March 31, 2020

Profit First: What Does "Real Revenue" Mean?

Profit First Methodology
Ronald B. Allen

What Does Real Revenue Mean?

Real Revenue is a term used in Profit First to show a business owner the "real" money their business makes. The top line revenue is not truly representative of the revenue size of your business. Your business may make a margin on materials and subcontractor costs, but that margin is not the core driver of profitability in your business.

This can be a real wake-up moment. For example, a home builder may have $10M in annual revenue and Materials and Subcontractors per year. This means the company has $3M in Real Revenue and manages another $7M in materials and subcontractors costs. This business needs to operate like a $3M company, not a $10M company.

Real Revenue is NOT the same as gross profit. Real Revenue is total revenue minus the cost of materials and subcontractors utilized to create and deliver the service or product. Gross profit can take into account burdened labor, building costs, and other "cost of sales" expenses.

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