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Five Steps to a Productive P&L

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The single-title P&L (estimate of profit and loss) is one of the most useful tools in a publisher’s toolkit, but P&Ls have a bad reputation because many publishers in a corporate setting won’t take a book on unless its P&L shows a certain level of profit at the acquisition stage.

The true purpose of a P&L is not to punish, but to plan. A well-thought-out P&L lets you:

  • see if you will make any money on a title, or whether you are making money on it
  • balance costs against revenue
  • compare the profitability of this title to that of other titles on your list
  • compare this title to industry benchmarks
  • estimate what revenues a book must bring in to pay its own way

P&Ls come in many shapes and sizes, from the bare-bones to the truly complex. You can run an estimated P&L when you are considering a book (a preacquisition P&L), and you can run P&Ls after the book has been on the market for a while (postmortem) to see if expenses have been creeping up on you or if profit margins have been dropping. Each publisher develops its own form of P&L, based on what it has found most useful over time.

The Numbers You Need

In what follows, I’m using a simple five-step P&L that you can adjust for the particular needs of your business.

Creating a title P&L entails five basic steps:

1. Estimate revenue. Start with a figure for what sales will bring in after discounts and returns (estimated at 20 to 40 percent for trade publishing) and add an allocation for free, lost, damaged, or stolen copies (3 to 5 percent), on the understanding that up to 10 percent of a print run never even makes it out of the warehouse. For example:

If you intend to print and sell 5,000 copies of a title at a retail price of $20, giving a 50 percent discount, here is the way you would get to your revenue estimate:

 

Copies printed                                              5,000

Gross copies sold (95%)  4,750

Price of book                                               $20

Discount                                                       50%

Revenue per copy after discount                 $10

Total revenue                                               $47,500

Reserve for returns (30%)  ($14,250)

Free/lost/damaged (4%) ($1,900)

 

Net revenue                                               $31,350

 

2. Estimate your cost of goods. Everything you will need to spend to get the book into
the marketplace. Cost of goods comprises four elements: 
 

·      plant costs—what you spend creating the book, including costs of interior design, cover artwork and design, photographs and illustrations, color separations and scans, translations and introductions, and permissions

·       printing costs

·      freight in—many publishers allocate 2 to 3 percent of net revenue as freight charges instead of trying to calculate the cost of shipping the books from the printer to their warehouse on an item-by-item basis

·      author’s royalty—as determined by your contract with the author (in the table below, the net copies figure of 3,325 represents 70 percent of 95 percent of the 5,000 copies that were
printed—because, of the 5,000 copies that were printed, 250 were never shipped, and 30 percent of the remaining 4,750 are expected as returns)

For example: 

Cost of goods sold

Plant

Cover art                                             $500

Proofreading/copyedit                        $750

Interior design                                     $500

Permissions                                         $100

Manufacturing (5,000 copies)                   $13,750

Freight (2%)                                               $627

Author’s royalty (10% of retail

price [$20] ´ 3,325 net copies)           $6,650

 

Total COGS                                              $22,877

 

Subtracting your COGS from your net revenue then gives you a figure for gross profit, or margin. 

Net revenue                                                $31,350

Total COGS                                               ($22,877)

Gross profit (margin)   $8,473

 

3. Estimate your selling expenses. Your estimated costs for selling the book should include distribution fees, fulfillment fees, and sales rep commissions; and marketing, advertising, and publicity/promotion expenses (including expenses for galleys).

 Selling expenses

Fulfillment fees (10% of net revenue)     $3,135

Marketing                                                $500

Galley mailing                                         $500

Website promotion                                 $500

 

Total selling expenses                                          $4,635

 

4. Estimate your overhead and profit. What “contribution” (to overhead and profit) will the book make? In other words, once it has recouped cost of goods and selling expenses, what revenue is left to contribute to the maintenance and growth of your company? Some publishers (generally those in a corporate environment) allocate a percentage of net revenue to overhead. If you do that at 15 percent of net revenue with our example, you get $4,703 as the figure for overhead. Deducting all your expenses from your net revenue lets you see your profit/loss:

 Net revenue                          $31,350

Less:                                    

Cost of goods                ($22,877)

Selling expenses            ($4,635)

Overhead                       ($4,703)

Profit                                    ($865)

 

5. Adjust. Now the fun part begins! You will notice that you lose $865 if everything works out exactly as predicted in the example. So what can be done?

