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Measuring Profitability

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Measuring Profitability

by Linda Carlson

Do you know which of your titles is the most profitable?

“The one that sells the best,” some PMA members told me, while others responded, “The one that sells for the highest price.”

True? You may want to run the numbers—all the numbers—to make sure.

Ideally, the revenue for each book is matched with such direct expenses as editing, design, printing, promotion, advertising, awards-program entry fees, costs of review copies and shipping on each sale, and royalties. If you have more than one title or you have other products and services, it’s also useful to have a method of accurately apportioning overhead—warehouse space, exhibit costs, and the time of the publicity, customer service, fulfillment, and accounting staff. In a perfect world, you could determine how many books were sold as a result of each promotion, and how much you made on each of those sales.

If you don’t run these kinds of numbers, you’ll never know how much each sale costs you. You won’t know whether this year’s new title has generated enough revenue to cover the cost of its direct mail campaign, the cost of the hours the publicist spends on the phone coordinating author appearances—or the cost of the time your warehouse staff devotes to handling the returns. Without careful analysis, you’ll never know whether a 15-year-old title that seems to sell itself at full retail is more profitable than a frontlist title that’s generating dozens of requests for review copies and purchase orders from wholesalers who buy returnable only. You also won’t know what promotions and changes in products and strategy make sense—whether, for example, online sales that require no personal interaction are so much more profitable that you can offer a discount on them.

Of course, if you spend all that time allocating expenses, comparing budgeted expenses to actual, and analyzing income statements, you’re incurring a serious opportunity cost. That’s time you could have spent selling books.

To quote David Ash, publisher at the Seattle-area Basho Press, which does titles such as Haiku for Chocolate Lovers, Haiku for Baseball Lovers, Haiku for Catholics, Haiku for Coffee Lovers, and Haiku for Poker Players: “My guess is that any publisher with less than $100,000 in annual revenue will know in his or her gut which titles are profitable and will not need to waste time—our most important asset—with too much coding and analysis. “

As Ash points out, all this analysis “can be as addictive as checking your Amazon sales rank every day when you could be making one more phone call or writing one more email to promote your titles.”

“Track your expenses in a way that makes the government and your bookkeeper happy at tax time,” he counsels, “and ignore the rest!”

Tools for Keeping Track

Those of us who don’t have a lot of confidence in our guts might want to track sales and profits more formally. As one small business outside publishing recently discovered after a careful review, the expensive ads and exhibit space the owners had been buying for more than 20 years had never brought in appreciably more customers than the owners’ speeches, and the cost per sale was significantly higher.

To ensure that they monitor sales revenue and expenses, many PMA members use some sort of accounting software, including but not limited to programs discussed below. As you’ll see, some rely on what their distributors provide; some buy inexpensive small-business and personal-accounting programs, and some use programs that are publishing-specific.

Atlas reports. Jamie Sutliff of Cold River Publications in upstate New York is one who uses accounting software provided by distributors. In his case, with three YA fantasy books produced by Bookmasters, he uses reports from its affiliated distributor, AtlasBooks, that show “monthly sales of all titles, a sales analysis, and a chart for expenses for everything from shipping and storage to insurance.” But, reports Sutliff, “I’m not sure yet if it’s worth the cost.”

What Atlas reports cost depends in part on what a publisher wants. The basic $495 setup fee and the $40 monthly charge for distribution cover a Web page on the Atlas site, use of the company’s toll-free number for orders, submission to Books in Printand accounts receivable management. As shown at atlasbooksdistribution.com/stats.htm, Atlas reports (included for that $40 a month after setup) also show “activity-related” charges for book storage, fulfillment, and returns, among other things.

Because they are online, these reports are available around the clock, and they can be downloaded to an Excel spreadsheet for each title. They do not take account of book-manufacturing charges (even if the book was produced at Bookmasters) or of fees paid to vendors other than Atlas, which a publisher must add manually. Rod Knieper, a customer service account executive, says custom reports that include expenses such as royalties can be created for an additional fee.

