How Ignoring Cash Flow Is Draining Profits
Jason Phillips: [00:00:00] Welcome to the Contractor Freedom Podcast. I'm your host, Jason Phillips. This show exists to help small business owners like you escape the tyranny of Contractor Freedom and enter the bliss of Contractor Freedom so you can have the Time, Money, and Freedom to Live Your Life With Purpose Beyond Your Business.
As a certified human behavior consultant in DISC personality styles and motivators, I'll be sharing with you skills for life, love, leadership, and business. I'll also be connecting you with experts that can help you scale your business and your life. So if you want to build the business and life of your dreams, then you are in the right place.
Let's go.
Jason Phillips: Hello, Contractors! Welcome to the show today.
We've got a very special show for you, and right here with me, we have Mr. Daniel Honan of Bookkeeping for Painters, and Daniel spoke at our Contractor Freedom Summit, and just delivered a, I'm just going to say, a pile of knowledge that I think was really eye [00:01:00] opening toward for so
many of the contractors.
Now,
daniel, he's, he is, by the way, he is a former business owner and military intelligence officer. I don't know if we might have to get into that or
not. He has an MBA, a degree in accounting and he used, he, he used to run, do cold calling. appointments, manage crews, run payroll, and with just all of that experience
he's created this back end for
painters to help save them time and money by just running an efficient
business and allowing you to focus, on the on the sales and production side.
Daniel,
I just want to say thank you so much. Welcome to the show, man and I'm
Glad you're glad you're here with us today. And so Let's get into it. But man, tell us a couple of things. Where are you right now? And what is, what is bookkeeping for painters and what made you start the company?
Daniel Honan: Yeah thanks Jason. I'm really happy to be here excited to be here. And right now I'm in Nicaragua that's where I'm, I work out of doing some advanced tax strategies we can get into maybe. But no I'm really passionate about helping painting business owners and closely related trades know their numbers and what they mean.
And I've been in [00:02:00] their shoes I've had to run a painting business and it, it was chaos, at least for me trying, that was my first business I ever ran and I did it in college and I definitely didn't have, a good grasp on my numbers and what they meant. So I definitely felt that pain of not knowing, how much money do I have?
Can I afford things? What are my margins? Am I doing good or not? I try to help folks get clarity in their business so they can make decisions to get their business to the next level. And then we also along with that, once they get nice and profitable, We try to help them solve the issue of taxes, because if you hit any level of success in your business, your biggest expense is going to be taxes, so we try to help them protect their profits through proactive tax
Jason Phillips: So when you say, Daniel, when you say, know your numbers, can we talk about what that means?
Cause there's so many, different types of numbers.
And, when you say know your numbers, what are you referring to?
Daniel Honan: Yeah, it's a great question, and it's a big one. There are many you could go with. I like to start with gross profit. [00:03:00] That's an important number. Maybe the most important. Because if you don't have your gross profit down, and just to define what that is, gross profit is your revenue, what you've produced in revenue, minus any direct costs, so that would be gross I'm sorry, any direct costs, so that would be direct labor, so painters on the job site, minus any direct materials, like paint or sundries, subtract that out, and what's left over is gross profit.
I also like to say, gross profit percentage, and that means gross profit divided by your revenue. That gives you a percentage. Typically what we see on average, the average painting business does 40 percent gross profit. Now, obviously, folks are probably not shooting to be average, and there's definitely folks that can do a lot better than that.
I definitely recommend doing better than that. But it helps to know that number, out the gate, knowing that number where do you stand on your gross profit, because that's going to tell you, give me an indication of what your overall profitability [00:04:00] is, because if you're hitting 40 percent gross profit, your profitability is probably not doing that great.
You're probably average profitability. And then that tells me about your pricing. Are you pricing? On target, tells me maybe a little bit about how efficient your crews are on the job. so It just gives a
lot of indications of of how you're doing. And a lot of folks starting out the, probably the biggest problem I see is the pricing.
And so gross profit gives me a good indicator of whether they have their
Jason Phillips: Yeah, so when, when you become a, let's just say you grow in your sophistication or your business skills,
Then you're going to start raising that pricing and you're going to, you're going to want, you're going to want to earn more ROI on that input, right? So you know, the and
just for clarity,
I know you and I know this, but for
our listeners when you speak, when we speak revenue, we're talking.
We're talking on finished product. We're not saying
contracted sales or we got the deposit. It's, hey, we finished the job
and we got paid on it. And that's
revenue. Just for clarification, and on [00:05:00] our end, of course we track contracted
sales. We've got all kinds of sales goals, but we call them confetti.
Because it's not real
until it's, until all promises, what we say is final. We say all promises have been delivered in both directions. And that means we
have delivered the project, we've also delivered the
touch up paint, or any other little loose ends, and then the customer has delivered their promise of final payment to us.
