If you start a new business or have been running Profit First for a while, you may be faced with the problem of how calculating your allocation percentages.

Should you be using real revenue or total revenue when calculating the allocation percentages?

Real Revenue – Revenue after all your materials & contractors are accounted for

Real Revenue represents the revenue remaining after accounting for all materials and contractors. This revenue, also known as Free Cash Flow (FCF), is what remains for allocation to your Profit First Bank Accounts (Profit, Owners Pay, Tax, and Operating Expenses).

For instance:

Suppose your business records $100,000 in sales with $10,000 allocated to materials and contractors to deliver services or generate income. In this scenario, your Real Revenue amounts to $90,000, which you then distribute among your Profit First Bank Accounts.

Total Revenue – before expenses and Materials are accounted for

Companies generate total revenue from the sale of goods and services, calculated by combining all products or services sold within a specific period. This revenue can be expressed in dollars or as a percentage of total income or sales. It’s a crucial component of profitability, reflecting income from business operations. However, it doesn’t indicate the profitability of these sales or any expenses incurred during the process.

What Should You Use

The Profit First method utilises Real Revenue to calculate the allocation percentages. Real Revenue should be used over total revenue because it reflects the actual money in your business account. It provides a clearer picture of available funds for purposeful spending in each category. Avoid using total revenue, which includes all costs, in allocation calculations. Focus on the actual real revenue of the business for accurate allocation decisions.

Takeaway

Use real revenue as it will help you with cash flow issues. You will have a clear goal of what your expenses are now. You know how much money will be in your business, which is good for planning ahead.

If you’re new to Profit First and looking for an easy way to understand this concept, think about how much money you’d like to make each month after paying yourself first out of every dollar you make.

If you need further assistance with calculating allocation percentages or the Profit First Method in general, please feel free to contact us.

We offer a free 1:1 Profit First Health Check appointment to be able to help individuals, business owners, and entrepreneurs like you in their Profit First Journey.