What Does It Cost To Operate Your Business And How Much Should You Charge?
To all my painting contractor compatriots out there, have you ever stopped to wonder, "How much should I be charging for my work?" If the answer is yes, then you're asking the right questions. It's not about what the "going rate" is, because ultimately, that doesn't matter. What truly matters are your numbers.
A vast majority of you may have been following conventional wisdom, or perhaps you've even stumbled upon a video or two discussing the going rates for painting jobs. However, let me tell you that these going rates are not your concern. Your concern should be to understand your numbers. To put it plainly, you need to know what it costs for you to operate your business for one hour.
We're going to get down and dirty in this comprehensive guide, and by the end of it, you'll have a tangible formula to calculate your costs and set your prices correctly. You'll have all the tools you need to transform your business's profitability. Now, let's roll up our sleeves and get started.
Understanding Your Numbers
To start, we need to know how many field employees you have, meaning how many people work on the job site. For the sake of our calculations, we'll assume you have two people working on the job site.
Next, we must understand your billable hours. Multiply 1,700 billable hours by the number of field employees you have. Why 1,700, you ask? If you consider an employee working a full year, minus vacations, sick leaves, and so forth, you're typically looking at about 1,900 to 2,000 man-hours. However, in the trades, due to seasonality and non-billable hours like company meetings, we reduce this figure by about 5-10% to give us a more accurate 1,700.
Assuming two employees, this gives you 3,400 man-hours of capacity in a year. That's the maximum amount of work you can take on in a year. Remember, you can't do any more work than that.
Next up is your annual overhead. This includes all the expenses that need to be paid in the business, even if you don't have a job this week or this month. This can include office rent, truck payments, and your salary. Yes, your salary is a cost of doing business and not a net profit. For the purpose of our calculations, we'll set the annual overhead at $150,000.
Setting Your Goals
Now, what is your net profit goal? Net profit is the money left after all costs and expenses are deducted from the revenue. It's a good practice to set a monetary goal rather than a percentage. This is the money you'll make after paying your employees, covering all bills, and other costs. Let's say you want a net profit of $50,000.
Now, add your annual overhead ($150,000) and your net profit goal ($50,000), which gives you $200,000. This is the amount you need to generate from your business in a year.
Calculating Your Hourly Wage
It's time to consider the hourly wages of your crew. Sum up the hourly wages of your crew and multiply by 1.4. Why 1.4? Because there are additional costs like payroll taxes and workers' compensation that you need to cover for your employees. Let's assume you're paying one worker $25 per hour and the other $20 per hour. That's $45 per hour. Multiply that by 1.4, and you get $63.
Divide that figure by the number of employees (2, in our case), and you get $31.5. This is your hourly labor cost per man.
Determining Your Break-Even Point
Divide your total income needed ($200,000) by your total billable hours (3,400), which gives you approximately $58.82. This is your break-even point per hour. It means if you charge $58.82 per hour, you'll just cover your expenses and meet your net profit goal.
However, you must keep in mind that this isn't a precise science, as you won't always be 100% billable or utilize all your hours.
The Art of Marking Up
Now you need to figure out your markup. This percentage will provide a buffer for your business to account for unforeseen expenses and increase your profit margin. A good rule of thumb is to set your markup around 50%.
To calculate your selling price, multiply your break-even point ($58.82) by your markup (1.50). This gives you $88.23 per hour, which should be your minimum charge rate per hour. This ensures that you not only cover your costs and meet your profit goal, but also have a buffer for additional expenses or issues that may arise.
Bidding Jobs and Selling Your Services
Now that you've determined your minimum hourly rate, you'll need to incorporate it into your job bids. Suppose a job is estimated to take 40 hours. Multiply your minimum charge rate ($88.23) by the estimated hours (40), and you get $3,529.2. This should be the minimum bid for that job.
Remember, it's essential to communicate the value of your services to your clients. Highlight your professionalism, quality of work, timeliness, and the peace of mind they'll have knowing their project is in good hands.
Conclusion
By mastering these numbers, you put yourself in a stronger position to command the prices that your services are truly worth. This will not only lead to a healthier bottom line for your business, but it'll also lead to more consistent profits, happier employees, and satisfied customers.
In a market as competitive as painting, understanding your true cost of doing business and pricing accordingly is a crucial aspect of long-term success. So, crunch those numbers, stand firm in your value, and paint your way to profitability!