So when we say final at our company, it means something
Very specific. And that's what we track as as
revenue. So we, we track, we actually have a dual entry system, our CRM and our and our QuickBooks, but it also provides some checks and balances for us as well. And we actually like it that way. So after gross profit, what would, obviously, hey, I
know my, I know whether good or bad, I know my gross profit day in, day out, per job, per week, per month. What would you say is the next number that we should be aware of?
Daniel Honan: That, that would, I would say your discretionary earnings, or another way to say it is cash flow to owner, [00:06:00] basically how much money are you taking home as the business owner. Now that's obviously important because your business, should be helping you, live a great life and provide for your family and the greater community.
You need to be making money, not only for yourself, but also for the business so you can grow and hire new folks to help you out and all that good stuff. So discretionary earnings, cashflow to owner, basically whatever you're getting out of the business going to you the average penny business owner is making somewhere around 12 to 15%.
Discretionary earnings or cash flow to owner. And a common question I get is how much should I be making? That's the average, but how much should I actually be making? And I usually, ask them back the question of, okay what are you doing in your business? What roles do you perform in your business?
Because what roles you perform should, um, tell you, give me an idea of how much you should be making. tHe first one is you're probably the business owner, right? Right off the bat, you should be getting, you should aim to get 15 percent of revenue going to you as the business owner, um, assuming you're completely passive in the business.
If you have the business running, you have a team [00:07:00] running it, you should be getting 15% passively. Net income, basically. After everything is paid, your team's paid, all overhead and supplies and everything. What's left over is Now, most of us are probably still working in our businesses a lot of folks are still doing sales.
So if you're doing, if you're performing that sales role, you should be tacked on another, 8 to 10 percent going to you if you're selling everything. So that would, that 15 goes up to 25 percent discretionary earnings. And then, some folks might also be doing production management as well, maybe they're selling everything and they're also producing it.
So if that's the case, you tag on another 5 to 7 percent, so that gets us to 30 percent or so. And you can keep doing that, but basically, so if you're, to answer the question of how much money should I be making my business is basically what rules you perform, add up the percentages of revenue to get what your target discretionary earnings.
So that would be the next number that I would, would look at and flesh
Jason Phillips: One of the things that guys could do, guys and gals could do is [00:08:00] just start by breaking up their paycheck according to payroll item. Hey I sold this many projects, so this is my, okay, so I've got my salary line, I've got my sales commission and my project. My project based commission production management commission
or whatever pay and start breaking those out.
That way, when you hire that first person or that next make, create that new position, you're not having to figure that stuff out later. I think that would be a, a great way. Do you ever help people do that?
Daniel Honan: Yeah, absolutely. That's also the benefit of thinking of it this way because If you're, let's say you're doing 500k in revenue, you're probably doing sales, you're probably doing production management. And you're probably thinking, man, I could really use some help in a little bit. So how much should I pay my production manager I want to bring on?
So that kind of helps you understand is if you're breaking it out already, you know that your production manager should get five to 7 percent of whatever they produce. Then, and you're, like you said, breaking it out on your profit and loss already, you can see it. And your financial report, [00:09:00] so you have an idea of how to, how that's going to impact your pay, your discretionary earnings when you hire a new person.
You have to make room for them, obviously but that will help you, grow the business more, hopefully focused on marketing and sales in this case. So yes, that would definitely be useful and it's just a matter of then from there coming up with a compensation package for that production manager so that they're aligned with you.
The they're incentivized to, to do what you need them to
Jason Phillips: A lot of the contractors are at a place that, that I was at once where I was making really good money, but I was bankrupt on time.
And matter of fact, I was just speaking to a guy the other day and he was, he's doing right around half a million a year in revenue. And he said, Jason,
He said, this is the business I,
I prayed for. He said, but I can't get away from my phone. I'm constantly fielding calls from this guy and that crew. And he said it's driving me nuts, and so at some point, You've got to start buying your time back, right? And we can always make more money, but we can't make more time.
But
we can free up our time by delegating roles
and responsibilities to other people. [00:10:00] And, having your financial your books set
up in a way to
where it, you, it helps you make solid financial decisions. And, I, if we were to take a poll right now, How many contractors are measuring their cash flow by how much money is in their bank account?
And I'm just going to say far too many. And you
probably run into it every, all the time, Daniel.
But okay, so let me ask you this. If let's just say that, we've got some listeners and they're like, wow, I know I need this. I need. I need to know more about, about running books, about how to make sound financial decisions.
Is that something that you just make a phone call, set up a consultation, because you guys can get backend accountant access to QuickBooks. Can you do that?
Daniel Honan: yeah, absolutely. Yeah. It's in QuickBooks online. There's a way you can invite an accountant in, and we can take a look at, what we often do is diagnostic reviews, which is basically what's the status of your books right now? Some folks that come in and they're either doing the books themselves or have a family member or friend doing the books.
