HOW TO PAINT YOUR SELF TO A PROFIT
Breakeven Analysis for Painting Contractors
Prepared for the Painting Contractors
Education Partnership
Rick Palmer, Executive Director, PCEP
that business venture, he showed a
surprising sophistication and expertise in
Abstract: Establishing the ground rules
accounting methods that only became
and definitions for painting contractors
popular in the 20th century.
to enable them to determine their
breakeven point is the basis for this
The Buffalo Hunt:
course of education. Most painting
In Wyatt Earp s day there were
contractors are proficient in the craft, but
thousands of men involved in the buffalo
do not have the basic business tools to be
hunting business, but the only strategy
able to run a small business effectively.
they employed was to shoot as many
Defining Breakeven Point, Fixed Costs,
buffalo as they could. They didn t know
Variable Costs, and Revenue per hour is
how to do a break-even analysis that
the basis of the course. Once the
could have made them more profit. And
definitions are understood, then an
to further complicate things, there was a
exercise is presented in using these terms
never-ending supply of amateur hunters
and formulas in Sensitivity Analysis
who were not well equipped, but who
(business decisions planning).
still competed, until they went broke, for
what profits there were. Wyatt Earp was
Profits: This course is all about profits.
different because he could see how
However, to first begin the process of
inefficient the typical buffalo hunt was.
building profits, you must lay the
The hunters paid little attention to
fundamental foundations by learning to
operating costs and only measured their
increase profit by spending a small
success at the end of the season by how
portion of time thinking ahead, planning
much money they had left over. The
and using break-even analysis. Any
typical hunter invested in enough fixed
planning function is business has to first
assets to kill and skin 100 buffalo per
be based on good financial and
day, but due to various uncontrollable
accounting records.
factors, the average take was less than
50. Wyatt did an analysis and
Break-even who wants to just
determined that if he invested in less
breakeven? No one is the answer if they
equipment and labor, he could make
are in business. However, understanding
more profit shooting only 25 buffalo per
break-even is the key that will aid you in
day. He used a form of break-even
bidding effectively, control costs, and
analysis to determine that more volume
thus, increase your profits. One person
doesn t always mean more profit. In this
who understood break even was Wyatt
program, we are going to find out why
Earp. Prior to the OK Corral, Wyatt was
that is so as we apply some of Wyatt
a buffalo hunter on the Great Plains. In
Earp s methods to the painting business.

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Terms:
only time equipment or vehicles would
• Break-even is a number that
not go into fixed costs is when you rent a
represents the volume of
specialized piece of equipment to
production needed to cover all
complete a particular job. In that
the costs incurred in a business.
instance, it would be classified as
Break-even is always expressed
variable.
in units of production.
• Volume refers to the total
Other types of fixed costs:
number of units produced within
• insurance,
a time period, (usually a year)
• office and shop expenses
and in this program, the volume
• rent and utilities,
of production will be in billable
• And employees who earn a
hours, or on-site hours.
predetermined salary, such as a
• Revenue is the total amount of
bookkeeper.
money you take in within a given
• All the costs associated with a
time period. In this program,
salary, such as payroll tax and
Revenue will be the same as
unemployment insurance, also
sales.
have to be figured into fixed
• Fixed costs are costs which don t
costs.
change no matter how much
These associated costs are sometimes
production volume you have.
referred to as payroll burden — make
• Variable costs are the costs
sure you include them when adding up
which are determined by your
your costs.
volume of work.
Examples of Variable Costs:
All costs can be classified as either fixed
• paint,
or variable, which is one of the steps
• consumable supplies,
necessary to calculate break-even.
• fuel and associated costs for
operating your vehicles,
Examples of Fixed Cost:
• repairs to vehicles and
The very first thing which goes into
equipment,
fixed costs is the owner s salary. If you
• Specialized rental equipment
don t take a regular salary out of your
needed for a particular job goes
business, you re making a big mistake.
into variable costs,
You re in business to earn a living, and
• Cost of subcontractors
budgeting for your own pay is very
• Jobsite labor.
important to building a successful,
This labor cost, by the way, includes all
profitable business. It s also necessary
the hourly pay, plus payroll taxes,
for figuring break-even, so if you have
workman s comp and any other
never budgeted for your own pay, start
associated costs.
now.
NOTE: If you have someone in your
Equipment and Vehicles that you own
business who earns a base salary plus
are classified as fixed costs. It doesn t
commission, such as an estimator or a
matter whether you are paying them off,
salesman, you will divide the costs,
leasing them, or own them outright. The
putting the base amount into fixed costs

