Profitable Painter Podcast
Profitable Painter Podcast is a rich resource for anyone interested in starting, running, and scaling a professional painting business, offering valuable insights, strategies, and interviews with industry leaders. Through case studies and in-depth discussions, we deliver a vivid picture of the painting industry, with a disclaimer that any financial or tax information is general and not a substitute for professional advice.
Profitable Painter Podcast
Commercial Painting: Financial Survival Guide
Daniel, a CPA who works exclusively with painting businesses, and Richard Dunton, an enrolled agent, discuss the financial considerations for commercial painting as a way to smooth out seasonal dips in business. They explore the differences between direct B2B commercial relationships versus working under a general contractor, highlighting the challenges and opportunities of each approach.
• Two types of commercial painting: direct B2B relationships and working under general contractors
• Cash flow challenges in commercial painting compared to residential work
• The importance of managing accounts receivable and following up on payments
• Understanding AIA invoicing formats and progress payment schedules
• Special payroll requirements for government projects including prevailing wage certified payroll
• Using accrual basis accounting to properly match revenue with expenses
• The importance of reviewing both profit/loss statements and statements of cash flows
• Setting up financing and lines of credit before you actually need them
• Building relationships with banks when your financials look strongest
If you have any questions about this episode or ideas for future episodes, join the Facebook group "Grow Your Painting Business" - request access and we'll get you in to join the conversation.
This is Daniel, the founder of Bookkeeping for Painters. I'm a CPA that works exclusively with painting businesses and today I am here with Richard Dunton, enrolled agent. How's it going, Richard?
Speaker 2:It's going great, daniel. We're recording this on. I think it's the first official day of spring, so things are starting to warm up. We're heading into better weather, which is great for our listeners too, because so many painting businesses, especially in colder weather areas, are cyclical. The winters are rough, and so folks are telling me that their phones are ringing more, they're booking more jobs and they're looking to bring on more projects, so it's a good time.
Speaker 1:Yes, and a lot of. Especially if you're a residential painting contractor, one of the things that often comes up is like trying to make your calendar less seasonal, adding in some commercial painting, and that can sometimes kind of smooth out those dips that you often see from residential. And so we're going to do an episode today just on the financial considerations for commercial painting, because it's a lot different with commercial painting compared to residential. There's a lot of financial things that you need to keep in mind and be ready for before diving into commercial painting.
Speaker 2:Keep in mind and be ready for before diving into commercial painting. Yeah, so you're saying it can definitely fill that need, but we want to be prepared because it might not be as straightforward as it seems.
Speaker 1:Yes, sir, yes sir. So the way I think about commercial painting is there's kind of two different types, at least in my mind. There's the B2B type, where you're you're as a painting business, you're going out and engaging another entity, another organization, so maybe another business like you're going out and painting an ihop, like I did this when I was running a painting business, we went and got some commercial work, got and started painting an ihop orOP or a university or maybe a government agency directly and you had that relationship, you own that relationship. So that's the one type of commercial painting. The other type is general. You're working under a general contractor doing commercial work, so you're like a subcontractor and you're sort of a cog in the wheel working under the general contractor.
Speaker 1:And so the, from my perspective, the more preferable one is the direct relationship, because then you have more control over the payment schedule and it's it's easy, usually a little bit easier on the cash flow, which we'll cover here in a second. But those are the two different types. The more preferable one is when you own the relationship, because you have more control. And then you have that other type which is GC, working under a general contractor, which can be okay if you have a really good relationship with a general contractor, it's just usually the payment schedules are not great. I've heard in some cases they are okay. It kind of depends on who you're working for. But just speaking in generalities, usually B2B, that direct relationship is better.
Speaker 2:Yeah, usually when you're working for a general contractor, you're, like you said, a small part of a larger project, so you're just not going to be able to, you know, control things as much as if you're working directly with the business owner. So, you know, keeping in mind that you might have to work around other trades or work at, you know, weird hours, like you said, accept payments on their schedule. Weird hours, like you said, accept payments on their schedule. There might be some retainage or I don't want to get into it, we're going to cover this later on, right? But yeah, they both can be good, but I think either one, whether you're doing B2B or GC work, you're going to require strong financial systems to make sure that you don't run out of money. Strong financial systems to make sure that you don't run out of money. You're keeping track of whether this is actually profitable or not, and just you know. If you plan it, you should be okay. But if you go in without a plan and without understanding what the challenges are going to be, that could be rough.
