Creating a solid business requires good accounting and budgeting practices. If the publisher does not know where the money is spent, how much is spent, and why it is spent, then the publishing house is going to fall. The way to answer where, how, and why is through good accounting and budgeting.
To read my newer article on creating an Easy and Free Royalty Management System within Google Sheets or Excel, click here.
Here are some accounting basics for publishers that I have learned over the years, including the importance of dedicated accounting software, cash flow, budgets, foreign currency sales, and royalties.
Good Accounting Starts with Good Software
The first two years that my publishing company was in business, I used spreadsheets for all of my accounting. This worked fine while the publishing business was a hobby. But, as the business grew, the importance of good accounting records became clearer.
Are spreadsheets a good way to manage the accounts of a business? Well, they certainly work, but good business accounting software will do a better job, providing some of the following benefits:
- Saves time.
- Creates a broad range of reports, faster.
- Automates more tasks.
- Scales up easily. Behind the scenes, the database that the software maintains grows with your business, but the front end still looks the same.
- Follows standardized bookkeeping procedures, like double entry.
- Makes the accountant happier at tax time.
- Makes it easier to sell the publishing business.
- Makes it easier to attract investors to the publishing business.
- Allows the publisher to clearly understand the real financials of the business—where is it losing money and where is it making money.
- Allows the publisher to generate complex, historical analytic reports that will drive the future direction, growth, and profitability of the publishing company.
- Double entry accounting catches errors that would otherwise be missed.
I am a Mac user. I have been my entire life. And I feel that Macs are intuitive computers for designing books and doing the other creative work required of a publisher. However, there is not a large choice of business accounting programs for the Mac. I use AccountEdge Pro by Acclivity, and I am pretty happy with how well it works.
Remember, this is a real business. So treat it like a real business! In publishing, it is easy to forget this fact and instead focus too much on the creative process. Accounting is absolutely vital to a successful business no matter the size. So, when designing the budget of a new publishing company, add in a couple of hundred dollars for a good business accounting program. And learn how to use it! This is one purchase and labor cost that will generate knowledge and profit far beyond its cost.
Cash Flow—Seeing into the Future
Cash flow statements give transaction by transaction insights into how much cash is flowing in and out of the publishing business at any point. When the publisher assigns to the vendors and customers the correct payment terms in the accounting software (e.g. 30 days, 60 days, etc), cash flow statements allow the publisher to see into the financial future of the business.
Obviously, this is a powerful tool for the publisher who needs to invest lots of money in forthcoming projects, from acquisition and editing costs to marketing and printing. Understanding cash flow allows the publisher to better budget limited resources and create a strategy for growth.
Early in the life of my publishing business, I visited the S.C.O.R.E. office in St. Louis, Missouri. S.C.O.R.E. is a non-profit that provides free business services to upstart and small businesses.
I sat down with a retired business owner in a high-rise in downtown St. Louis. He asked me the usual questions about my business. What does it sell? Who is the market? Etc.
Then he asked me a question that I didn’t know the answer to. What is your cash flow?
My response was, Cash flow? What’s that?
Within a few minutes he gave me a lesson on cash flow and stressed its importance in building a business.
Now, every time I launch my accounting software, I check the business’s cash flow for 30, 60, and 90 days. Using that information, I can revise my budget and publishing plans for the coming months.
Budgeting is far simper than keeping the books. But that does not diminish its importance in the success of the publishing business.
Using the cash flow statements from the accounting software, the publisher can design a budget that meets the needs of a growth or profit oriented strategic plan.
Here are some points to consider when pursuing growth or profit:
- Focused on building the size and cash flow of the business.
- Most likely, spending will either match or exceed revenue.
- Focused on allocating assets to the areas that will create the most growth, and thus have the greatest profit potential.
- In addition to new publishing projects, this can include growing or strengthening the core structure of the publishing business, such as through building a database that will ease rapid growth or through purchasing equipment that will make the business more profitable.
- Focused on making profit, i.e. the business brings in more cash than it spends.
- Focused on cutting back on expenses. Purchase only the bare essentials.
The publisher uses budgeting at different levels of the business as well. The publisher should have a budget for the entire business, a budget for each imprint, and a budget for each book. And the profit or growth strategy applies to each budget.
Some accounting software will allow the publisher to create budgets. That said, budgeting is one area where a spreadsheet does a good job because it is a simple process.
Several decades ago, most small publishers would not have dealt with foreign currency. They sold most their books in the domestic market. However, Print-on-Demand and eBooks have caused a paradigm change in book distribution. Some of the books that I publish generate most of their sales in foreign markets like the United Kingdom and the European Union.