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and the commission amount into
Presentation Example is:
variable.
BE = 114,110/ (70-46.75) for a break
When determining variable costs,
even # of billable hours of 4,908.
include everything that you paid any
money for, whether you ended up using
it or not. If you had some waste or made
For the presentation example, 4908 is
extra purchases because of mistakes or
the number of hours that must be billed
theft, those expenses have to be added
to cover all expenses and begin earning a
into your costs to get an accurate
profit.
breakeven number.
Once a painting company has
determined it s breakeven in billable
The Break Even Formula:
hours, this allows them to begin the
process of Sensitivity Analysis which
After sorting the costs into fixed and
is a method of making decisions
variable, from the Profit and Loss
regarding variables affecting your
Statement, add them up to get the totals
business.
of each (Fixed or Variable) for the year.
In the example in the presentation, the
Sensitivity Analysis Examples
total of fixed expenses is $114,110 and
the total of Variable expenses is
Should you Raise Your Prices?
$233,750.
Raise Your Prices
and lose 10% of your business
This is the first of the cost figures we
2002
If You
Result
need to be able to calculate break-even.
Hours
5000
lose
10.00%
4,500
The last piece of information we will
Fixed costs total
$ 114,110.00

$ 114,110.00

Variable costs total
$ 233,750.00

$ 210,375.00

need is the
Variable costs/hour
$ 46.75

$ 46.75

volume of production,
Revenue total
$ 350,000.00

$ 346,500.00

Revenue/hour
$ 70.00

raise
10.00%
$ 77.00

which is expressed as billable hours
Profit
$ 2,140.00

$ 22,015.00

worked for the year. In the presentation
example, Wyatt s Painting Company has
charged out 5,000 hours divided by his
In this example, we see what happens if
sales of 350,000; gives us 70 dollars per
we raise prices by 10% and lose 10% of
billable hour.
sales because of it.
BE (Break-even)
Profit Formula
F- Total Fixed Cost
Profit = Revenue per hour * number of
R- Revenue/Hour (billable hour)
hours — (Fixed Cost + Variable Cost) *
V- Variable Cost/Hour (billable hour)
Hours.
P= (R * hours) — (F + V) * Hours.
Formula:
Revenue per hour is where you set your
BE = F/(R-V)
prices. In the presentation example,
raising prices by 10% means that the bid
per hour is now $77, in lieu of the 70 for
the base year. So, if you raise your

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hourly rate by 10% and if we assume
Example Two What if?????
that you lose 10% of your sales
because of higher prices, you still have
If I do X, and Y happens as a result,
more profit. To go a step further, we can
what will the effect be on the bottom
determine exactly how much business
line?
you can afford to lose if you raise your
prices by 10%.
In the case in the presentation, it is
decided to spend an additional $2,000 a
It s important to say right now that no
month on advertising and marketing to
one knows exactly how much business
get more business. You have to make an
you might lose by raising your prices.
assumption about how much additional
The 10% figure used here is for
business you will receive because of the
purposes of illustration only.
marketing, and we have assumed that
you will get enough to hire one
additional painter — about 2,000 hours.
The partner formula is to solve for the
This presentation shows the end result of
number of hours you could loose by
spending $24,000 on advertising if it
raising your prices to still attain the same
does, in fact, bring you the expected
profits as you did in a prior time.
additional sales and you hire another
person. Since one more field person
hired doesn t affect your fixed costs, the
changes have no effect there. Instead,
Raise Your Prices
and lose ? % of your business while maintaing profit
your variable costs go up and your
2002
Result
revenue goes up because of the
Hours
5000
lose
23.14%
3,843
Fixed costs total
$ 114,110.00

