In the Profit First system, Real Revenue is your true operating income—the amount left after subtracting the direct costs required to deliver your product or service.
That means you don’t base your financial strategy on top-line sales. You base it on what you actually get to keep.
This is the number you use to allocate funds for profit, taxes, owner’s compensation, and operating expenses. If you get this wrong, everything else downstream becomes distorted.
Let’s break it down.
What Is Real Revenue in Profit First?
Real Revenue is not your gross income. It’s what remains after you remove the cost of materials and subcontractors—the direct costs needed to fulfill your work.
Formula:
Real Revenue = Total Revenue – COGS (materials and subcontractors only)
These are not your fixed overhead or team payroll. These are pass-through costs tied to delivering the service or product.
Profit First Example
Let’s say you’re a general contractor who brings in $100,000 in a quarter.
You spend:
- $20,000 on lumber, fixtures, and raw materials
- $10,000 on subcontracted electricians and framers
Those are direct delivery costs.
Your Real Revenue is $70,000. That’s what you use to run your business and apply your Profit First percentages.
Why Real Revenue Matters
1. Accurate Allocation
Using top-line revenue to fund your Profit, Tax, and Owner’s Pay accounts will lead to shortfalls. Real Revenue gives you a reliable base for allocation.
2. Cleaner Financial Visibility
When your operating decisions are based on Real Revenue, you avoid overcommitting cash that isn’t really available.
3. Better Strategic Planning
From pricing to team structure, understanding Real Revenue helps you stay grounded in the numbers that reflect actual margin and sustainability.
4. Target Allocation Percentages (TAPs)
Profit First uses industry-specific TAPs to guide how much you allocate to each account. Those percentages are always based on Real Revenue, not gross sales.
What to Subtract—and What Not To
Subtract:
- Subcontractors performing client-facing work
- Materials that go directly into a deliverable
- Outside vendors whose costs are tied to fulfillment
Don’t Subtract:
- In-house payroll
- Admin contractors
- Marketing or advertising costs
- Software or tools
When It Gets Complicated
Blended businesses often get stuck here. If you offer both products and services, or if your team includes a mix of employees and contractors, it’s easy to misclassify costs. That’s when a proper Profit First assessment helps.
Because if you’re allocating from the wrong number, the system fails.
Start with the Right Number
Your entire Profit First system is built on Real Revenue. Get that part right, and the rest becomes much easier to manage.
If you’re not sure how to calculate it correctly—or if your margins still feel off even after implementing the system—it may be time to bring in a professional.
Work with a Profit First Pro
We help business owners implement Profit First the right way, starting with a clean Real Revenue calculation. Then we build a financial system that gives you predictability, clarity, and control.
