A bedrock concept in Profit First is for the owner to have the clearest picture of all business operations from largest to smallest. And, it is important to avoid any confusion caused by how the accounting is done. Thus, Profit First uses a concept called real revenue to help business owners understand the true scope and size of their operations. In order to make the necessary calculation you need to know how to determine between employees and contractors or subcontractors. First of all let’s look at how to make the determination and then at why matters.
Not all folks who work for you are employees. Some are part-timers who are contractors or subcontractors. Here is the breakdown between employees and contractors or subcontractors.
Part time employee paid on a per job basis: contractor or subcontractor
Employee who is compensated per project: contractor or subcontractor
Anyone else who is working full time and who is not hired for one specific project is an employee. Why this is important is that contractor and subcontractor pay is part of the calculation for real revenue.
If your business uses subcontractors (such as in construction) and buys materials (such as for construction) this may distort the meaning of your Total Income, the “top line” revenue of your business. As a general rule, when more than twenty percent of your business is contractors and materials you need to use another calculation to know your Real Revenue. Take your Total Income and subtract both materials and contractor or subcontractor pay to arrive at Real Revenue. This calculation is necessary for any business that uses a lot of subcontractors.
There are times when a business owner gets fooled by all the money flowing back and forth in a business. It would appear that they are running a successful and large business. But, when subcontractors and materials are a large part of the picture, the true size of the business may be significantly smaller. Because it is important for the business owner to have a clear picture of all operations, he or she needs to know how to determine between employees and contractors in order to know their Real Revenue instead of their Total Income, which may be misleading. For more insight into the difference between Total Income and Real Revenue, watch our YouTube video.
Not all businesses use materials or subcontractors, so this determination is not always necessary. When you are new to Profit First, you need to work with a Profit First Professional to learn the specifics of the method. Profit First can make all the difference for your business so work a professional to get it right the first time.
If you still have questions or are interested in implementing Profit First in your business, visit our website, ExigoBusiness.com, or contact us at (816) 394-6818.
Click here to watch the YouTube video about how to determine between employees and contractors.