Why are You Losing Money?

If your business was losing money, would you simply conclude that you need to raise prices and do so by some arbitrary amount? Or, would you sit down, analyze your finances, and determine a specific cause for the loss? In other words, would you just take a wild guess or would you approach the problem scientifically? Unfortunately, many contractors take the guessing route.

Certainly, not charging enough is a primary cause for contractors to lose money. But that fact alone does not tell us why a contractor isn’t charging enough. Perhaps he doesn’t know his true costs and isn’t recovering his overhead and labor burden. Perhaps jobs take longer than he expects. Perhaps it’s a combination. But he won’t know if he simply guesses.

While guessing may be fun at a carnival, it seldom is an effective business strategy. This is true whether you are trying to determine what you should charge for labor or whether you are trying to determine how long a job will take. To make accurate decisions, you must approach each aspect of your business scientifically, and this is particularly true of estimating.

Fundamentally, estimating comes down to identifying the time and materials required to complete a particular job. But we must do this before we ever open a can of paint. We have a choice when we are estimating a job: either we can guess, or we can approach it scientifically.

If you are estimating a simple job, such as a single bedroom, you might be able to accurately guess how long it will take. There are few substrates and other issues to consider. A small error won’t be financially catastrophic. But what happens when you are estimating a complete repaint of a 3,000 square foot house? The number of substrates, preparation and access issues, and other considerations rises significantly. A few errors could have a significant financial impact.

You wouldn’t paint this house in one fell swoop. You would approach it in a systematic manner—remove or cover furniture, prep the surfaces, paint, and then put things back. You would follow a series of steps to complete the job. The same approach should be used for estimating.

All things being equal, a painter should complete a specific task in the same amount of time, whether he is working at Mr. Brown’s or working at Mrs. Green’s house. If you know that time, then estimating becomes nothing more than a process of identifying which tasks must be completed and how much of that task is involved.

Of course, all things are seldom equal. Preparation will vary and access will be different. Surface textures will vary and other variables will come into consideration. But we can attach numbers to these variables, just as we can count the number of doors or windows.

Just as we attach a number of our financial activities—we identify how much of each expense occurs—we can attach a number to our production activities. By doing so, our estimating can become as scientific and objective as our finances.

In this regard, I am proud to announce Estimating Paint Jobs.com, a new project dedicated to helping contractors develop an estimating system.

Do you know what to charge?

It is not uncommon for a painting contractor to state that he wants to make $X per day. Let’s say $200 a day, which is $25 per hour for an 8-hour day. He believes that if he charges the customer $25 per hour, all will be fine and dandy.

I hate to be the one to spoil the fun, but it won’t work out that way. If he wants to make $25 an hour, he will likely need to be charging the customer $45 to $50 an hour.

If the only cost associated with a paint contracting company were labor, the above might work. But there are many other costs incurred by a business—insurance, advertising, depreciation, office supplies, etc. If these costs are not built into the selling price they will ultimately come out of the owner’s pocket.

Let’s say a contractor decides that he will charge $25 an hour for a particular job. He gets the job and everything goes smoothly. He winds up making his $25 an hour. And then what? He doesn’t have money for advertising—it’s not in his price. He doesn’t have money to pay his insurance (if he has it)—it wasn’t in his price. He doesn’t have money to maintain his equipment—it wasn’t in his price. The only thing in his price was his wages.

When these other expenses come due—and they will sooner or later—the money must come out of his pocket. Slowly his $25 an hour is lowered as he pays these expenses.

Some may say—but I’m only going to do this to get my business going. But how will you get it going if you don’t have money for advertising, insurance, etc.? How will you build your business if you are simply working for wages? The fact is, you won’t.

Your wages are only one part of the pricing puzzle. If you don’t understand that, and price your services accordingly, you are in for a very rude surprise. What you want to make, and what you actually make will be very different numbers indeed.

Wanna buy a crate of roller covers?

I used to regularly get a phone call that would go something like this:

“Hey Brian, how’s the weather there in Houston.”

“Fine,” I would say, even if we are in the middle of a hurricane. (I sometimes like to be sarcastic.)

“Recognize the voice?”

“Yes. I didn’t think that you were getting out for another six months.”

“What?”

“Never mind. I’m not interested in your crate of roller covers, your pallet of drop clothes, or whatever other garbage you are hawking today.”

Click.

At first these boiler room salesmen amused me. They all have the same spiel. Start with some comment about the weather, followed with “recognize the voice?” Initially my reaction was probably typical. I would say that I didn’t, and they would they feign being insulted by my amnesia.

But I can be pretty sharp sometimes, and after about 50 of these calls I caught on. These guys get in a boat load of some painting product and then they start calling every painting contractor in the country trying to unload them. At first I was tempted. Who wouldn’t like to buy 1,000 roller covers for 50 cents each? And I wouldn’t even have to pay for them for 90 days. What a deal!

I have to assume that they find enough contractors who need a lifetime supply of roller covers to make it worth their while. And when I find out who these contractors are I’m going to make them a real sweet offer on some swamp land.

The why determines the what

Sometimes I see contractors get so obsessed with a number that they lose sight of what the number represents. I’ve seen this happen in regard to a variety of numbers, such as labor rate and what percentage of revenues to spend on advertising.

While it is important to know the numbers, it is even more important to understand what the number means. The number tells you what happened, but it doesn’t tell you why it happened. And the “why” determines “what” that number really means.

A multitude of variables can impact any particular number. If you don’t understand the impact of those variables, then the number isn’t going to do you much good.

For example, a recent thread on PaintTalk.com addressed the percentage of the job spent on materials. The numbers offered varied considerably, depending on the materials used, the efficiency of the painter, the application methods, the labor rate charged, etc. Each of these are unique to a company and thus will impact the percentage spent on materials.

If a contractor arbitrarily seizes some number and sets it as his goal, he will likely ignore the impact of these variables. The result could easily be decisions that are very harmful to the business.

My numbers have nothing to do with your numbers. Certainly you can learn from my numbers, but only if you understand the reasons that give rise to them. Only then can you make decisions about your business.

For example, I spend less than 3% of my revenues on marketing. If you tried to duplicate this, you would likely fall way short of the leads you need. But if you understand why I spend so little, then you might be able to reach that number.

Your business is unique. So are your numbers.

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