Do you have the insight into your painting business to make targeted improvements to make more money? With the right insight into your business, you can almost instantly improve your financial position.
In order to increase the profitability, efficiency, and the bottom-line of your painting business, you must first understand your painting business. Key performance indicators can help you accomplish this. Key performance indicators are metrics used to evaluate facets of your business that are critical for its success. Once you understand your business, you can make decisions to make targeted improvements and track results using your key performance indicators.
3 key performance indicators to Track in Your Painting Business
1. Gross Profit Margin. Gross Profit Margin is the proportion of revenue left after deducting direct costs. Tracking gross profit margin allows you to determine if your direct costs (labor and materials) are staying close to what you estimated initially.
For example, you complete a residential house paint for $3,000. You spent $1,000 on labor and $800 on materials. Your total direct costs for the job are $1,600 ($1,000 + $800) and the remaining revenue after directs costs is $1,200 ($3,000 - $1,800). Thus, your gross profit margin is 40% ($1,200 / $3,000).
The average gross profit margin for a US-based painting business with revenue between $500,000 to $1 million is ~46%. Going back to the example, a 40% gross profit margin is low, indicating you need to either raise prices, estimate more accurately, or control job and material costs more effectively. A reasonable target gross profit margin of 50% can ensure your business is effectively estimating jobs and managing labor and materials costs.
2. Quick Ratio. The quick ratio allows you to gauge how liquid your business is, compared to what you owe. In other words, the quick ratio gives you an idea of how much cash you have available to pay upcoming expenses. Understanding how much cash your business has is critical to ensuring your business’s ongoing viability.
For example, your business has $25,000 in the company bank account and $5,000 in accounts receivable (money due to you from customers) for a total of $30,000 in liquid assets. In addition, you have manager salaries, advertising, rent, insurance, and office expenses of $20,000 due in the next 12 months (AKA: current liabilities). Your quick ratio, in this case, would be 1.5 ($30,000 / $20,000). In other words, for every $1.00 you owe in the next 12 months, you have $1.50 to cover.
The average quick ratio for a US-based painting business with revenue between $500,000 to $1 million is ~1.3. Going back to the example, a 1.5 quick ratio might indicate your business has a little bit too much cash on hand (not a bad problem to have). In this case, it might make sense to invest in equipment or employees to put money back into the business (or take an owner distribution).
3. Profitability Ratio. The profitability ratio measures the proportion of revenue left after deducting all expenses (not including tax expense). Whereas the gross profit margin looks only at revenue after direct costs, the profitability ratio looks at revenue after all expenses. This ratio, when coupled, with your gross profit margin gives you a picture of how much your overhead costs are and how profitable your business is.
The average profitability ratio for a US-based painting business with revenue between $500,000 to $1 million is ~7%. Thus, a reasonable profitability ratio target for your painting business might be 10%.
How To Track Key Performance Indicators
I recommend using Fathom reporting to track key performance indicators. Fathom integrates with Quickbooks Online and Xero bookkeeping software, making it easy to get instant insights into your business. With Fathom, you can set key performance indicators, targets, and alerts to keep you informed about your business. Plus, Fathom has intuitive and aesthetically pleasing graphs to display the data.
In order to make these key performance indicators to work for your business, you must review them periodically (at least monthly during busy season) and make improvements based on the data. Making improvements based on this data will push you past your competition and put money in your pocket.
For more tips on making more money in your painting business, get this free report for painting contractors.