February 10, 2020

Gross Profit and Real Revenue Difference

Profit First Methodology
Ronald B. Allen

When you do your bookkeeping the ultimate goal is to provide you, the owner, with a clear picture of your business from the smallest details to the big picture. Unfortunately, some approaches to bookkeeping can be misleading. At Exigo Business Solutions we use the Profit First method for our clients so that they obtain and maintain the clearest understanding of their business. One of the important issues we deal with for our clients is the difference between Gross Profit and Real Revenue.

The Difference between Gross Profit and Real Revenue

Gross Profit is Total Revenue minus cost of goods sold, as well as materials, subcontractor pay, employee labor, project costs, travel expenses, shipping costs, and other ancillary expenses.

Real Revenue is a simpler and less subjective calculation. It is Total Revenue minus cost of materials and contractors or subcontractors. In this calculation you do not subtract any employee, labor, or other costs.

Why Is the Difference between Gross Profit and Real Revenue Important?

When you get a QuickBooks custom report every month you want a clear picture of the health of your business and any specific problems. Unfortunately, there can be truth in the old saying that “figures can lie.” You have your books done so that you do not have to sort through every single detail. But, if the bookkeeping categories are misleading for your business, you will make the wrong decisions, or none at all, based on misleading information. The numbers may be correct but what they represent can mislead you. That is why in Profit First we use terms like Real Revenue to give the business owner information that is not only accurate but actionable as well.

When you decide how much money to allocate to your various savings accounts, it should be based on a realistic assessment of the ability of your cash flow to support those allocations. As you pay off debts, you need there to be enough money in your operating account to pay the minimum of each debt plus something to pay down the principle on the smallest debt. For this to work correctly, you need a clear view of all financial aspects of your business.

Knowing what your business is worth is important. How many times do we see that a company was taken over in a leveraged buyout, taken apart, and the pieces of the business sold for more than what the buyers paid? Knowing the difference between gross profit and real revenue helps you understand what your business is really worth. You may not be worrying about a leveraged buyout, but you would like to maximize your profits and perhaps expand your business. To do those things you need to be looking at the right numbers, like Real Revenue instead of Gross Profit.

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 the difference between Gross Profit and Real Revenue.

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