Quick Books. At Balcony Press, a Glendale, CA, publisher that markets primarily to architects and designers, Ann Gray uses QuickBooks. “We assign each title a class,” she reports, noting that “the program allows us to do a P&L by class.” Overhead is calculated as a percentage of gross sales, and because Balcony also publishes FORM magazine and does consulting, “allocation of overhead to the three divisions is very inexact.”

Quicken. Pete Masterson of Aeonix Publishing Group, which offers one title and book design, production, and consulting services from its offices in El Sobrante, CA, uses Quicken and explains why: “It’s not a particularly good accounting program—but it’s not particularly bad, either.”

As Masterson notes, one helpful feature is a “memo” field for each entry. “Quicken has the ability to search on this field, a feature that isn’t shared by several competing programs,” he says. In fact, consistent use of the memo field is the key to maximizing the effectiveness of Quicken. “For example,” Masterson explains, “if you were to pay a publicist $500 to prepare and distribute a press release on two titles, you could note in the memo field, ‘Half Title A; half Title B.’ Then you’d be able to run a query on title B and get all the related items.”

Your reports will be more accurate if you use Quicken’s “split” function, which allows you to allocate which portion of a payment in a certain category—say, “publicity expense”—goes to each title. Similarly, publishers with more than one title can use the memo field to attribute revenue from one check—for example, a check from a wholesaler—among various titles.

It works the same way if you receive one check for more than one kind of business activity—a school program and book purchases, for example. In states where retail sales are taxed at different rates than consulting or presentations, this feature allows you to create income categories that match tax categories.

The key to accurate reports is being consistent in your memo entries, Masterson notes. If you say “hike book” the first time, don’t call it “Hikes” somewhere else. He also suggests that, if you use an accountant for tax preparation, you have the accountant create a chart of accounts for use as Quicken categories. That way, he explains, “when I run my reports at tax time, they appear just as the accountant expects them to.”

Sole proprietors who handle their own taxes can use the categories on Schedule C of the federal income tax form for the chart of accounts. Then completing your tax return simply means copying the figures reported by Quicken.

One compromise Quicken requires is with invoicing. Unlike Quick Books, Quicken does not invoice, so Masterson used a shareware application in FileMaker to issue invoices and track accounts receivable until he outsourced fulfillment.

Acumen. With almost 100 titles in print, Seattle’s Parenting Press uses Acumen, which co-founder Fred Crary says does a good job accounting for cost of goods sold, especially payments to vendors for such expenses as design and printing. Its weakness, however, is with tracking the cost of staff labor.

To supplement purchased software and allow Parenting Press to extract (albeit manually) all the costs attributable to one book or one project, Crary long ago developed a very detailed set of project codes that serve as extensions to the chart of accounts. So “Exhibits” has an account name and number and also a project code with an abbreviation of the conference name such as “NAEYC” (for National Association for the Education of Young Children).

Publishers’ Assistant. About 200 publishers, mostly in the United States, use Publishers’ Assistant from Vermont book publisher Upper Access. Ron Lawrence, who owns the software company, says it was designed to handle some of the real-life situations publishers encounter.

For example, it provides such reports as sales vs. returns by customer, and sales vs. returns by title by customer, which can be used to determine if a customer consistently overorders some or all titles. Publishers’ Assistant also alerts publishers to possible returns, because it tracks the unsold inventory at distributors and wholesalers. As Lawrence notes, this last feature may keep you from going back to press too soon.

Recently the company introduced PubAsst Web Services, which allows publishers to export title information from an in-house database to an online sales site, complete with a shopping cart. Orders can then be downloaded to a PC. Publishers Assistant also offers an add-on that formats title information in the ONIX format standard for Ingram, Amazon, and other major customers.

Linda Carlson (lindacarlson.com) writes from Seattle, where she will use Pete Masterson’s advice to take full advantage of Quicken’s potential to track her income and expenses for books, consulting, and speeches.

 

 

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