I recently shared this slide, which shows the “cents on the dollar earned” for various scenarios, at the 20Booksto50k writers conference this year.
Since then, I have named this important metric “Author Royalties Kept.” This simple measurement gives you insight into your capacity to turn your creativity into personal wealth.
I recently watched a documentary on David Geffen, a founder of DreamWorks, with Steven Spielberg and Jeffrey Katzenberg. When they decided to start the studio, Geffen told the other two that most studios fail because they run out of money, and if he were going to be part of it, they would need to raise two billion dollars. The studio spent one-point-eight billion dollars before making a profit.
This story shows the importance of capital in the creative process. Even with some of the biggest names in movies and animation, they would fail without getting the money right. Geffen knew that to get the business to be self-sustaining, it needed to spend a massive trove of cash.
You learn that lesson by running out of money. When you are short on cash, you make desperate moves. Quality suffers, fans flee. If you have made it over the break-even hump, congratulations; most don’t.
How to calculate your Author Royalties Kept (ARK)
Now, you can use ARK to evaluate the performance of your business, but to do that, you need to look at the whole industry. Monthly evaluation of ARK means tracking your monthly expenses. To do this, take the pre-tax profits, which is what you pay yourself in salary (an expense to the business), and the profit you take out from the company (distribution, dividends, whatever you call them), and add that together.
For example, imagine you are an S corp, and you had seventy-five thousand in revenue and paid yourself twenty thousand in salary. The business had fifteen thousand in profit, then twenty thousand plus fifteen thousand equals thirty-five thousand. Thirty-five thousand divided by seventy-five thousand equals 0.46 or 46 ARK.
Let’s say you sold a million dollars of books and paid yourself one hundred and twenty thousand dollars. That means you are a seven-figure author paying yourself six figures.
By our key indicator, you are earning twelve cents for every dollar. This is pretty inefficient when you have to sell thirteen times the book to earn three-point-four times the money of the first example.
Evaluating your business
Our first example only needs to grow sales to two hundred and fifty-seven thousand to earn six figures. Work smarter, not harder.
More often, the situation goes like this: to scale the business, you increase advertising expenses, and things get out of control. Suddenly, you find yourself in scenario two. You can post #goals on seven figures sales and six in profit, but you are minutes away from a breakdown.
This is where we can either get complex or simplify. Simplification is driven by systems thinking that focuses on a singular system goal: improved ARK. But any good system has tension to keep it in balance and momentum. You must always weigh what amount goes out and stays in business. Striking for the correct growth rate is determined not by your goals or what the industry says is the next cool thing but by the cash you have on hand. You accept where you are right now and try to get bigger and better with the resources you have at hand.
Have you heard of the guy who traded a red paperclip for a house? The idea is to make a bigger and better trade with what you have. Can you take something of lesser value and make it more? This is, in essence, the idea of what you do. You build a bigger and better machine for ARK. You take money, use it to fuel your creative process, and it goes out and gets bigger and better. Before you put your profits through the process again, shave off some ARK because it’s not ARK unless you get it.
Last year, several of my clients experienced what looked like a stagnant ARK. That wasn’t the case; what was going on was that they chose to reinvest more in the business to attain other goals like market or media diversity. In these cases, it’s my job to remind them that a strategic choice was made to sacrifice short-term results for long-term benefit. That tension is what will drive a business to new heights in a healthy way, not going all in for growth and not sucking all the profits out, so it dies.
Each year, your business will have a different “right” growth rate. Your ARK result will shift based on the choices you make as the CEO. What should be evaluated is the balance with respect paid to there being an above-average ARK. In the case of my private client base, the average ARK is 0.47. Figure out your ARK for last year and what you would like it to be for this year. How does that limit your growth? How do you feel about having this constraint on your business?
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