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!