In this studio‑style podcast, host Kevin Simpson (Speaker A) and colleague Kelsey Ayers discuss the Profit First concept of “real revenue.” They explain that real revenue is an adjusted figure derived from top‑line sales after removing pass‑through costs such as materials and subcontractor fees, which the business merely manages rather than earns. Using a home‑builder example, they show how a $1 million top line can be split into $500 k of pass‑through costs and $500 k of true earnings, yielding a real revenue of $500 k. They extend the illustration to a jewelry manufacturer, where customers supply raw materials and the business is paid mainly for assembly. The conversation concludes with a practical rule: service‑based businesses use their top‑line revenue as real revenue, while manufacturers or businesses that rely heavily on subcontractors should calculate a real‑revenue adjustment to reflect the actual size of the operation.
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 colleague here, Kelsey Ayers.
Hello, friend.
Who is running the business here While I'm outing up our business, I'm causing mucketing muck.
Yes, all the time.
So 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 do you like 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 a basic example. If you make houses, if you're a house builder and you make say a million dollars 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 and 250 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, 250, 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 and 250 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. 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.
