Shifting away from marketing to do a very, very quick and basic post about finances and accounting. I’m seeing some issues with the way people calculate profits and/or forgetting to ask the right questions. Or just bad use of terminology.
So, I’m going to try to tackle that today. Let’s start with the basics. Realise this is incredibly simplified since it doesn’t include things like potential tax witholdings (if you are outside the US and not 0 rated) , EU taxes (if you are selling direct) or anything like that.
Talk to an actual accountant to set-up your business accounting to start and get them to clarify things. It’ll help you a LOT.
Revenue – This is the top line number. For indie publishers, this is the top line number you get from Amazon, Audible, etc. This is what arrives in your banking account.
Cost of Goods Sold (COGs) – This is what it cost to sell your item. When it’s a phsyical product (think your print paperback) it’s the cost of the product, the cost of shipping to get the product to you, labour and overhead cost for selling the product. At least, that’s the accounting definition. Oftentimes, as indie authors, we’ll discount everything but the cost of the product and the cost of shipping. Which is (sort of) fine.
Ebooks often have no COGs. You could put cost like Publishdrive’s use fees here, if you wanted. That’s an overhead cost. While variable cost like delivery cost from Amazon or the 10% from D2D is often taken out of Revenue (so it’s already removed, don’t add it back here!)
Gross Profit – very simple. Revenue – COGs = Gross Profit.
Generally speaking, this is before fixed cost like rent or sunk cost (e.g. editing) is included. The reason we don’t include editing cost to COGs (even if it does cost us to make the product) is that the variable cost for selling another ebook is 0. There’s no additional editing cost, so it’s better to stick it in further down. Under….
Often fixed expenses like rent, telephone, internet, etc. Also includes variable expenses like editing, covers, marketing cost, R&D (trips), meals and expenses, etc.
Basically, if it cost your business, it should be in the expenses section.
Things like Depreciation, Interest Expenses, Taxes or Amortization are technically included here. Which… can be fun.
Net Profit – This is Gross Profit – Expenses
This is NOT necessarily what you have in the bank (thats a different cashflow analysis which we won’t get into); but what you earned. Again, depending on how you ‘play’ with the numbers, Net Profit is not necessarily how profitable you are because the third paragraph under expenses here.
There are also other ways to make your ‘net profit’ act weird; but we’re not getting into that. Talk to your accountant.
The Reason I Brought This Up
One of the things you need to pay attention to, when you see posts about how well someone is doing is whether they are talking about Revenue, Gross Profit or Net Profit. And HOW they are calculating each of those.
The MOST common number you’ll see is Revenue.
Revenue is vanity, Profit is sanity, Cash is king
Revenue means nothing. I can say I earned a million dollars, but if my expenses are a million five hundred dollars, I’m losing money.
If someone is promoting how much money they made, check to see what their expenses are. As an indie publisher, your most common expenses are:
– marketing expenses
– cost of production for the product(s)
– COGs (if it’s paperback)
Outside of that, if they are getting consultants, have PAs, etc; all those will drive up their expenses.
Someone selling ebooks and turning over a revenue of a million is generally going to do better than someone selling paperbacks and turning over a million. After all, with ebooks, the COGs should be zero or close to zero. Paperbacks have production costs, storage costs, etc.
But… what if the ebook seller is spending five hundred thousand dollars, and the paperback seller is spending 100k?
Then, numbers change.
Ask the right questions. Or, since many times the data we get is volunteered and questions are considered rude; take it all with a grain of salt.
PS: Cash is King
Just because you made money this month on Amazon / Audible, etc, don’t forget that expenses often come a month earlier, while payout is two months later. So… CASH IS KING.
Don’t put yourself in the position where you can’t pay rent.
Like the business blog post? Want to support me writing more of them? Want to read ahead (2 weeks) of others? Become a Patron and choose the $2-tier to be able to read the business posts only and ask questions about the business side of writing.