Real Revenue is the Cash to Run your Business

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.

How Does a Businesses Calculate Real Revenue?

Real Revenue is the total revenue minus the cost to make a product or perform a service.  This includes materials and subcontractor expenses associated with delivering the product or service in your business. It is the cash that you can use to allocate to the profit account, tax account, operating expense account, and owners compensation account. 

Real Revenue is important because it gives you a true picture of how much money your business actually makes.

What Factors Can Influence Real Revenue?

Real revenue is the lifeblood of any business. Without it, a business cannot survive or grow. It is the money that comes in from customers and clients that allows a business to pay its bills, invest in new products and services, hire employees, and more.

Real revenue is not just about sales; it also includes other forms of income such as investments, grants, donations, and more.

Is Real Revenue the Same as Gross Profit?

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. In summary, gross profit is the amount of money left over after all expenses have been paid.

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.

Are there any Benefits to Using Real Revenue Over other Metrics?

When you get a QuickBooks custom report every month, you want a clear picture of the financial 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.