$ 114,110.00

additional hours worked. Your price, in
Variable costs total
$ 233,750.00

$ 179,659.09

Variable costs/hour
$ 46.75

$ 46.75

this scenario, stays the same as it always
Revenue total
$ 350,000.00

if you
$ 295,909.09

Revenue/hour
$ 70.00

raise
10.00%
$ 77.00

has been. If assumptions are accurate,
Profit
$ 2,140.00

maintaining
$ 2,140.00

this analysis predicts an increase in
profit of $22,500.
The formula to solve for hours required
is Hours = Fixed Costs plus Profit (in
Increase Business by Advertising/Marketing
this example— 114,110 Fixed Cost plus
Requires hiring 1 more painter
2,140 Profit = 116,250) divided by
2002
If You
Result
Revenue per hour (77.00) minus
Hours
5000
increase
2000
7,000
Fixed costs total
114,110.00
$
spend
24,000.00
$ 138,110.00
$
Variable cost per hour (46.75) = 30.25.
Variable costs total
233,750.00
$
327,250.00
$
Variable costs/hour
$ 46.75

$ 46.75

Revenue total
350,000.00
$
490,000.00
$
So 116,250 divided by 30.25= 3,843
Revenue/hour
$ 70.00

$ 70.00

Profit
$ 2,140.00

$ 24,640.00

billable sold hours.
Hours = F+Profit /R-V
F stands for Total Fixed Cost
The presentation also presents a scenario
R stands for Revenue/Hour
where Fixed Costs Increase with no
V stands for Variable Cost/Hour
change in Sales Price per hour or no
Profit number is set by you
change in Variable Costs totals or per
hour. The net result is less profits for the
business (Example Buy a New Truck).

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Bidding opportunities with Breakeven
Example of project to be bid after
Analysis:
breakeven number of hours is reached
Let s go back and look at the break-even
Hours required = 500
formula we did a little earlier.
Variable cost/hour = $46.75
Total cost to you = $23,375
BE = 114,110/ (70-46.75) for a break
Profit required = $5,000
even # of billable hours of 4,908.
Your bid can be $28,375
If you had bid it normally it would be
When you have billed out 4,908 hours,
R ($70) X 500 hours = $35,000
(or, when you re confident that you ve
The keys to bidding to cover you
got enough work lined up to reach 4,908
variable costs only:
hours) you will have covered all your
fixed costs for the year.
• You have a very accurate
estimate for your labor hours on
Every job you do after reaching the
that job
break-even point will cost you $46.75
• You know you have the ability,
per hour (Variable Cost per hour).
with your employees or extra
employees you have to hire, to
You can use this information to
get the project handled.
formulate bids. If you are absolutely
•
YOU ARE ABSOLUTELY
confident that you will reach your
T O T A L L Y C O M P L E T E L Y
SURE AND POSITIVE THAT
break-even point this year, (with
YOU HAVE OR WILL REACH
no unexpected surprises such as a
THE BREAKEVEN POINT
non paying customer, theft of
PRIOR TO THAT PROJECT
STARTING!!!!!
equipment, etc) you then have an
• And, you know your variable
opportunity to make a different bid on
costs (especially for the project
jobs which will take you over the break-
you are bidding).
even point in hours.
Conclusion:
First, you have to know that you can
handle the extra hours required. If you
To be profitable, the very first
believe you can, then you need to
requirement is that your have good
accurately estimate the number of
financial records. If you do not have
billable hours that the job will require.
good records, work with your
Multiply that number by V , or
bookkeeper, hire an accountant, or do an
Variable cost per hour. This gives you
analysis of your business that provides
your total cost for the job. Next, add in
you what you need to begin to
the amount of profit you want for this
intelligently figure your Breakeven
job. Adding together your total cost and
point. Hunting Buffalo intelligently,
your required profit gives you the bid
made Wyatt Earp s business work—
figure. If you had bid this job not
Knowing your breakeven point will aid
knowing if fixed costs were covered,
you in making your business better and
you would have had to bid it to include
more profitable.
those fixed costs and your bid would
have been $35,000.

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Credits: production by the
West Texas A&M University Small
Business Development Center, 2003
for the Painting Contractors Education
Partnership.
Sources:
Jesse T. Barfield, Cecily A. Raiborn,
Michael R. Kinney
Cost Accounting — Traditions and
Innovations
3rd Edition, 1998
Michael W. Maher, Clyde P. Stickney,
Roman L. Weil
Managerial Accounting — An
Introduction to Concepts, Methods, and
Uses 6th Edition, 1997
Irvin J. Chasen, Understanding,
Allocating, and Recovering Overhead —
A Contractor s Guide To Greater
Profitability Through Job Cost
Accounting N.D.
Thomas L. Barton, William G. Shenkir,
John E. Hess Wyatt Earp, Frontier
Accountant, The CPA Journal, (June,
1995), p. 48

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