Real Revenue Calculator

Calculate Real Revenue for Profit First allocations and determine whether a business should use Real Revenue or Total Revenue for their TAP calculations.

What is Real Revenue?

Real Revenue = Total Revenue - Materials & Subcontractors

Real Revenue is NOT the same as Gross Profit. It only subtracts direct pass-through costs, not labor or overhead.

When to Use Real Revenue

Use Real Revenue when Materials & Subcontractors exceed 25% of Total Revenue.

Otherwise, use Total Revenue directly for TAP calculations.

Input Required

1. •Total Annual Revenue: All money the business brings in
2. •Materials Cost: Raw materials, components, inventory
3. •Subcontractor Cost: Third-party contractors paid per project

What Counts as Materials & Subcontractors

INCLUDE (subtract from Total Revenue):

• •Raw materials and components
• •Inventory/product costs
• •Third-party subcontractors
• •Pass-through costs tied directly to delivering product/service
• •Per-project contractors (only paid for income-generating work)

DO NOT INCLUDE (these stay in OpEx):

• •Employee wages (even "direct labor")
• •W-2 payroll
• •Fixed overhead
• •Rent, utilities
• •Regular team salaries
• •Benefits

Calculation Process

1. •

   Gather inputs:

   • •Total Revenue: $______
   • •Materials: $______
   • •Subcontractors: $______
2. •

   Calculate Materials & Subs percentage:

   code

   M&S Percentage = (Materials + Subcontractors) / Total Revenue × 100
   

3. •

   Determine which revenue to use:

   • •If M&S Percentage ≥ 25%: Use Real Revenue
   • •If M&S Percentage < 25%: Use Total Revenue
4. •

   Calculate Real Revenue (if needed):

   code

   Real Revenue = Total Revenue - Materials - Subcontractors
   

Response Format

## Real Revenue Calculation

### Inputs
- Total Revenue: $X
- Materials: $X
- Subcontractors: $X
- **Materials & Subs Total**: $X

### Analysis
- M&S as % of Total Revenue: X%
- Threshold: 25%
- **Recommendation**: [Use Real Revenue / Use Total Revenue]

### Result
[If using Real Revenue:]
- **Real Revenue**: $X
- Use this figure for TAP lookups and allocations

[If using Total Revenue:]
- **Use Total Revenue**: $X for TAP lookups and allocations
- Materials & Subs are below the 25% threshold

### What This Means
[Explain implications for their business type]

Examples

Example 1: Home Builder (Use Real Revenue)

• •Total Revenue: $10,000,000
• •Materials: $4,000,000
• •Subcontractors: $3,000,000
• •M&S Total: $7,000,000 (70%)
• •Real Revenue: $3,000,000
• •This business operates like a $3M company, not $10M

Example 2: Consultant (Use Total Revenue)

• •Total Revenue: $500,000
• •Materials: $5,000
• •Subcontractors: $20,000
• •M&S Total: $25,000 (5%)
• •Use Total Revenue: $500,000
• •Materials & Subs are minimal

Example 3: E-commerce (Use Real Revenue)

• •Total Revenue: $800,000
• •Inventory/COGS: $320,000
• •Subcontractors: $0
• •M&S Total: $320,000 (40%)
• •Real Revenue: $480,000
• •Product cost is significant

Common Mistakes

1. •Including employee wages - Even "direct labor" employees are NOT subtracted
2. •Using Gross Profit - Real Revenue is simpler: only materials and third-party subs
3. •Forgetting the 25% threshold - Low M&S businesses use Total Revenue
4. •Subtracting overhead - Rent, utilities, etc. are OpEx, not M&S

Why This Matters

If you use Total Revenue when you should use Real Revenue:

• •Your TAPs will be based on the wrong tier
• •You'll allocate percentages to money that's already committed to materials
• •OpEx will be underfunded
• •The system will fail

Attribution

Real Revenue calculation is from the Profit First methodology by Mike Michalowicz. For the complete methodology, see "Profit First" at profitfirstbook.com.