 

Keep in mind that the overhead allocation isn’t a real number. It is not cash that is coming out of your pocket for this particular book. It’s money that you’re spending to run your
business, whether you publish this particular book or not. For this reason, many publishers don’t worry about the overhead number and add it back in. If you do that, you are $3,838 to the good in this example. Warning: you can fool yourself like this on one or two books, but if you adopt this method for every book, you will soon find that you don’t have enough money to pay for salaries, rent, utilities, and other necessities.

See whether any parts of the equation can be adjusted. For instance, could you raise the price of the book $1, and if so, what would the new set of figures look like? Would the author accept a lower royalty? Are there any marketing expenses that could be reduced?
Are the percentages on this P&L comparable to the percentages you’ve experienced historically? Sometimes a review of your historical costs can reveal ways to improve a P&L’s bottom line, and it is also useful to use this review as a reality check (if your traditional return rate is 35 percent, don’t put 20 percent in your P&L to make it look better).

Compare your figures to industry norms. If you add a column to represent your costs on a percentage basis, you get the following: 

                                                                       $             %
of net revenue

 

Copies printed                                                5,000

Gross copies sold (95%)     4,750

Price of book                                                  $20

Discount                                                         50%

Revenue per copy after discount                    $10

Total revenue                                                 $47,500

Reserve for returns (30%) ($14,250)

Free/lost/damaged (4%)   ($1,900)

 

Net revenue                                                 $31,350                      100%

 

Cost of goods sold

Plant

Cover art                                                 $500                2%

Proofreading/copyedit    $750                                       2%

Interior design                                        $500                2%

Permissions                                            $100                0%

Manufacturing (5,000 copies)                      $13,750           44%

Freight (2%)                                                   $627                2%

Author’s royalty (10% of retail price

[$20] ´ 3,325 net copies)                       $6,650             21%

 

Total COGS                                                 $22,877          73%

 

Gross profit                                                $8,473            27%

 

Selling expenses

Fulfillment fees

(10% of net revenue)   $3,135                                         10%

Marketing                                                      $500                2%

Galley mailing                                                $500                2%

Website promotion                                        $500                2%

 

Total selling expenses                              $4,635            15%

 

Net revenue                                                 $31,350                      100%

 

Less

Cost of goods                                          ($22,877)        –73%

Selling expenses                                      ($4,635)           –15%

Overhead                                                 ($4,703)          –15%

 

Profit                                                            ($865)            –3%

 

In this analysis, a few things jump out.

You want to get a margin of at least 50 percent (60 percent is very nice; 70 percent is a thing of beauty). Here you are getting 27 percent. Not acceptable. Where is the problem?

Your total plant ought to run about 6 percent of net revenue, so that’s not it. But your printing cost is 44 percent of net revenue, when it ought to be 22 to 28 percent. Turns out you’re paying $2.75 per copy for a book you intend to sell at a $20 retail price. Although there are many different ways to set a retail price on a book, the retail price should generally be 8 to 10 times the printing price, so you can see that something is askew in this example. 

In addition, the author’s royalty is 20 percent of net revenue. This is about normal if you are a large publisher, but for a small publisher, that level of royalty can be unsustainable. Are there other ways to structure compensation that will allow the author to participate in the success of the book without making it a losing proposition for the publisher?

A word of caution about industry benchmarking. If you choose to compare your percentages to other publishers’ percentages, make sure you are comparing apples to apples. Your cost structure depends on the size of your list, the type of book you publish, and the size of your company, among other factors. What is appropriate for a large corporate publisher may not be appropriate for you. Also remember that costs can be either expensed or capitalized, depending on a company’s accounting policies, so the percentages another publisher achieves may or may not be relevant to your situation.

Taking Risks with Your Eyes Wide Open

If publishing were an industry run strictly by the numbers, we’d all give it up and go into something more rational, like horse racing. The purpose of a P&L is not to convince you to give up on a particular title (although in some cases that is exactly the right decision), but instead to give you the information you need to make qualified, informed decisions about which risks you want to take and which you don’t. Devise a P&L form you are comfortable with, and use it at multiple points in the publication process for every single title you publish.

 

Deirdre Smerillo has over two decades of experience in the publishing industry, including 15 years as director of contracts for Random House and Hyperion. In March 2006 she founded Smerillo Associates, a firm specializing in the business and financial needs of independent publishers. She can be reached at deirdre.smerillo@smerilloassociates.com.

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