Speaker 1:Yes, yeah, and the first item is you mentioned already is cash flow.
Speaker 1:This is kind of the biggest financial consideration.
Speaker 1:Is that in, for the most part, commercial painting is a lot harder on your cash flow because on the residential side oftentimes you can go book a job and then you can get up to 50% down payment for the project, which oftentimes covers your labor and materials, and then you do the job and get the final payment and so that the cash flow situation is pretty good for residential.
Speaker 1:However, on the commercial side, oftentimes you might not get any money down. You have to start working, paying people, payroll, paying for the materials, and you haven't got paid at all and you're not getting paid for another 30 days, 60 days, 90 days, and then they pay you but then they withhold money, like you said, the retainage at the end of the project for six months or a year or something crazy like that. So the and then that retainage you know it could be 10% or or maybe more, and that might just be your profit, basically that they hold on to. So it's it can be very difficult from a cashflow perspective. So you have to make sure, really, that you have some either some capital like that you've saved up for from maybe your residential side. You have a good amount of capital set aside and your bank account saved up, or you you line up some, some financing or some line of credit to be prepared for those times where you're having to pay payroll and not get paid from your commercial work.
Speaker 2:Yeah, depending on the circumstances, you might be able to break up your invoicing a little bit. This is probably going to be easier if you're doing B2B and maybe get some progress payments, especially on the larger jobs. But yeah, it's definitely going to be harder than with residential. And it's such a shame too, because I think we've all seen people who are super busy. They're working like 60, 70 hours a week, but they're also broke and we're like how does that happen? How do you work so hard and not have money? It's due to cash flow. Cash is king. It's the lifeblood of your business and you may be making money, but if you're not receiving cash to keep things going, you will go out of business. So, carefully monitoring that, understanding what your needs are, having a plan in place, like you mentioned, daniel, whether it may be lines of credit or getting progress payments or whatever you need to do to make sure that you can keep the lights on is super important. Is super important, yeah.
Speaker 1:So the other key component here, before getting into commercial, is that you need to be familiar with what accounts receivable is and how you're going to manage the accounts receivable. With commercial painting. So accounts receivable is just a fancy way of saying people owe you money. You got to have a way to track who owes you money and you need to have a system for following up with those people. In this case, you know these commercial painting clients, whether it's a GC or a business or government, whatever it is. So for accounts receivable, in some cases you'll actually have to set, have a certain format of your invoice to send to them. Like, if you work for a GC, they might require you to use a certain format so that they can properly process your payment. So you have to. In some cases they require AIA, billing or invoicing, and that's just a specified format that you'll have to use and be familiar with to submit to to get paid, um, you know. So that would be something to be aware of. I'm familiar with noify. Noify does aia invoicing um, it's a. It's a software that you can develop those aia invoices and it syncs with quickbooks online. So if you're using quickBooks Online, quickbooks Online does not have AIA invoicing in there, but you can stack it with NOAAFI so that might be helpful.
Speaker 1:In other cases, if you're just doing direct relationships with businesses, they're not going to require AIA. That might be something if you're working with a GC. But even in the cases where you're just working with businesses, you might have a payment schedule that's like a little bit upfront. And then the progress payment, especially if, like you mentioned, like if it's a longer project, it's going to take, you know, several weeks or months. You know you want to make sure those the contract has some progress payments in there.
Speaker 1:The more frequent and the more the larger the amounts is better for you because that again helps your cash flow, because cash flow is all about getting paid faster and slowing down payments to others.
Speaker 1:So if you can get paid faster, that's better on your cash flow. But you get to have that process on creating those invoices and then not just sending an email with an invoice and saying, okay, my job is done, but also having someone yourself or someone in the office to follow up and like say, hey, I just want to make sure you received our invoice. You know this is due per the contract, it's due today. So, uh, be great if you could go ahead and pay that, because getting paid like a day or two early or a day or two, you know, within a day or two when the invoice was submitted, that can be the difference between making payroll and not making payroll you may be scheduled for a progress payment but if you don't have enough of the job done to have earned that payment for example, you're going to get a progress payment when 30% is complete.
Speaker 2:If you only got 25% complete, the GC is going to resist making that payment. So it's getting the job done plus following up on the billing. And I'm glad you mentioned that, daniel, because I think a lot of commercial painting businesses miss out on like retainage, because it happened a long time ago. We've moved on and we forget that. Maybe you know this GC owes us five or 10% and we they're not going to show up at your door and offer it to you. I mean, I have family members who are general contractors so I can talk a little dirty about them, but you're going to have to take the initiative and be on them and if somebody owes you retainers, don't let that go. That's money you've earned. Follow up on it.
