< back to full list of articles
Advice for the Accounting Impaired

or Article Tags

Few if any of us decided to become publishers because we loved accounting.
It’s books we like, and accounting is just a necessary evil. But how much of
this evil is really necessary?

At Least Know the Basics

First a disclaimer: I am a recovering academic and have never had any formal
business training of any kind, let alone accounting. I did years ago attend a
“business of publishing” class where in each session the instructor covered
the blackboard with arcane formulae alleged to have something to do with
publishing. He was a practicing publisher. At the end of the course, I asked
him if he really applied all the stuff he had been teaching to the operation
of his own company. He said of course he didn’t, or there wouldn’t be any
time to publish books!

On the other hand, many independent presses do not have any idea whether a
book, or their company, is profitable, which means that it never will be.
What I am going to try to sketch out here are the accounting tools which, at
a minimum, any publisher must master. Those with expertise in accounting
should avert their eyes.

Spreadsheet One:

Will Your Book Make a Profit?

The most fundamental tool is a spreadsheet that will tell you if a book you
are about to publish will make a profit, and if so, how large a profit. To
put one of these together you need to understand the concept of fixed versus
variable costs. Fixed costs are things like printing, cover design, and
typesetting, which are not related to the sale of the book (you pay out this
money whether or not you ever sell any copies). Variable costs are things
like royalties, salesman’s commissions, customer discounts, and shipping
costs, all of which are directly related to each copy sold (no sales, no
variable expense).

Here is a simple version of this spreadsheet:

List price: $12.95
Average Discount 55% ($7.12)
Author Royalty 10% ($1.30)
Shipping Supplies 2% ($0.26)
Gross Margin per Copy 33% $4.27
Printing (units): 5,000 $10,000
Cover $1,200
Index $300
Editorial $500
Total Fixed Cost $12,000
Cost per Copy $2.40 19%
Gross Profit per Copy $1.87 19%
Profit If All Units are Sold $9,350

Of course, much more elaborate versions of this are possible. You might want
to figure your multiple, that is, the number you get if you divide your Cost
per Copy into the List Price; or you might want to know your break-even
point, which is the Total Fixed Cost divided by the Gross Margin per Copy
(2,810 copies in the above example).

If you intend to sell some copies direct to consumers and some through the
trade, you might want to have two versions of the variable costs, estimate
what percentage of sales will go through each of these channels, and total
them up to estimate your profit. You might also want to put in another 10% of
variable costs; it does always seem to be the case that there is at least
that much slippage when all the chickens are actually hatched.

Spreadsheet Two:
Evaluating Overall Company Profitability

A second very useful spreadsheet, really just an expansion of the first one,
allows you to model your whole company rather than a single book. It also
relies on the idea of fixed versus variable costs, but here the fixed costs
are things like rent, salaries, and the phone bill. If you only have one
book, all you need to do is add to the first spreadsheet the concept of
income from X number of copies sold, which is just your estimate of copies
sold, times your Gross Profit per Copy. Put this figure at the end of the
variable costs:

Gross Profit per Copy $1.87 33%
Estimated Copies Sold 2,500 $4,675

Now if you add a heading called Overhead at the bottom of the spreadsheet
and subtract your fixed overhead expenses from the Estimated Copies sold
figure, you will get a snapshot of how well you would do at various levels of
sales. Using the example above, if your overhead costs were $4,000, your
profit would be $675 when you had sold 2,500 copies.

Accounting Software Programs

It is certainly worthwhile to purchase and learn a computer spreadsheet
program because you can so easily try out “what if” scenarios based on
varying levels of sales, discounts and costs in the above spreadsheets.

If your publishing business grows, and you begin to need to keep track of
multiple titles, it will make excellent sense to put your whole operation on
an accounting program and enter the numbers yourself. This is not as daunting
as it sounds if you hire a qualified person to set up the program for you at
the very beginning. These programs are now cheap and very powerful, and they
will produce for you monthly or quarterly balance sheets and profit and loss
statements that will greatly simplify your life at tax time.

A Few Words of Caution

Never suppose for a moment that an accounting system, no matter how
sophisticated, will keep you out of financial trouble. I have known many
publishers, and some distributors too, who have gone bankrupt even though
their perfectly accurate Profit and Loss Statement seemed to indicate a
company in blooming health. Projecting future cash flow is the name of the
game, and most accounting information simply records what has happened in the
past.

Oddly, many accountants do not understand this limitation of their
profession. They are like Dr. Johnson’s philosopher/astronomer Rasselas, who
having for years watched the sun rise every morning, concluded it only rose
because he was watching.

Connect With Us

1020 Manhattan Beach Blvd., Suite 204 Manhattan Beach, CA 90266
P: 310-546-1818 F: 310-546-3939 E: info@IBPA-online.org
©2016 Independent Book Publishers Association

Visit Us On FacebookVisit Us On TwitterVisit Us On LinkedinCheck Our Feed