You should markup materials for your paint jobs

Marking up materials is a crucial part of proper financial management. Material markup is used to cover the time and expense of obtaining materials. The amount you should markup materials will depend on numerous factors, such as the time required, the frequency of material purchases, and the cost of the materials.

Some contractors view this as a ripoff. They think that customers will be upset if they are marking up materials. First, you should be including the material cost in your estimate. Second, you should be compensated for the time required to purchase the materials.

For most painting contractors, the markup should probably be 40% to 60%. You can, and should calculate what your markup should be. To do so, you need to know a few things: the average number of gallons purchased per trip to the paint store, your average cost per gallon, and the average time required for a purchase (including travel time).

Let’s say that your average purchase is 4 gallons, your average cost is $25 per gallon, and it takes 1 hour per trip. This means that your average purchase is $100. The time spent purchasing materials is lost production time, and the costs associated with that time must be recovered. If your labor rate is $40 per hour, and the trip takes 60 minutes, each trip deprives you of $40 of revenue. However, if you markup materials 40%, or $40 on your average purchase, you have now recovered that revenue.

Of course, your numbers will vary, and so it is important to plug in your actual numbers. I’d suggest looking at your purchases for a month to arrive at some reasonable averages.

You could also simply adjust your production rates to recover the trip time, or add a specific charge for picking up materials. But I think marking up materials is the easiest and most accurate method.

Pay yourself like an owner

Many painting contractors do not draw a regular and consistent salary. Such contractors generally pay themselves whatever is left after paying the bills. And when this occurs, the contractor really has a job, rather than a business.

An important step in owning a business, rather than a job, is drawing a regular and consistent salary. Mind you, there is nothing wrong with owning a job. But you should be honest to yourself regarding your situation.

A regular and consistent salary does several things:

  1. It provides for stability in the business’ expenses.
  2. It allows the business to generate a real profit, and thus have the funds to grow.
  3. It provides stability for the business owner in his personal finances. He knows what his income will be.
  4. It allows the business to operate like a business, and not simply an extension of the owner.

Operating like a business is not dependent on the size of the company. It does depend on the procedures and policies within the business and how they are implemented. It does depend on adopting sound business practices, which includes treating the owner as an owner.

The time to adopt and implement sound business practices is now. If, like many contractors, you believe that you will do so when your business gets larger, you might be in for a rude surprise. How will you grow your business without sound business practices? How will you manage that growth? How will you hire and train employees?

The time to implement sound business practices is now. The time to act like an owner is now. And you should pay yourself like an owner as well.

Five steps to starting a successful painting business: Knowing your numbers

There is perhaps no area of a painting business that is more important than finance and accounting. And yet, this is the one area that painting contractors are typically the weakest. If you don’t know your numbers, you can’t charge the right price. And if you don’t charge the right price, you won’t be in business for long.

I regularly hear painting contractors claim that they have no overhead. This means one of two things: They really don’t have a business, or they don’t know what they are talking about. Neither bodes well.

The contractor who makes such a claim typically explains that he has a home office (no rent), relies on word of mouth (no advertising), has no employees (no labor burden), etc. However, overhead consists of much more than the items listed.

Overhead consists of insurance, vehicle and equipment maintenance, depreciation on equipment, postage, office supplies, professional fees, training and consulting, owner’s salary, and much more. A contractor who truly has no overhead has no insurance, no equipment, does not pay himself a salary, and does not use a lawyer or accountant. Without insurance or equipment, can he really call himself a contractor?

Understanding your overhead is crucial to identifying the selling price you need. If you do not recover your overhead in your selling price, it will come out of your wallet. Which means, you will make far less money than you think you are.

Another common misunderstanding relates to profit and owner’s salary. Many believe that the two are synonymous. They are not. Owner’s salary is what you are paid for the investment, time, and effort you exert on behalf of your business. Profit is what is what is left over after paying all of your bills–including owner’s salary.

A further confusion relates to gross profit and net profit. Gross profit is what remains after paying job related expenses, such as labor and materials. Net profit is what remains after everything–including overhead–is paid.

These numbers can vary widely between companies, and therefore, it is imperative that you understand your numbers. If you don’t you cannot establish a profitable selling price. If you don’t you cannot estimate profitably. Tomorrow we will look at estimating.

A study in knowing your numbers

Numbers can tell us a lot about our paint contracting business. There are the obvious numbers like net profit, but many other numbers are very useful in planning and managing the business. Knowing your numbers allows you to make intelligent decisions about your business, rather than just guessing.

Let’s say you decide that you want to grow your business. You currently do $200,000 a year and want to grow to $500,000 in 3 years. That’s an increase of $100,000 per year.

For this illustration, we’ll assume the following:

  • Your closing rate is 33%
  • Your average sale is $3,000
  • Your average lead cost is $100

This means that for each job sold you need 3 leads, which will cost you $100 each in advertising. To increase your revenues by $100,000 you will need to sell 33.3 more jobs, which means 100 more leads, which means $10,000 more in advertising.

This gives you some pretty powerful information. You now know you need to beef up your advertising, and by how much. You can now develop a marketing plan with specific goals in mind, as well as benchmarks for measuring your progress. You can also look at different scenarios to determine which is the most feasible. Most significantly, rather than simply guess you can make a very informed projection.

For example, you might conclude that spending $10,000 more on advertising isn’t realistic, but $5,000 is. You can then choose to improve the other numbers, or scale back your growth plans. In either case you can make informed decisions.

A simple spreadsheet can be constructed to look at different scenarios. This will allow you to see how changing one number will impact the others. (See yesterday’s post if you would prefer to purchase a pre-programmed Excel spreadsheet.)

Of course, we can make the numbers do almost anything we want. I’ve made a million dollars on paper far more times than I can count. We must be realistic. The numbers are merely a tool—they help us plan our actions. And without actions, the numbers are just a fantasy.

Now let’s look at another option. Again, we are assuming the following:

  • You want to increase revenues by $100,000
  • Your closing rate is 33%
  • Your average sale is $3,000
  • Your average lead cost is $100

Which means you must sell 33.3 more jobs, generate 100 more leads, and spend $10,000 more on advertising

At these rates, you need to generate an additional 100 leads each year. But what if you could cut the cost per lead in half? You would now need to spend only $5,000 more per year. Of course, the issue becomes how to reduce the lead cost so dramatically.

The point here isn’t how to reduce the cost per lead, but the impact it will have on the advertising budget. Obviously, cutting the cost per lead in half is a pretty big task and probably not realistic. But a reduction of 10% to 20% isn’t so crazy. And when combined with other measures could significantly reduce the advertising budget.

A 10% reduction would drop the cost per lead to $90 and the total increase in advertising to $9,000. A 20% reduction would mean an increase of $8,000. Again, you must then develop a plan to realize these reductions.

A simple spreadsheet can be constructed to look at different scenarios. This will allow you to see how changing one number will impact the others. (Or you can purchase a pre-programmed Excel spreadsheet. See the introductory article of this series.)

A few simple ways to reduce the cost per lead are customer retention and referral programs. Both can be relatively inexpensive and generally result in a higher closing rate. Both can also increase the closing rate, which will further reduce the number of leads required.

The important thing is to know your numbers. When you know your numbers you can make very informed decisions about your business. When you know your numbers, business really can be fun.

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