Helping a Painting Franchise with 3 Accounting Red Flags

In this session, we dive into the three primary accounting red flags that can hinder the success of a painting business: improper pricing, team compensation errors, and poor cash management. You will learn why undercharging can be fatal for franchisees with royalty fees and how to build a strong sales process to attract high-quality clients. We also explore effective subcontractor management, including how to use production rate estimating tools and material budget incentives to lock in your profit margins. Finally, discover why 80% of businesses fail due to running out of cash and how you can use strategic payment terms and business credit lines to keep your cash flow healthy.


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painting business profit margins, painting subcontractor compensation, cash flow for painters, painting business red flags, painting contractor pricing strategy, subcontractor material budget, painting franchise profitability, business cash flow management.

This episode was originally recorded as a video for YouTube.

If you hear me say things like “in this video” or reference visuals, don’t worry —
the content still works perfectly in audio form.

And if you ever want to watch the video version, you can find it on the
 Profitable Painter YouTube channel.

https://www.youtube.com/@BookkeepingForPainters

This episode was originally recorded as a video for YouTube.

If you hear me say things like “in this video” or reference visuals, don’t worry —
the content still works perfectly in audio form.

And if you ever want to watch the video version, you can find it on the
 Profitable Painter YouTube channel.

https://www.youtube.com/@BookkeepingForPainters

Transcript

Three Red Flags That Block Profit

SPEAKER_01 0:20

Got your question. The question here is what are three primary red flags from an accounting perspective that could hinder your ability to succeed? Great question. Do you have any further context you want to provide to that question?

SPEAKER_00 0:36

Well, you as painters, uh, I see a lot of uh I see a few painters that are quite profitable and a lot of painters that are just making it as making a living. So I am interested in knowing what are some of them that are making it or doing outstanding, and what are some of them that are not? What are some of the real red flags that you see when you look at their operations?

SPEAKER_01 0:58

Absolutely. No great question. So if I were to limit it to three things, basically it's the policies and behaviors that they have in the business, which one number one is pricing. That's usually the number one thing that's really limiting how much a penny business owner can make. The second thing is compensation to the team. So potentially overcompensating or on sometimes undercompensating their team so that either they're cutting too much into their profits or they are undercompensating the team and then restricting how how well they can scale because they're not attracting the good enough talent. And then the third thing would be their cash policies, meaning how do they manage their cash in the business to ensure that the business has plenty of cash available to continue to invest in growth. So those would be the three things. But I would say for your particular situation, to go back to number one, which would be pricing. I would say since you are a franchisee, that would be probably the biggest thing for you is your ability to charge more money than other folks. And because you have that, those royalty fees that you have to cover off the top.

Pricing That Covers Real Costs

SPEAKER_01 2:15

So being able to charge more money. And so the way that you can usually charge more money is to have a really strong sales process and then to have a good offer. So those would be the two things that I would focus on to avoid the first misstep, which is undercharging, is to have a good sales process and a good offer so that you can charge higher and charge enough to cover all of your costs. And then the second one for your situation, compensation to the team, which is basically in your case, you're using a lot of subcontractors. So I would just make sure that you have a good production rate estimating tool, which you already do. You have a good production rest production rate estimating tool that's generating those budgeted hours. And then from there, you're providing a good market hourly rate for your subs. Usually it's somewhere around $30 to $40 per hour. And you're multiplying that $30 to $40 per hour times the budgeted hours for the job, and then giving that to the subcontractor with a work order, number hours, and then the price that you're gonna pay him and agreeing on that price up front so that it's set in stone. You kind of locked in your margins, you're pretty much how much you're gonna make on that job, and include in the subcontractor agreement that they're gonna get paid after you're paid. And that will help your cash flow, but also align their incentives to make sure the job is done in a way that the customer pays you in a timely fashion. So you get your money quicker and they get their money quicker. And then for the last one, which is a cash policy for your situation. Basically, the whole game with cash flow is to make sure you get paid fast and then you slow down payments to others. So when you're talking about getting paid from your customers, try to get paid as quickly as possible in the form of a deposit, progress payment, final payment, making sure that that cash is coming in quickly. And then you're slowing down payments to others. Example we already talked about, which is paying your sub after you're paid. So you get the money first, then you pay your sub. And also using your Sharon Williams credit line to charge account to charge materials on that credit line, and then wait 30, get that interest-free 30 days, pay down that with maybe maybe even a credit card, a business credit card to extend that that flow to another 30 days interest-free. Again, slowing down cash, going out of the business because the whole the whole thing with business is you gotta you can't run out of cash. If you run out of cash, you go out of business. There was like a US Bank study recently done that of the businesses that went out of business, 80% of them went out of business because they ran out of cash. So you really got to make sure you have really strong cash policies where you're getting paid fast and then slowing down payments to others.

SPEAKER_00 5:04

So you said 80%, right? 80% was uh cash running out of cash.

