In last week’s article, I asked if you were a trophy hunter or a profit hunter.
I also challenged newer authors to explore if they were trying to hunt big game when they should be focused on trapping profit rabbits.
Profit.
Without it, your business won’t be able to sustain itself.
Net profit is the best indicator that your business system is accumulating advantage. We are talking old-school Adam Smith, Karl Marx evaluation of capital in a business.
Even if you are familiar with the formula revenue – expenses = profit, and you have run a profitable business, I guarantee you will have a deeper understanding of purposeful profit after reading this article.
If you’re unclear on what profit is or have an aversion to this business, this article will change your life.
Let’s begin at the top and work our way down.
Revenue isn’t profit.
When the industry talks about earning six figures, that means revenue, not profit.
Revenue is the royalties you collect on sales minus processing fees. In the case of Amazon, that’s the sales price minus 30% and a download fee or a per-page payment from Kindle Unlimited.
That leads to significant confusion because you can sell six figures’ worth of books and live under the poverty line if your expenses are too high.
The next thing that can confuse you is people lying. They puff up their numbers. They say, “I’ve sold a million dollars in books.” They forgot to add, “Because I wrote 100 books, which took me ten years to do.” Maybe that isn’t a lie, but it is a misleading omission of fact.
Others have a handle on that top-line revenue, but they don’t have a handle on expenses, so they don’t know how profitable they are.
Business costs like advertising, formatting, editing, virtual assistance, going to conferences, and subscriptions, while fully deductible from your taxes, consume cash. Cash that you don’t get.
You pay taxes on what’s left over. So there’s another slice of money you don’t get, leaving your net profit after tax (NPAT).
When people talk about money at conferences or forums, we assume they are taking home six figures. Far from it. Depending on how they achieve their sales and how much goes to their expenses, they could be losing money.
Think about this: if a book sells for $3.99 on Amazon and you spend 30% of sales on advertising, you are left with a 40% margin. You still need to deduct any further business expenses.
Let’s do some math.
Retail price: $3.99.
Your royalty is $2.79.
Advertising cost is $1.19.
Gross profit is $1.60.
Now, there are all those other costs to apply: covers, formatting, conferences, etc.
All those expenses deducted from the revenue collected get us to a profit, and if you’re not looking at the whole picture, then you are, in effect, blind to reality. If you do know your number, you can calculate what I call Cents on the Dollar or Author Royalties Kept.
Operating expenses: $0.27.
Operating profit: $1.33.
Cents on the Dollar = 47.
After that, you still need to pay taxes. For this example, let’s say your effective tax rate is 21%.
Taxes at 21% = $0.27
NPAT = $1.06
1.06/2.79 = $0.37
When you’re all done, you get thirty-seven cents of every dollar of revenue. Those are good results, but to have $100,000 of after-tax income, you need to sell $390,625 worth of books at the retail price.
In a later article, we will discuss another equally important function—WHEN you collect funds and pay expenses. This is the time function of cash flow.
Authors who advertise have to pay the cost to get the sale today but collect the proceeds of that sale in sixty days. If you can’t cover the cash float over that timeframe, you’ll run out of cash.
So, what does a six-figure author take home?
It depends…
A “seven-figure” author with high expenses (you know who you are) could profit $100,000 and be EARNING five figures after taxes.
I have seen more high-earning author businesses and helped more than will ever admit to turning around their business just because of this situation.
It sounds like this, “Joe, I had my biggest year of sales ever and never worked harder, but I made less than last year.”
Or,
“Since the changes at [insert latest issue], I’ve had to spend more and more just to keep my top line where it was, and I’m running out of money.”
This gives me the unique perspective to understand that there is a far better way to assess an author’s business performance.
First, profit should be measured monthly on a cash basis on your income statement.
That sentence means you look at your revenue and expenses when they hit your account (cash basis). This will skew performance because you’ll be applying this month’s expenses to revenues that could be from sixty days ago.
That’s why you should look at your monthly snapshots and three and twelve-month trends—more on that in a later article.
You now know how to measure profit. You subtract expenses from revenue, but what does “good” look like?
Finally, let’s talk about a way we should compare businesses with a method that works across big and small publishers. I’ve come up with this measure to understand profitability, and if you need to compare, do it across the industry and use it.
I call it Author Royalties Kept (ARK). It is essentially measuring a business’s pretax return on investment. I do it pretax because taxation varies from place to place and year to year.
Then you take your pretax profit and divide it by your revenue. If you are running an S corp, you would add your dividend, salary, and retirement contributions, then divide them by your revenues.
This will give you a percentage of the cents of every dollar earned before taxes and is a good way to compare performance. Let’s look at some examples. The names have changed, but these are real scenarios.
On the stage stands Sally, talking about how she makes seven figures selling books with her killer ad strategy. She spends 55% of sales on advertising, and while her business has scaled after all the expenses are paid, she makes $100,000 before taxes. That’s ten cents of every dollar.
Sitting in the audience is a silent giant that has revenues of four-hundred-ninety-thousand dollars and keeps 48 cents of every dollar. She is 2.35 times what Sally does.
Down the row from that silent giant is another silent giant that is constantly underestimated. Writing in a niche, he only sells 250,000 worth of books, but he has built a loyal following. He is keeping seventy-three cents of every dollar. He is taking home 1.8 times Sally selling a quarter of the books.
Who do you want to be?
My experience is that most authors are operating in a range of 20-30 cents on the dollar. Don’t get me wrong, that’s good, but it can be better with work. If you’re sub 20 cents and starting up, that is reasonable given what phase your business is in, but if your revenues are over fifty-thousand dollars and you’re sub twenty cents, there are issues you need to address.
You see, bigger isn’t better. Better is better.
Those in the audience can produce far more profit with manageable growth than Sally does. Yet we all hang on Sally’s every word about how to run a business.
Typically, authors get themselves into this position by pushing growth too fast.
Profit is an amazing regulator for your growth. If you always seek to deliver and, most importantly, take out profit from your business, it will moderate growth and deliver a return today—a REAL return.
Too often, the idea is that I’ll forgo a return now so I can get a bigger one in the future.
That’s not good business. That’s how you starve to death hunting for the trophy when you could be catching smaller profit games and building up a healthy reserve.
Homework
Figure out your cents per dollar.
If you’re a negative number, get it to one cent. You have to hunt down the profit.
My experience is that you should be running at least 25-35 cents pretax. With work and optimization, you can get to the 40s and 50s.
Seasoned profit hunters can bring home 60 to 70 cents on the dollar.
Read: Use a Not-To-Do List to Transform Your Publishing Business Potential