Kelly McClymer's Blog

I hope I convinced you yesterday that it is okay for a new writer’s business plan to have a lot of zeros in the first year columns for cash flow projection. Reality is reality, after all. Sometimes we think we’re better off not knowing, but most of the time we’re better off facing reality periodically and forgetting it in between (like when we’re in the throes of drafting the story).

There are few more financial sheets for a business owner to create to keep track of the bottom line of a business, the balance sheet, and the profit and loss statement:

Balance Sheet: The balance sheet keeps track of the assets and debts of a business. It is useful for a quick look at how the business is doing.

Assets are divided up by those that are liquid (cash, or things easily turned into cash) and those that are long term (equipment like a writer’s computer, which could be sold or pawned). A writer should consider every completed piece of fiction/nonfiction as an asset. One of the interesting things about the business of writing is that every completed piece of writing has the potential to make money for years (some may need revision, of course, but many novelists who couldn’t sell a time travel novel in the 80s, suddenly found there was a hunger for them in the 90s). [Note: this only applies to complete fiction, and well developed non-fiction proposals. Undeveloped ideas should not go in the asset column.] Writers sell the rights to a piece of fiction or non-fiction. Unless all rights are sold (not recommended, but sometimes writers do this in the beginning — in which case the piece is no longer an asset, it has cashed out), pieces can be sold as reprints (based on contractual agreement, so read your contracts!). As an example, my first seven novels, historical romance, are out of print. I have received the rights back on five of them and I am free to resell them, or to re-release them myself in any form, including Kindle.

Debts: (or liabilities) New writers have few debts, as there are no banks I know of who would float a writer a start up loan. You can, if you choose, include all owner contribution to start up funds as a personal loan to yourself. Some hard-nosed business types might do this in order to make sure they have a picture of business profitability (for instance, if you take five years and $5,000 of your other-job income to finance writing a novel that nets you a $2,000 advance, you haven’t really made a profit on the writing business yet). I’m not that hard-nosed, but I admire those that are. One thing about being this scrape-bone realistic is that you understand the consequences of every sale (for example, if that $2,000 advance is attached to a contract that gives you a better royalty percentage and guarantees your book being in WalMart, it may be worth taking the small advance for the likelihood of great royalties that usually accompany having your book in every WalMart).

Profit & Loss Statement: This is the reality check for all business owners. Most advisors recommend a new business do a P&L once a month, and quarterly thereafter. As I was learning about this statement, I had a very strong reaction: “Writers don’t need to do this! We don’t get paid every month. And new writers can wait years for the first payment.”

I was wrong. P&Ls do two things: give you a realistic picture of what is working to bring money into your business (did that class you offered get enough students to make it worth your time to teach? or does it need tweaking, or scrapping?); and inspire a writer to send out that batch of queries for non-fiction in order to build the business name (your name, or your writing name). The moment you begin your business, you begin growing your reputation. This is what writers need to know. I hate the word “branding” — but reputation is a venerable and accurate term. And your writing business rests on your reputation. The sooner you start building it, the better.

A typical P&L (you can download the form from your local SBA), will include:

Net Sales:Net sales covers sales during the time period minus an allowance for returns (for example, if you contract a non-fiction article with a kill fee, your net sale is the kill fee — the minimum you will receive — until your article is accepted by the editor), or the 15% to your agent. [Note: It is important to understand that your sale is not the article, story, or novel, but the specific rights sold (all, first NA serial, English language, etc.). Whatever rights you do not sell, you retain the right to sell. This is critical to keep track of for the long term.]

Cost of Goods Sold: This one, for writers, is either going to be $0, or figured by a writer’s time, depending on your mindset. The only cost of a completed but unsold article, story, or novel is a writer’s time. The hard-nosed business writer values that time (3 hours x $25/hr = $75). But that can be depressing for a new writer, because a sale may not cover the cost, so valuing your time at $0 until you have a selling track record and can put in a realistic figure is fine.

Cost of Goods Available for Sale: Here’s where you list the assets and rights you haven’t sold, valued either at $0 or by time.

Expenses: There are indirect costs (time, labor, etc.); and direct costs (raw materials — which is your creativity and is priceless, imo).

All these figures will give you your business’s Gross Margin (Net Sales – Cost of Goods Sold).

After you have the Gross Margin figured, then you subtract the Selling and Administrative Expenses (contest fees, conference fees, queries, market research, networking) and get your Net Operating Profit (Gross Margin – Selling and Administrative Expenses = Net Operating Profit).

But, still, you’re not done. You need to enter Other Income and Expense (unexpected, unplanned, unrelated to your business expenses such as the interest you earn on business money in an interest-bearing account, or an overdraft fee).

Now we take Net Operating Profit – Other Income and Expense and get Net Profit Before Income Taxes.

I bet you can figure out what comes next, even if you are a numberphobe like me:

Net Profit Before Income Taxes – Income Taxes = Net Profit

And, remember — you have three years before your business should be showing a net profit.