So want to make sure you're working off of good data. [00:11:00] And so we'll do a complimentary diagnostic to see, make sure you're,
Jason Phillips: Wow, guys, if you are not set up. iF you're using the default chart of accounts or you're not using QuickBooks at all you've got to, you've got to take Daniel up on this and get a complimentary what did you call it? A diagnosis? No. What'd you call it? diagnostic. Yeah.
Daniel Honan: Diagnostic we'll go through and just basically say, okay, this, this needs to be looked at like this, chart of account. It's, we'll often pull the balance sheet. And and go line by line and see, identify any issues and say, okay, here's how you can fix it.
And either yourself or obviously we can fix it for you as well, but just so you have a good idea
Jason Phillips: One, one thing that you really don't want to play with guys is you don't want to get behind on your payroll taxes. Because the IRS is not very merciful. So there's a lot of businesses that go, that really
go out of business, but you can't file bankruptcy and get off of the IRS.
Okay. You're going to owe that money. So if you don't have a PAC,
a payroll service, and I believe you guys do that as well, don't you, Daniel?
Daniel Honan: [00:12:00] We can run payroll for you as well. Yeah, absolutely. And you're completely right. Like the IRS is not someone you want to mess with. Unfortunately we do see a lot of not necessarily our clients, but, folks coming to us with issues and. We're just hearing about it. I think a couple weeks ago, I think a Connecticut painting contractor just got put in jail because he was not reporting, he was basically taking cash from customers and not reporting on his income tax return.
So he's pocketing cash and not reporting that. So that's tax fraud, which is thrown in a cage for that, unfortunately. That, yeah, payroll tax is a big one, for sure. It's, especially if you're running QuickBooks Online, yourself running that payroll yourself and paying those manually.
Yeah, it's easy to get behind on those, and then that's not fun to have the IRS put a lien on your bank account and start pulling money out of it because you owe them money. Definitely [00:13:00] something you don't want to mess with. Get his help as soon as possible when you're
Jason Phillips: So many business owners that I meet are admittedly terrible with details and they hate paperwork.
And so my, my suggestion is why not hire someone to do it and someone that loves it, someone who's good at it, someone you can depend on, and then you don't have to do that. They just need to give you the data so that you can make the right decisions.
So that's, I'm a huge, I'm a huge
proponent, and like I told the guys at the summit of Daniel, where were
where were you when I,
When I started my company and a lot, and someone chimes out from the audience, he wasn't born yet,
But it's, it's true that
in Business, we think we start out and we're
like, we can do it all, we're going to do it all this, we've got this bravado,
but we can't do everything all at the same time.
And being an expert at different things is just, you can't be an expert at everything. You can't cover all the bases.
Whether it's bookkeeping for painters, or someone else, you've gotta have your books be, you've gotta have them [00:14:00] be right. You've got to have things be done timely, and you need to be able to count on those reports if you're going to run your business.
Are you just going to run your business based on the balance in your checking account and decide what you're going to buy, whether it's the new truck, or the new spray rig, or take, throw a party, just based on what is in what's in your checking account? That is a terrible way.
to run your business. And if you're doing that, chances are you will, as long as you're doing that, you're going to be in contractor prison. And so someone like Daniel can help you with a financial plan to get you into contractor freedom and have a confidence. So many guys, they have this, when we start talking about. I say guys, I'm talking guys and gals, that you can just see their face, their countenance when you start talking about these type of things. You can tell it's an uncomfortable conversation. But when you have a trusted advisor and trusted books, then
you can make sound financial decisions and you can have confidence.
So I want you to think about wherever you're at
right now. And then what it could be like when you have complete confidence in knowing [00:15:00] and knowing what the
truth is, because all
progress starts with knowing the truth. Excuse me there. Daniel, let's talk about, this big nebulous
thing called overhead.
Tell us what overhead is and a little about it.
Daniel Honan: Yeah. Sure. Absolutely. we Talked about gross profit and direct costs or people often refer to a cost of goods sold or COGS, if you hear someone say COGS, it's direct job site costs. So basically anything that's not directly used on the job site, it's not your painters, it's not your paints or sundries, it's probably an overhead cost.
So this could be things like. Your marketing costs, your insurance, paying someone to do your books or your taxes, all those items that don't apply to a specific job that, but they help run the business overall. So that's your overhead and to continue the example we talked about, if you're doing 500, 000 if you have a 50 percent gross profit margin, maybe you're shooting for 50 percent and you are the sales in.
[00:16:00] In production manager and you're the business owner. So you're taking 30% home. So that leaves 20 percent left to, to pay your overhead costs. Most of those overhead costs are going to be, or I would say a good portion of them will be marketing. So usually folks are spending between five and 15%. of revenue towards getting more customers.
So if you have 20 percent left over, maybe you're spending half of that on marketing. Then the other half will be your accounting. Your accounting costs is usually one to 3% your automobile. You're the cost to to go out and for fuel and maintenance on, on the vehicles, that's going to be a percentage...
