Thursday, November 17, 2011

Keeping books on the books you don't keep (and the ones you do keep)

You’re a publisher, right? Sure, you’re a self-publisher, and you only have one title under your imprint. Nonetheless, you’re a publisher. And you’re trying to sell books at a profit.

But you’re also an author, right? And as an author, you want to be paid for your effort.

This is a hard concept for some people—many people—to wrap their heads around.

Wholesale or retail?
In a previous life, my first wife and I exhibited and sold our wares at large arts and crafts fairs, mostly in upstate New York. Because the region is somewhat isolated, many of the same exhibitors did all the shows we did; so I got to know quite a few of them. Quite a few of them, consummate craftspeople though they were, did not quite get that they were in business. Some were happy to collect enough from their sales to pay for their materials (never mind the booth fee, the transportation, or their time). It was just a hobby, after all. Others decided what their time was worth and then proceeded to sell at the same price to everyone, retail or wholesale. They could not understand how that might hurt them financially. Others applied a formula to calculate their wholesale and retail prices but never looked at whether they were actually making money as retailers.

I looked at the situation differently. I figured that for every piece of every product we made, I had the opportunity to sell it wholesale to a shop at a price determined by what the competitive traffic would bear, and I had the opportunity to sell that same item retail if I took it to a craft show. So my wholesale left hand told my retail right hand what the wholesale value of the item was. And my retail right hand had to make enough of a margin to pay for the booth, pay for the truck rental, pay my helper’s wage for the day, pay for meals and occasionally lodging, and cover the opportunity cost of my being there. Otherwise, I was losing money by going to the show. After a couple of years of testing all the craft shows in the region on this basis, we winnowed our schedule to fewer than a dozen weekends a year while other people kept beating themselves up week after week after week and never knowing whether they made money or lost money.

Self-publishing works much the same way.
As the author, you want the publisher to pay you royalties. As the publisher, you want to show a profit after paying those royalties. And you don’t want to count the same money twice, only to find out when it’s time to pay your bills that you have half what you thought you had.

Marion Gropen consults with publishers of all sizes on accounting and finance matters. The other day on a mailing list for mostly small publishers and self-publishers, she had this to say in response to a question from a new publisher:
Publishers have a few unusual issues. First, we are not ever allowed to include the fixed costs of producing an edition (such as editorial, cover design, etc.) in the inventory value. They are, of course, part of your cost of goods sold (COGS), but they are not part of the unit cost of your books. Instead, you are required, for tax purposes and by Generally Accepted Accounting Principles for publishing, to put them in an asset account when you incur them, and then to amortize them over the expected lifetime of the book. This is generally a trivially easy task, and you can certainly do it in any basic accounting software, but you do have to know that you’re going to do it when you set them up.

Second, even if we’re self-publishing, it’s wise to pay ourselves a royalty, and treat our publishing operation and our authoring operation as separate functions, and entities.
When I asked Marion to elaborate a bit on that last point (does she really mean that the one-title self-publisher should formally pay royalties in that way?), her was her answer:
The typical one-book self-publisher may need to be dragged into recognizing that they are running a business, and this will help in that effort.

But the best reason, from my perspective, to do this is that it makes crystal clear how much of your income is coming from which part of your operation. If you pay yourself as an author, and also as a publisher, you will often see that you’re doing much better from the author side of the table. If you also don’t enjoy the publishing work, then it becomes clear that you need to sell the rights to a traditional publisher.
Words to the wise (quoted with Marion’s permission,of course).

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