Speaker 1:Yeah, the saying is, the squeaky wheel gets the oil. Yeah, yeah, it's definitely true in commercial painting and making sure you're getting paid. It's not just about sending that invoice. You gotta fall have a process for following up and ensuring that gets paid in a timely manner. So accounts receivable got to have that process, got to have that the format, the way to send it out, the way to follow up with it.
Speaker 1:The next one to consider is your payroll. If you do certain government work certain, so this is kind of going into government. Certain government work certain, so this is kind of going into government. Some sometimes when folks a commercial, they also are encompassing like government contracts as well. So just a note for payroll if you're working on certain government projects, a lot of them do require prevailing wage payroll, certified payroll, and so that is a a beast that not a lot of payroll providers do. So you got to be really careful on who your payroll provider is to make sure that they actually can do prevailing wage certified payroll. And again, this is oftentimes a requirement for government projects. They want to make sure that you're paying a certain amount of money to your workers and they require a certain format so that they can verify that you paid that wage in a certified payroll format.
Speaker 2:It's not just paying the prevailing wage, it's also submitting the reports to the government so that they can verify. So that's where working with a company like ADP or maybe one of the bigger payroll companies that provide the service is important. You can't, I mean you may pay them very well, but you also have to prove it. What's the same like Pixar? It didn't happen. Is it the Davis-Bacon Act? I think it is. That requires all this. So the government's involved. There's going to be red tape, there's going to be regulations.
Speaker 1:So just one more thing to think about when you work on those public projects yeah, Another big one, another financial consideration that's really important is using the accrual basis for your books. So when you're doing commercial, oftentimes it's a longer term projects, so they're spanning months in many cases, and so the problem is, if you're just doing cash basis financials meaning that when you receive money from customers you book it to revenue and when you pay your team or for materials you book it as an expense the problem with that that's called cash basis accounting. When you're just cashing cash out, you record it when the cash transaction happens. The problem with that and that can be fine for residential that can work fine for residential because they're short-term projects Usually when you're getting paid from the customer and residential, you did the work in that same month. The problem with commercial is that you're doing work for months and then not getting paid until months later in some cases, and so it's called the matching principle.
Speaker 1:In accounting, your income's in another period than where you're expenses on the project are, and so when you look at your profit and loss, you might see a month where it's just like a bunch of expenses but no income, or a bunch of income and no expenses. So you want to have that matching up and that's where the accrual basis comes in. It's using that matching principle to say, okay, if we did work in a month, we need to make sure there's revenue, even though we didn't receive the cash for it. We want to record the revenue by creating an invoice and record that revenue in that month so that we're matching up the income of what we produced but maybe not got paid for yet. We produced it, didn't get paid for it, but we need to recognize it as produced income or revenue. And then so it matches up the labor that we did.
Speaker 1:And so so our financials make sense when we're looking at them. And this is really key for commercial, because oftentimes, like we were talking about, you know it's going to be hard on your cashflow and so you want to make sure that you're being profitable, because there are cases where you are being profitable but it doesn't feel like it because you don't have any cash. And so the financials will be if you're setting them up correctly and doing that accrual basis. They'll be able to tell you one way or another if you're being profitable and just having cash flow issues because of the payment schedules, or are you not being profitable and you also are struggling with cash. It will be able to answer that question for you. But again you get to have that accrual basis set up and doing that matching principle that I mentioned.
Speaker 2:Yeah, and it's hard because this is not intuitive. You know we have an emotional reaction when we see the cash in our bank account go down. That tells us you know whether things are good or bad, but with accrual like, we can't rely on that. So that's where we need to. We need to have these reports reports, specifically, the profit and loss report, or sometimes called the income statement, is going to help us know whether our income, the revenue we brought in, is greater than our expenses and whether we're actually making money.
Speaker 2:And then the other report that we would like to focus on is the statement of cash flows, which is one that a lot of people haven't heard of. It kind of gets ignored in the big three financial statements, but that's how we're going to know whether we're going to have enough cash to keep the business going Because, like we mentioned earlier, you can be very, very profitable and all of that revenue can be sitting in accounts, receivable and you haven't picked it up yet, and you can run out of cash in a profitable business, and that would be a very uh, that would be a shame, that'd be a terrible thing. Yeah, um, so having a good accountant who can help you understand these reports and see the health of your business is going to be important, because it's not something that you're going to be able to like. Just kind of look at your accounts and get a feel for, um, you're going to need a little bit higher end um bookkeeping and accounting there.
