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 taxJason 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 theirJason 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 fleshJason 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...