now his expenses would be 175, not 75, because his salary is an expense. So it's, that's why I'm not very impressed when I see people bragging about their
"what I made", like you're saying, I want to see what did the owner take home? What was the ROI for this business? And it sure as heck better not be the number, like 80,000 like you said, because there's a lot of risk. And if you want to make 80,000, you could probably just go be a painter [00:22:00] in a lot of places.
Without any risks. Knowing those numbers are important.
Now it's okay to not be making bank in a growth phase, because most companies in a growth phase, how do you fund growth? There's only two ways really. You're going to fund it out of a retained earnings, cash that you have in the bank that you definitely remove from the company, or you're going to finance it with a, with debt, like you're going to go get a loan to grow your company.
Those are the really, the two ways. Yes, you could bootstrap it and do it through cash flow, but most people are going to invest retained earnings or cash into growing their business. And if you don't have any there, then you can't. So that's one of the benefits of having cash in your bank.
And it's not uncommon, for us to see two, three, $400,000 in the bank with clients because that gives them some flexibility to do things as they want to do things and invest in places. And they live on a, they live on an amount that's comfortable but not extravagant. [00:23:00] And they leave money in the business for growth.
So I, it's okay if you want to take debt. I don't really care what, whatever you're comfortable with, if you have a line of credit or you go get a term loan, or whatever you want to do, you want to grow with debt, do it. I don't care. But that's the only way you're going to do it, either through retained earnings or through debt.
Right.
Mark: So let's continue with the analogy. I'll put myself in that place. I'm a young hustler. I'm making a, my business's revenue is about $500,000. Probably got three, three and a half, maybe four guys working for me. Let's say I want to take home more money. My wife comes to me and says, we need to make more money.
So one of the common ways that people think how do I make more money out of the existing business? And they think, aha, I will simply cut my expenses. What do you think about that strategy for taking more money out of the business? I'm just going to cut my costs.
Scott: Yeah, man, I have had this conversation a lot lately because the economy has been a little frustrating, hasn't it? So while I appreciate controlling expenses, [00:24:00] I think typically it's the wrong place to focus because there's not enough paperclips to eliminate, right? Expenses are things that you're purchasing, or services you're buying to run your business. So you can go in there and say well, I'm just going to eliminate all marketing. Okay, so then what? How is that going to work? Or, I'm going to get rid of all my overhead staff. There's a consequence to that, so, I think you should be frugal and say, Hey, can we eliminate, renegotiate a cell phone contract?
Or, I don't know, whatever. But at the end of the day, say you saved a hundred bucks a month, that's 1200 bucks a year. Is that really where you want to focus? I think you should focus on revenue. Like I said, revenue is the gas that this engine runs off of. So I would focus on controlling expenses, not as much eliminating expenses, and I would focus on revenue.
Now, using your example, how could you make more money out of this $500,000 company? It's [00:25:00] not by buying less copy paper for the most part, right? Yes, you could whittle it down and save 400 bucks a month. It's not how you're going to get rich. You would increase your bill rate, you could do that.
So, same three and a half painters, but we charged an extra 10 bucks an hour. That's roughly 7,000 hours a year, so you could do that. That'd be $70,000 of revenue using the same people.
So that'd be an option, right? You could do that. And if you did not want to grow your headcount, in other words, I don't want to get to 10 painters and I don't want to get bigger, then you're a lifestyle business with nothing wrong with the lifestyle business, absolutely nothing wrong.
And I think we should be okay with people saying, I want to be here. I'm comfortable here. I can manage this, I can take vacations. I have enough money to live the life I want. So I don't think everybody should be required to be a $10M company. It's not necessary. But if you have enough work or too much work and you don't want to [00:26:00] grow your headcount, then you just keep pushing your bill rate and that it will be equilibrium where you're going to get more people saying no.
And then you're going to have to just manage that. And you can use dynamic pricing in that moment where, Hey, when we get really busy, I'm going to raise my prices, when we get a little bit slower, I'm going to lower my prices. But always staying within enough. Enough margin to do what we talked about before in this session, which is proper cost of goods sold, which gives us the gross profit and expenses.
From there though, it's about hitting numbers because this is really why I'm data-driven is, people say, I want a double next year. That sounds fantastic. How are you going to do that? So what did you do this year? Did you only do half the bids when the phone rang? No. I did every bid.
The phone rang and I did every bid. Okay. And did you use half the painters you had available? No, I used all the painters I had. Okay. So how would you double? You need the phone to ring twice as many times. You need twice as [00:27:00] many painters or subcontractors. So that's a pretty big statement.
Now, if I was a $200,000 company, wanted to double, I could do that with you pretty easily. But if you're at $1.5M and want to go to three, it's going to be a pretty tough jump. So this idea of ramping up and understanding your numbers and what your revenue numbers need to be per month, for the most part, we just need to manage our down line, right?
We're probably not going to be like, oh shoot, did we buy way too much copy paper this month? No, it's just not going to happen. Maybe in our marketing, maybe we hired too much staff. We need to, that's where planning comes into play. But the focus of what does it take to grow our revenue line and how to do it in a calculated way with a runway that makes sense. You can't say, Hey, I'm going to double in January because it's January 1st. No. Maybe we can bump up January 5%, then February 10%, and then on and on, and maybe by the end of December, we've [00:28:00] grown 30, 40%, maybe in two years we can double. That would be more sensible, right? But this idea of how are you going to just double because that sounds great, and I heard it on some podcast or some influencer or marketing company said, I can get you more leads, I promise.
Just throw a crap load of money at me. It just doesn't make sense. Because even if they could get you more leads and you could sell more jobs, I doubt you could get them done. Quite frankly, that whole strategy falls apart if you don't have a good plan.
Conclusion: Becoming a Better Business Owner
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Mark: I think the whole subject of what we've been talking about today is really what separates tradesmen or craftsmen from businessmen. You know this, the ability to understand your numbers, your job profitability, to know what those key performance indicators are, to understand a profit and loss sheet, and how we have to make sure that we're making money.
That's really what running a business is about. And I know a lot of our listeners are somewhere in that mix. Somewhere maybe between being real small and real big, but we're all still learning how to be responsible and [00:29:00] good businessmen. To, to run a profitable business rather than thinking like a painter and just thinking more work equals more money equals better life.
And it's not that simple.
Scott: Yeah, and if you don't know your numbers or you don't know how to read your numbers or you don't have a good structure, I'd love to talk to you. You can, schedule a call in the show notes because that's really the foundation of a sound business is your numbers. And if you don't know them or they're not structured correctly, that's the place you start.
That's our sweet spot. That's what we do. That's where we start, everybody.
Mark: And we know that there's a lot of listeners, that is their key pain point right there, because most of us hate the paperwork. We don't like accounting, we don't like the bookkeeping. It's not our strength. And we're desperately looking for somebody who can explain it to us and maybe help us through that.
And we know that C4C is that call.
Scott: We're glad to help if we can.
Mark: Appreciate everybody listening today. Thanks so much.
Scott: Thanks, Mark. Thanks for listening to Success Beyond the Brush. We hope you enjoyed today's episode. We dug [00:30:00] into why revenue alone doesn't tell the whole story, why true business health comes from understanding your financials, your job costing, and what you're really taking home as the owner. If you want help getting your books organized, dialing in your numbers or building a more predictable and profitable business, please visit Consulting4Contractors.com. That's Consulting4Contractors.com. Be sure to follow the show and share this episode with another contractor who might need to hear it. We'll see you again next time.