Foreign sales make up about 8% of my overall book sales. 8% is a lot, especially when considering that I have done almost no advertising in those markets and that it is only a couple of titles that generate those sales. I owe the success of my foreign sales to good research, something I talk about in the book pricing chapter. I looked at what books the market wanted but publishers were not supplying, and I supplied those books. A classic example of supply not meeting demand.
Remember when I said that early in my publishing career I used spreadsheets for all of my accounting? Well, sorting through the mess of remittances in foreign currencies at different exchange rates for multiple book titles quickly became a time-consuming task. This was one of the accounting headaches that pushed me toward using dedicated accounting software.
I am not going to describe my early workflow for dealing with these transactions, because it was pretty anarchic. But here is my current workflow using AccountEdge Pro on the Mac:
- Receive sales statement from distributor for each foreign market for the previous month. This statement includes the quantity of books sold and the amount in the local currency (e.g. euros or pounds) that the books sold for.
- I enter the sales into my accounting software. Each market and each distributor gets their own sales transaction. I use the foreign prices that the books sold for. I will update this price when I know what the exchange rate is. I save the transaction for later updates.
- Receive a remittance notice from the distributor that they have initiated payment for the period. This notice will include an invoice or event number. I update the sales transaction with this number, entering it as the purchase order number. This will help me to quickly verify transactions and reconcile bank statements.
- Receive a statement from my bank alerting me of the foreign deposit. This statement includes the invoice number from #3 above and the price in US dollars that was deposited into my account.
- Calculate the exchange rate using the bank statement, update the price of each book in the sales transaction, and receive payment for the sales in the accounting software.
Publishers may want to use a different process for dealing with foreign sales. The one described above works well for me and I am able to do it quickly and accurately. Ultimately, the publisher’s goal is to develop an accounting process that handles these transactions quickly and accurately. We didn’t get into publishing to spend our days dealing with accounts, but we must do it, so let’s do it right the first time!
Royalties are a liability—an expense. And they are an easy liability to lose track of during the course of the royalty period—in my case six months.
Unfortunately, there is a lack of affordable small business accounting software with royalty management capabilities.
This means that the new or small publisher must develop their own process for managing royalties. After a few years of dealing with increasingly complicated royalties and accounting for them, I redesigned the royalties that I pay, how I pay them, and how I account for them. Here is my process:
First, I now pay royalties for all new contracts based on net price received. So, if I receive $10 for a book at wholesale, then I calculate the royalty based on the $10. If I receive $20 from the sale of a book on the imprint’s website, then I calculate the royalty based on the $20.
Why do I calculate royalties this way? Because net amount received is the amount that I receive for every single transaction, and therefore it is an easy number to use in reports. If I based the price off of retail price, then I would have to deal with several prices for each book (domestic prices for print and eBook, and foreign prices for print and eBook), which would entail having to create more detailed royalty reports which means spending more time calculating royalties.
Using net amount received, I only need to generate sales reports for each title within the accounting software and then pay the copyright holder a percentage of the total amount for each applicable title.
Here is the process, from generating the sales report to writing the check:
- Generate a report for the copyright holder’s books for the royalty period.
- Enter the total sales (net price received) and volume for each version of each title into a predesigned spreadsheet for the copyright holder.
- The spreadsheet uses already entered royalty percentages to calculate the copyright holder’s royalty payment.
- I enter the royalty payment into the accounting software and cut a check to the copyright holder.
I believe in transparency, especially with my business partners. Each copyright holder who I work with is a business partner. Each of us depends on the other. In the royalty reports that I send to the copyright holders every six months, I show the following:
- Net amount received for each title, broken down by market.
- Volume sold for each title, broken down by market.
- Their royalty percentage.
- Their royalty amount.
This is a transparent report because it shows how much I received for the books from customers and how much of that the copyright holder receives.
Now, how do I keep track of the royalties accrued during the royalty period so that I can have accurate cash flow reports? The best method is to keep an open invoice for the copyright holder, the same invoice that will be used when entering the final amount at the end of the royalty period—as described in step #4 above. Update this invoice with the new amounts at regular intervals (e.g. 30 days) using the workflow described above. This will make sure that the cash flow statements generated using the accounting software will be accurate and include future royalty payments, which are often sizable liabilities.
In Conclusion—Keep Good Books!
One of the goals of this book is to help new and small publishers develop a publishing business that is professional. Keeping the financial books organized and accurate will make the publishing business stronger, smarter, and more valuable. The best way to do this is through dedicated accounting software and thought-out, efficient accounting procedures. The business will profit from this and the publisher will gain valuable insights into the financials of the entire business, the imprints, and each project. These insights will help the publisher in making decisions when developing or updating the strategic plan of the publishing house.