Your publishing business has an ultimate purpose—positive free cash flow. Before I go into it, let’s talk about all the other reasons authors have for publishing I hear authors profess.
Love of writing
Many authors declare that they write for the love of writing. Sure, you need to love what you do, but once out of limerence, it’s like a marriage. Sure, there’s love, but it’s different and carries responsibilities. Also, love won’t pay the bills.
Serving your reader
Reader delight is essential—without it, the business caves in on itself. Your customers are your source of revenue, but if your business didn’t exist, others would step in to meet the need. Your business needs customers, but it doesn’t exist only to serve them.
Fame
Who doesn’t love the accolades? Everyone is wired for appreciation and acknowledgment; when it comes from the masses, it’s all the sweeter.
Here’s a chunky nugget: fame won’t make that imposter syndrome go away. It will be greater because you’ve got more at stake and wonder when it will all crumble. As an observer of the industry, it’s easy to see when an author has built their business to feed their own ego rather than serve others.
Fortune
Who doesn’t love money? I mean BIG money—hundreds of thousands in big advances—wowsa!
This is a winner-takes-all market, so some will garner fortunes from writing. But even those who make the elite 1% by writing a profitable title may still struggle to earn a living. Fortune is a tough goal for authors. Few ever attain six or seven figures by self-publishing.
Positive free cash flow
The answer is producing positive free cash flow.
Wait, Solari, that’s the same as fortune.
No.
When you define the business around positive free cash flow, you have one KPI to guide you.
It measures the accumulation of your most powerful asset—cash.
Sure, that comes from fans, and you need to accumulate them, but cash allows you to reinvest in the business and provide a return to your investor.
We can never forget the investor’s needs. Every business is valued for its ability to produce cash. The more money it makes, the higher the return on capital employed. The higher the return, the more valuable.
You measure the bottom, not the top.
How much of every dollar of sales do you pocket?
How fast does every dollar you put into your business go out and come back, and does it return with friends?
Positive free cash flow (the post-tax money you take out of the business) determines if you ever pay yourself anything, then how much, and for how long.
So here’s the dirty secret: If you manage your cash flow well, you can also achieve fame, fortune, and fans.
But how do we generate it?
Let’s walk through the phases every author will need to pass through…
Phase 1: Break even
You are the source of cash until the business breaks even. Once you finally reach the glorious moment when you don’t have to put more money into the business, you’ve cleared a critical hurdle. The problem is that getting to this stage takes longer than most plan for. Even after the company makes money, you may still need to invest because you want it to grow faster than the money it produces.
Phase 2: Set the right growth rate
When you begin to earn a profit, it’s time to pay your investor: yourself. A good rule of thumb is that you pay 6% of gross revenues back to you and start the flow of cash out of the business. Over time, you can increase the percentage, but initially, just setting a rate will force you to pay your investor back.
In any start-up, it’s a massive relief to the operators and the investor when the investor gets their investment back. Even if there isn’t a return, it’s no longer money at risk. Everything from there is an upside.
The natural inclination is to pour on the gas. Throw all of your income back into publishing. Grow that business into a monster.
That’s a dangerous path.
You can only grow as fast as you can keep up with working capital. That’s the cash that has to stay in the business to make covers, pay editors, and share advertising. If you grow too fast, you’ll have growth-related cash flow problems.
Suddenly, you won’t know where all your money went. You will have to slow down, disrupting plans you can’t afford to fund. Now, cash and growth are dictating their terms to you.
Phase 3: Diversify
The elites who earn a living from writing need to accept the cold, hard truth—there is no diversification within writing.
Going wide isn’t a solution because Amazon is still 60% of the market.
Think about how you can move profits out of publishing and into wealth-generation methods to create a durable business. You don’t need to learn those businesses, but you’ll need to find trusted partners that can help you diversify.
The way to diversify is by investing in industries and assets that are not associated with publishing or ones that run counter to its trends.
Most business owners never escape the fate that their most valuable asset is their business. They are good at what they do, and their business produces cash like no other asset. Expecting not to have it be your biggest cash-flowing asset isn’t the goal. Instead, siphon off cash to create additional assets that produce more cash, giving you less reliance on one highly concentrated asset.
Read: Plan for the Unexpected with Future Positive Optionality