The purpose of bookkeeping is not just to tally up the numbers. The reason you keep the books is to fully understand how your business is going. With the Profit First method, there are terms that are used to help the business owner better see both the details and the true size and scope of business operations. One of these terms is Real Revenue which is sometimes used in Profit First instead of the usual “top line” Total Income.
The “top line” revenue of your business is Total Income. This number includes all cumulative sales. And, Total Income minus the costs of subcontractors and materials is Real Revenue.
A business only needs to use Real Revenue for Profit First accounting when a large part of business operations uses subcontractors and materials (more than 20%).
If your business is service-based and has full time and part time employees, use Total Income for Profit First.
If your company is in manufacturing, the restaurant trade, or a service provider that provides a substantial part of its services through subcontractors, then you need to use Real Revenue for the Profit First method.
Note: While Real Revenue has similarities to Gross Profit, they are not the same.
Profit First professionals like Exigo Business Solutions, use the term Real Revenue because it shows the business owner that their “top line” Total Income is not really indicative of the size of their business.
As an example, someone in the business of home construction could show $15 million as “top line” Total Income or annual revenue. But, in their business, they subcontract the majority of the work and need to purchase the materials needed for construction. In our example, the total cost of materials and subcontractors comes to $10 million. This company is really a $5 million business and not a $15 million business.
Gross Profit is specifically the Total Income minus the Cost of Goods Sold. And, guess what. Payments to subcontractors and building materials are not goods sold! Neither are shipping costs, ancillary costs, project-related travel, project costs, or employee labor.
Real Revenue is a simple calculation, Total Income minus subcontractors and materials. The wages of any of your full time or part time employees are not part of this calculation.
And, 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 explaining the difference between total income and real revenue.