SPEAKER_01 5:09

That was US bank study basically of the businesses that went out of business, 80% of them went out of business because they ran out of cash. And that's why they say cash is king, because it literally, if you run out of cash in the business, you can't make payroll, nobody wants to work with you anymore. Right. If you can't pay your Sharon Williams bill, they're not gonna let you use the charge account anymore. And then you won't have a way to purchase materials, it makes it very difficult to continue operations when you don't have that cash. So you gotta prioritize cash flow. Right, right.

SPEAKER_00 5:44

So, Daniel, just quickly, I know we got 20 minutes. So jumping back to number one, where it says pricing of the jobs and all that. Because we because I'm a franchisee, what I'm encountering is most of the jobs that I'm seeing, which could make good money, would be the ones that are somebody selling their house because uh selling their house and they want to get it painted, or I had a rental property, I need to get it on the on on there, and I want to get it done. And instead of looking for real quality, they're looking for quick jobs, right? With uh a quick turnaround. And I tend to encounter that, and I seem to be doing those quotes, but they're much higher than the average guy with a coming and do the painting. How do you cut that debt?

SPEAKER_01 6:29

Great. So basically, you're a lot of the leads that you're getting are folks that are motivated because they want to sell their home, so they just want to get the house repainted, so it checks that block. And they're so in that case, it's really of who who are you serving? So nailing down specifically who is your

Choose Clients Who Value Quality

SPEAKER_01 6:49

ideal client avatar, which is who who specifically you should be able to picture in your mind who am I wanting to reach out to and provide services to. Now, the reason why this is important is because if you are attracting only people who want to quickly get their their house painted and then move on and and they don't really care about the quality as much or things like that, then maybe your offer won't really be compelling for them to charge to pay you more. Now, so you because you want to align your offer to your client avatar. So a common client avatar for folks that I work with, they're looking for homes that are wealthy individuals that that have a decent size home and they they have a lot of discretionary income, right? So getting some painting done is not an issue for them. So they're well off. And they're really looking to make their home look beautiful and for it to last a long time and for it to look great to impress their neighbors, right? So that might be like a client avatar for a lot of the painting businesses we work work with, and and then developing an offer that is compelling for that group. So in this case, an offer that might be compelling is what we talked about previously is an on-time on budget guarantee because maybe that client avatar, they've had bad experiences in the past with contractors not being not getting things done quickly so they get it in and out of their lives, and then also asking for more money after already agreeing upon a price.

SPEAKER_00 8:22

Right.

SPEAKER_01 8:23

So incorporating that and also having a warranty and that sort of thing that might be compelling. Now, with someone who's just trying to resell their home, having a warranty, having a risk reversal guarantee, probably not super compelling of an offer because they're gonna be gone in a few weeks. They just want to get this done and move on. So you'll you'll have to either ensure your marketing is calling to that client avatar, calling out that client avatar in your marketing, you're tracking them, and also qualifying as those leads come in, qualifying those leads to ensure that they are your client avatar and you're not wasting your time with with people who aren't gonna see the value in your offer. So that that's the the I guess the answer that is basically your offer can't be, it's not gonna be for everybody. And so you have to really find the group of people, maybe they're in certain neighborhoods in your area. How can you get in front of those certain neighborhoods to do work for them?

SPEAKER_00 9:25

I like the I like the piece that you mentioned about the cash, cash escape, cash policy, and and and and having available cash, uh good cash flow. So you think that it's better to work with, for example, for most of your business purchases stuff, work with a credit card so that it holds your cash in the business for longer and then just paid it

Cash Flow Rules That Keep You Alive

SPEAKER_00 9:45

back to the credit card at the end of the month, or should you continue to just uh work too directly to the bank to your bank account for the business?

SPEAKER_01 9:54

Right. So should should you have a business credit card or just work out of the cash in your your business? Right. I say liquidity or cash is super important, it's probably the most important thing in business. So having a business credit card is really great. Now, obviously, you don't want to abuse it, it's a tool. You can go, you can do the wrong thing with a credit card. You can max out a bunch of credit cards and and never pay them off and pay a bunch of interest and all that stuff. That's not good, obviously. But when you use it responsibly, where you use it to hold on to your cash a little bit longer to get paid from your customer and get 30 days interest free, like most credit cards, paying off the balance each month, that that would be a great way to have a business credit card where you're essentially not really accruing any interest, but you're using that 30-day float period can be a great, a great way to use a business credit card. Now, if you're in a situation where you don't have a lot of cash, but you do have debt, the first step would be to get enough cash to basically have like an emergency fund in the business. And that's usually at least two months of overhead cost as cash in the bank. So if you look at your overhead costs, if it's add them up for the month, maybe it's 10, 15, 20,000, whatever it is, multiply that by two. And then that's the amount of cash that you should have at any point in time minimum in the business. Now, obviously, you can have more than two months, maybe you can have three plus months, but months would be the minimum I'd recommend. Once you have that minimum in there, then you can tackle any credit card debt or any debt that you might have.

SPEAKER_00 11:34

Very good. Thank you. Good, very good tip. All right, so let's just quickly talk about compensation to the team. You mentioned that you can overcompensate or undercompensate, which would both have literally the same effect. Elaborate on that a little bit for me, see if I could I could understand it a little better.

