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name: real-revenue-calculator description: Calculate Real Revenue for Profit First allocations. Determines if a business should use Real Revenue (vs Total Revenue) and calculates it.

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:

   CopyM&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):

   CopyReal Revenue = Total Revenue - Materials - Subcontractors
   

Response Format

Copy## 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.