Speaker 1:Yeah, I'm glad you brought up the statement of cash flows. This is super important for commercial uh painting companies. Because as a commercial painting company, if you're on the accrual basis, you're looking at your profit and loss, You're like, uh, okay, my profit and loss on the accrual basis is telling me that I was profitable this month, but I have no cash. So what happened? The answer to that question is on your statement of cash flows. So the statement of cash flows will say, okay, here's your net income and then let's do all the adjustments for cash. Where did the cash go?
Speaker 1:And it tells you, okay, oh, we didn't collect any of our invoices. We invoice people but we didn't get any money from those invoices because nobody paid the invoices. So that was a big chunk of cash that we didn't get. Maybe we paid a bunch of payroll, we paid off some credit cards. It's going to tell you line by line where your cash went and why you may have net income on your profit and loss on the accrual basis but you don't have any cash is because it will, line by line, show you where it went.
Speaker 2:Yeah, the credit cards are a big one because we incur those expenses on the credit card and we show those expenses in that month. But we eventually have to pay off that credit card and that's where the cash comes in. So you can have a month with low expense, but if you're paying off your credit cards from things you bought months ago, that can strain your cash. Yep.
Speaker 1:All right.
Speaker 2:Go ahead. Yep All right, Go ahead.
Speaker 1:So if you are strained on cash, you know we tend to look to what financing lines of credit, loans, things that can serve as a stopgap method while we're trying to collect that AR that's been out there. Get those retainage payments that we're waiting for. Yeah, and this is the last item on the list, but it's really probably the first thing you should consider to start working on, because you want to ask the bank for financing before you really need it. So if you're a residential painting contractor right now and your cash flow is pretty good, you have healthy financials. Now would be a great time to go ahead and line up a line of credit and financing so that you can start exploring commercial painting. Get it lined up ahead of time, before you need it, because you want to ask the bank for money when you have money, which is counterintuitive, but they want to invest or, you know, give their money to, to someone who they feel can actually pay it back.
Speaker 2:So yeah, the bank doesn't care how many hours you work a week, right, like like, you can walk and be like, hey, man, I am, I am swamped, I am busy, I'm exhausted, I'm working seven days a week and they're like, cool, show us your profit and loss. They're bankers, right? So you want to have, like you were saying, daniel, you want to make sure that you have a good, clean set of books, that you are recording everything, that you've got timely filed tax returns that accurately reflect what your business is doing. These are the things that the bankers really care about and that are going to allow them to have enough trust in you to repay the loan so that they're actually going to give you that line of credit. So, like you're saying, preparation is key here. Get that set up before you need it. You do not want to walk in and show the last three months of yeah, we've been losing money these last three months and that's why I need a loan. They're going to tell you to turn around and walk out the door.
Speaker 1:Yeah, yes. So those are a few financial considerations for if you're, if you're considering commercial painting, those are some things you definitely should look at before jumping in, because those are some big pain points that we've seen a lot of folks struggle with. So hopefully that that helps and it's definitely possible. There's a lot, plenty of painting businesses that do just commercial or a mix of residential commercial and make it work. You just need to be on top of those issues.
Speaker 2:Yeah, and if you are going to, if you're going to take on a commercial, just a few quick recap tips. I'd say definitely reviewing your accounts receivable. You know we do a lot of. We do monthly financial planning and analysis with our clients where we are looking at their accounts receivable. We do monthly financial planning and analysis with our clients where we are looking at their accounts receivable, we are looking at the statement of cash flows, we are helping them understand where their business is. Additionally, you're going to want to make sure that you have your tech stack right. So if you need NOAA-FI to be able to do those AIA invoices or a payroll company that can do certified payroll, that you've got that in place. And then, lastly, I'd say, make sure you have a good relationship with your local bank. Getting that line of credit set up before you need the money, before you're in that cash crunch, is also gonna be very important.
Speaker 1:Awesome, cool. Well, if you have any questions about this episode or have some ideas for future episodes, love to hear from you. If you go to Facebook and type in grow your painting business, go ahead and send us an invite or, I'm sorry, request access. We'll grant you access. Love to hear your thoughts in the in the group and, with that said, we will talk to you next week.