SPEAKER_01 11:54

Sure. So overcompensation is what you

Pay Subs Right Without Bleeding Margin

SPEAKER_01 11:57

typically see, which would be you're you're you charge your customer, let's say uh you have a $10,000 project, and you pay your sub $5,000, and then on top of that, you pay for $1,500 in materials. So $15 for for materials and then $50 to your sub. Now you have a 35% gross profit. That's pretty pretty slim gross profit. You're probably not going to make any money. So on the conversely, if you would have had that same project and paid your sub $3,000 and had a $1,500 for materials, then your gross profit is $5,000, which is a lot more manageable. So in effect, you've just making sure you're not overcompensating the subcontractor, making sure you're doing the right math right for the markup to your customers, but also the payment to the sub. I've just seen a lot of mistakes being made where literally just the math was done wrong on paying the subcontractor, and they just paid them more than they should have. So just being careful with that. It's an easy mistake to make. And your sub's not going to complain about it. So it's it might be hard to catch unless you're looking at your financials each month. So, and then just another tip on that regard is when you're paying your sub, one thing that you can do to incentivize them to be good stewards of the materials is to incorporate the material budget into their pay. And so, for example, let's say you have that $10,000 project and you say, Hey, subcontractor, I will pay you $5,000 for this job minus the costs of materials. Whatever I have to spend on materials comes out of that $5,000. So if I have to spend $1,500 on materials, you get $3,500. If I have to spend $1,000 on materials, you get $4,000. So what that does is it now they are more in control of the material budget, which is good because for paint, it's easy to overuse it where you or or misuse it. Or you don't, if you don't take care of the paint, you leave paint cans open, you don't strip out the paint out of the brushes and the rollers at the end of the day, that sort of thing, you can waste a lot of paint. So if the sub isn't paying for the paint, they probably don't really care about saving that material. However, if you tie that into their budget of how much they're going to get paid, now they'll start to care a little bit more. If they can save a couple hundred dollars on materials by just being efficient and doing the needed steps at the end of the day to make sure they're taking care of that paint, then that's money in their pocket. And it so it helps helps them and it also helps you because obviously lower material spend for you will look better on your margins. So overcompensation to your to your subs. Now let's talk about undercompensation. So this would be underc under undercompensating your team members will make it hard to get good team members because people that are good at their job usually want to get paid a good rate, right? So for subcontractors, if if you're only offering $30 per hour where a lot of they could get paid somewhere else for $40 an hour, it's gonna be hard to attract good subcontractors with that rate. So now you're hurting yourself where you're you're not able to attract the the best talent to work for you because you're only offering a lower, a lower rate. You might be able to get somebody to work at that rate, but they might not be the best. And so that under underpaying for talent can also hurt you, where you'll likely have more issues with having to manage people because they they're just not of high quality or they don't work very well, whatever the case is. Whereas if you have an an a rock star a player and you're you're compensating them appropriately, it makes your life a lot easier. And so undercompensating can can hurt just as much as overcompensating in some cases. So uh real quick, I know we only have a few minutes more, but so so tell me this.

SPEAKER_00 15:59

We I came across an article that I read on on that topic, and it says there were two options. One was doing, for example, 50% of the job to the uh contractor, to the subcontractor, and they pay for materials, and then one was doing 35% of the job, 35% of the job

Tie Material Use To Sub Pay

SPEAKER_00 16:19

to the contractor, and you pay for all materials. Each one of them usually come back up to about 50% of the job. Which one would you recommend to work better in in the painting environment as you have seen in your experience?

SPEAKER_01 16:34

I I would I would say option C, which you mentioned, which is the one that I recommended, which would be you instead of the sub paying for the materials, because if you have the sub pay for the materials, you might have some sort of agreement. Well, you almost certainly do have an agreement with your your customer about what type of product to use, emerald or whatever. And and the sub could could buy it and do the right thing, but and to to really ensure that you you are using the right products, I think it's best for you to actually purchase those or have oversight over that. So, but I also do like the fact that when the sub purchases them, it comes out of their budget, right? So it's combining those two things together where you're still purchasing it, but you're telling the sub up front, hey, I have 5,000 budgeted, I'm gonna purchase the materials, but I'm gonna job cost the materials. And if you if you are more efficient with it, I'll give you the difference with the example I said $5,000 budgeted. If you only use $1,000 of materials, you get $4,000, which is the balance. But if you use $1,500, you only get $3,500. So it's combining those two options together into a third option where you're still purchasing the materials, but it's also coming out of the subcontractor budget because your job costing that that information and determining how efficient they were with that that materials budget and then rewarding them accordingly if they did were efficient with that material budget.

SPEAKER_00 18:00

I see. Yeah, I I I there's one section that I'd had to where it says you can use your account to have the all the all the materials go to your account under your PO, and then you just minus the amount from that so that the subcontractor gets paid. But that's interesting, very good. Yep, exactly. Cool. Thank you. All right, was that helpful? Oh, all of it was excellent. There's never there's never enough time, man. It's never enough time.

SPEAKER_01 18:26

Awesome. Well, I I really I appreciate your time. Oh, thank you, sir.

SPEAKER_00 18:32

Thank you.

SPEAKER_01 18:33

Thank you.