Monday, October 12, 2009

P&L 1 of 4: The Basics

I'm finally making good on my earlier promise by bringing you a four-part series on one of the publishing industry's most important processes: the profit-and-loss analysis. So, without further ado: P&L Week™ commences here on PMN!

The P&L (which, as you can see above, stands for "profit and loss") is a financial analysis performed by publishing houses (generally in Microsoft Excel) to try and determine whether a book is profitable. There are several iterations of the P&L—usually one done before the acquisition as a predictive tool, a few revised versions generated throughout the editorial process, and one "post-mortem" P&L done post-publication to determine both profitability and how accurate the initial estimation was. They're all fairly similar, however, and for the purposes of this post, when I say "P&L" I mean the initial, pre-acquisition P&L.

When estimating profitability in the P&L, it goes something like this:

• Gross sales are estimated (that is, the number of books the publisher thinks they'll be able to sell x the proposed price per copy), based on historical data for that author/genre/format/&c. See? This is why comps are important.
• Returns (the number of books the publisher expects will be returned by the accounts x proposed price per copy) are estimated, also based on historical data.
• Net sales are derived from subtracting returns from gross sales.
• After that, direct costs (also called cost of goods sold, or COGS) are subtracted. Direct costs include plant costs (art, permissions, typesetting, &c), printing/paper/binding, and (o joy!) author royalties.

Another important point, now that I think of it: the publisher always offers a discount to the accounts, so the publisher never actually earns money based on the price you pay at the book store, but rather a fixed percentage of said price.

Back to the bullets:

• Once you've got net sales and direct costs/COGS, you only need one more factor in order to calculate gross profit: subsidiary rights. They vary from title to title and include things like book club, audio/large print, and foreign rights. Due to said variability, some houses don't bother to include them on the acquisition P&L, and those that take them into account calculate averages based on—you guessed it—historical data.

We've got net profit! Hooray! However, we're not done. We still need to subtract operating costs (to calculate contribution) and overhead costs (to get our net operating profit).

• Operating costs are exactly what they sound like: costs incurred by daily operation of a company. In book publishing, these costs include freight (variable depending on the format of the books being shipped), marketing (including co-op money), and departmental costs like salaries, travel, &c. After being in business for awhile, a company can usually figure out their average yearly operating costs, and those percentages are pre-loaded in the P&L Excel grid.
• Once we've subtracted operating costs from our gross profits, we're left with contribution—the departmental money available to cover any additional corporate costs, reinvest in the company, work toward overall growth, &c. Speaking of additional corporate costs—that is, overhead costs—those need to be subtracted before final (well, nearly final—see below) profits can be calculated. Overhead includes any and all corporate-level expenses that haven't previously been accounted for, including sales and merchandising, IT services, and any general administrative costs.
• Now we've got net operating profit, or EBITA (Earnings Before Interest, Taxes, and Amortization). This is the actual profit, less interest owed (e.g. on loans taken out to finance the company), taxes (variable by state) and amortization (e.g. goodwill, the price in excess of assets one company pays when it acquires another company).

In short: once the P&L analyzes all these figures, if it still looks like your book will turn a decent profit for the house, your book may well get the green light for publication. (You may even get acquired even if the P&L predicts a loss, but more on that later this week.) If there's no projected profit, then there's (probably) no book.

I hope this was more helpful than it was... uh, confusing. As always, leave any questions in the comments. Tomorrow: how all these factors interact to determine the details of acquisition!

16 comments:

  1. Um, totally not related to P&L, but I saw this in the New Yorker today and thought of you:

    http://www.newyorker.com/humor/2009/10/19/091019sh_shouts_weiner

    :)

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  2. Scary! There's not a lot left over sometimes, so forget about getting rich quick if you're an author!

    Also, publishers have been chopping promo budgets (and often authors pay for this kind of thing themselves). And then to have to worry about returns... and what about ebooks & "pirating" them?

    Yikes, yikes and more yikes...

    Scary business... publshers really have to be ready to gamble on a new author. This make a tough gig evn tougher.

    Thanks for the eye-opener, Jill
    www.jilledmondson.blogspot.com

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  3. This is great information! Thanks Eric!

    I wonder, on average, just how accurate the pre-acquistion P&L usually is. Projections are really difficult.

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  4. Publishing Industry's P&L: Scary for authors. Sad for readers. So much fine writing doesn't get out there. There has to be a better way. I hope we will see it in the not-so-far future.

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  5. Pimp,
    Thanks so much for such an informative look at the ins-and-outs of the industry!

    I'll have to admit, the information is a bit scary to process for newbie author like me (my agent is getting ready to send my book proposal and novel out to publishers), but I'm really glad to know the details.

    Thanks again,
    Christi
    http://christicorbett.wordpress.com

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  6. My head hurts just a little.

    Thanks, Eric, for doing your part in demystifying the process.

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  7. Send in the clowns....uh......I mean the accountants.......

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  8. I'm curious about an aproximate amount publishers get for selling foreign rights. Any idea?

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  9. All that and amortization too.

    Thanks, again, Eric.

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  10. What I would be curious about is how are advances decided upon? I'm talking for non-famous people.

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  11. Great info. Thank you so much for posting this!

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  12. thank you! can't wait for the rest of this series... I will definitely be saving this and rereading :)

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  13. I'm a full-time fantasy novelist, and I belong to Novelists, Inc., an organization for career novelists in commercial fiction, which has run several excellent articles in its newsletter about P&Ls--but the newsletter is available to members only. You're posting excellent information here, and I'd like to post links on the Writers Resources Page of my website to your four-part series on P&Ls.

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  14. There just aren't enough publishing industry blogs that reference EBITA on a routine basis. As somebody in the financial sector, I loved this post. (And in response to people who don't feel there is much leftover for authors, that's true, but that's also capitalism. If we do away with overhead, that means we do away with Eric's job and he'll be a homeless-poet/literary-fiction-writing person.)

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  15. My dad's always been into to publishing business and I'd like to continue his business. That's why I love your site, you keep me up-to-date. I'm not one of those who wastes his internet time on viagra online without prescription , like my brother!

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