Page 16 - Profit assessment Template v1

Details for Recommended Profit First Rollout

Total Revenue - It is common for business owners to focus aggressively on top line growth,

and we have discussed that although this is probable in the current financial year, our primary focus
should be on profitability. From our experience entrepreneurs want to drive top line growth to increase
the bottom line (profitability), instead of just focusing on the bottom line itself. This often causes a trap
of constantly increasing revenue and increasing costs in parallel.

Our recommendation: Drive profitability improvements as the priority over top
line revenue growth. Revenue growth will be a natural benefactor of improved profitability and
focus.

Mats & Subs (Materials & Subcontractors) - Reducing the costs of

materials and subcontractors, without compromising quality and/or performance, is a powerful way to
increase Real Revenue and since it won’t require more OpEx (Operating Expenses) that money typically
goes directly to Profit and Owner Pay.

Our recommendation: Thoroughly analyze the Material & Subcontractor costs,
and seek ways to decrease these costs. Typically, an 80/20 (Pareto) principle applies to this

category and can be used to find costs to cut that won’t affect the performance or quality of
your offering.

Real Revenue - Your Real Revenue is the revenue your firm generates when Materials &
Subcontractors are excluded. This number is used to represent the ‘true’ income of a company, and the
cash flow it manages ‘above’ Real Revenue.

Real Revenue is a term used in Profit First to show an entrepreneur that their top line revenue (Total
Income) is not truly representative of the size of the business. No recommendation necessary.

For example, a home builder may have $10M in annual revenue and to complete their projects require materials and
subcontractors that cost $7M a year. What this means is that the company really has $3M of ‘real revenue’ and manages
another $7M of transactions
(effectively moving money from the customer directly to the purchase of materials and the cost of subcontractors).

This business needs to operate like a $3M company and not a $10M company. The term Real Revenue is used to make it very
clear that the entrepreneur really has a $3M business.

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