In this podcast‑style discussion, the host and colleague Kelsey Ayers explain the Profit First concept of “real revenue.” Real revenue is an adjusted figure derived from a company’s top‑line sales that subtracts pass‑through costs such as raw materials and subcontractor fees, reflecting the amount of money the business actually generates from its core activities. The speakers illustrate the idea with a home‑builder example: a $1 million top‑line with $500 k in materials and subcontractor expenses yields $500 k of real revenue. They note that larger firms may have a substantial gap between top‑line and real revenue, affecting how they should be managed. The rule of thumb presented is that service‑based businesses use their top‑line as real revenue, while manufacturers or businesses that rely heavily on subcontractors should calculate real revenue. Applying this adjustment helps owners size their operations correctly and make more accurate financial decisions under the Profit First methodology.
So you're watching Under the Covers, the covers of books, my books, because behind it there's more questions that people ask that we don't have time to go into in our podcast. So we're here in our podcast studio recording videos now, and I'm joined with my my colleague here, Kelsey Ayers.
Hello, friend.
Who is running the business here while I'm out mucketing and mucketing up our business. I'm causing muckety muck.
Yes, all the time.
Yeah. So let's, you have a question?
I do.
What?
So in Profit First, you talk about something called real revenue. What is real revenue and how do I apply it to my business? Should I apply it to my business?
When you read Profit First. Yeah, yeah, and I know you're asking like as a theoretical your business, but actually your business, you, You have a jewelry manufacturing business, you would apply there. So real revenue is an adjustment we make to our actual top-line revenue to reflect what the business truly generates from its activities. A little bit complexly said, but here's, here's a basic example. If you make houses, if you're a house builder and you make, say, $1 million a year building houses— probably would be more than that— but you spend $250,000 on materials, sheetrock and so forth, and another $250,000 on subcontractors. Effectively, that $250,000 and $250,000, or $500,000, your customers are paying you money to immediately hand over to another entity, the supplier of the sheetrock or the contractor. They could effectively pay them directly, but they're doing it through you and you're managing money. So that first $500,000, the $250,000, $250,000, you're simply managing the dispersion of money. The remaining money, which happens to also be $500,000, is the money you generate from the activities you provide. So your real revenue is $500,000. You're actually doing $500,000 of work, and you're managing another $250,000 and $250,000 above the line. So we make that adjustment to understand what size business you have. When it comes to bigger businesses, this is necessary. I worked with a home builder that was doing $50 million in top-line revenue, but their real revenue is about $20 million. And they have to run their business like a $20 million operation, not a $50 million operation. And it's different. This is true. Jewelry manufacturer, you know, those customers of yours could buy all the materials. They could simply say, hey, I have the semi-precious and precious metals and jewelry and stones and so forth and ship them to you. Then you assemble them. You're getting really paid to assemble, not necessarily to procure those things. So your business is— we make an adjustment based upon the materials you're spending to get to a real revenue point. I know it can be complex. What I'm trying to do is put all businesses of all types on the same footing. Here's the general rule: if you provide a service-based business, do not make a real revenue adjustment. Just go with whatever your top line is. That is your real revenue. And if you're a manufacturer or you use a lot of subcontractors, that's often when you make this adjustment for real revenue. Hopefully that
