Tuesday, March 11, 2014

The Business Side of Writing

Writing is a joy.  The business of writing can be a pain in the you know what. I’m not talking about giving interviews or doing book signings. I’m talking about the nitty gritty aspects of the business side of the enterprise. Marketing, calculating the costs of doing business, accounting, and... shudder... taxes. I’m going to leave marketing for another blog... maybe. There are probably others more qualified to talk about that than am I. I’m going to talk about the housekeeping side of business.  Cost accounting, pricing, Profit and Loss (known in the business world as P&L), bookkeeping, and the good old IRS reporting. Let’s talk bookkeeping first.

There are fundamental aspects of business accounting that figure into the actual cost of doing business (aka CODB).  A good accounting software or an accounting ledger (if you are old-fashioned) is essential to tracing income and expenses.  Tracking is how you calculate your CODB, your P&L, and, ultimately whether you have a business, an avocation, or a hobby. If you aren’t making money after five years, it’s an avocation or hobby. Ask the IRS. The good news is that, with a home-based business, you can keep your costs and overhead down. That means you have a better rate of return on your investment (ROI). The bad news is, most novice writers have no sense of the business of writing, they don’t track costs against sales. A lot of novice writers would be shocked to find out that the article they were paid $50.00 for cost them $75.00 to get published, or the e-book that sold 600 copies on Amazon for $2.99 per that generated a total royalty revenue of $630, cost $700.00 to produce. That’s where good bookkeeping comes in, and that is a big part of business housekeeping.

As a former COO, I have a pretty good accounting breakout for the business of writing. The income side of the ledger is pretty straight forward... it’s what you get paid for your writing, speaking engagements, and so forth. It’s the cost side of the ledger that is the sticky wicket. Let me share the basics of that side. It consists of Direct Costs and Indirect Costs. I’ll break mine out for you... maybe it will help, but in the words of an old friend of mine, at least “it couldn’t hoit.”

·         Direct costs - these are the costs directly attributable to the production of the final product.  Usually I will assign an alpha-numeric project number to these... it can be based on a book project (e.g. FOM6, FOM for the title - Fishing and Other Misadventures - and 5 for the sequence in books I have written). Where an overhead number applies to a specific project, I will use number in conjunction with the project number (e.g., 0740-FOM6 designates postage costs specific to that book).
  • DL       Direct Labor (project specific - if you pay yourself an hourly rate as a function of your business enterprise) 
  •   DM      Direct Materials
    • Office supplies (project specific) 
    •  Software (project specific) 
  •   DT       Direct Travel 
    •  Airline/Train tickets 
    •  Auto rental/cab fare 
    •  Lodging and meals and incidental expenses (M&IE) 
  • ODC   Other Direct Costs 
    •  Mailing costs (USPS, UPS, FedEx) 
    •  Copies 
    •  Advertising (as applied to a single book - general advertising is an overhead cost) 
  •  DE       Direct Equipment  
    • Hardware (computers, external storage devices, printers, monitors, etc.) 
  •  DS       Direct Subcontractors 
    •  Cover design (single book - this may or may not be included in Illustrator cost)
    • Illustrator (attributable to single book and paid only, not collaborator) 
    •  Printer (this includes printing services like CreateSpace) 
    •  Publicist/marketer (can be outside service or paid family member) 
    •  Web site developer (for a single book - general author’s website development and maintenance is an overhead cost)
·         Indirect costs - these are the things that may or may not be specifically attributable to a specific product.  Many of these can be calculated into a general overhead rate and applied to each book for a per book P&L statement. Below the list of indirect costs I use in my business calculations.
  • 0701    OH Labor (general business development, not directly attributable to a project) 
  •  0702    Home Office Space (calculated as a % of total living area of your home) 
  •  0703    Rent Office or Storage Space (off-site - this includes occasional rental of an executive suite for meetings away from your home and any storage unit dedicated to your business) 
  •  0710    Utilities (electric, gas, water bill calculated as a % = Home Office Space) 
  •  0719    Facility Repair & Maintenance (for home office space only) 
  •  0730    Telephone Costs (hard line, cellular, hardware) 
  • 0732    Repair and Maintenance/General Equipment
  • 0740    Postage (includes postage machine costs and repair if used) 
  •  0741    Delivery & Freight (outside couriers, FedEx, UPS, etc.) 
  •  0744    Copiers: Supplies and Papers  (this can apply to your all-in-one printer) 
  •  0745    Copiers: Repairs & Maintenance (this can apply to your all-in-one printer)
  • 0746    Copiers: Rentals and Leasing Costs (some home businesses use these services) 
  •  0747    Outside Printing (copy costs, photos, business cards, etc.)
  • 0748    Publications and Subscriptions (professionally related only)
  • 0753    PC Software Purchase
  • 0754    PC Hardware Purchase
  • 0756    PC Supplies
  • 0757    PC Repair and Maintenance
  • 0760    Office Supplies
  • 0761    Small Furniture and Equipment Purchases
  • 0762    Furniture & Equipment (rentals and leases)
  • 0764    Equipment Purchases (this can include things like camera equipment) 
  •  0766    General Field Supplies (e.g., if you do outdoor writing this can include any expendables used)
  • 0770    Consultant Services (general, including accounting service, tax service, business management, general publicist, author’s website designer, etc.)
  • 0771    Business Conferences (these can be conferences you attend to promote your work, book trade shows, writing conferences, even conferences like ComicCon, etc.) 
  •  0772    Training & Seminars
  • 0773    Professional Dues & Conference Fees (Writer’s organizations memberships, conference booth fees, etc.)
  • 0781    Recruiting: Interview Costs (applies to non-contract assistants both full and part time)
  • 0782    Recruiting: Advertising Costs (see above)
  • 0784    Employee Local Travel (this is work-related local travel to research, attend book signings, interviews, etc.) 
  •  0788    Fees & Licenses (this includes business licenses if required, and can include things like hunting and fishing licenses if they are necessary to your work)
  • 0792    Health & Safety Expenses (can include portion of insurance applicable to your business - this one can be a little dicey for newbies - research before applying it)
These costs, using a standard business model, all go into calculating the price of your product if you price for profit.  Of course, you must also project sales to see if your pricing is realistic. Most articles and books, however are not priced based on a standard business model by writers.  Traditional publishers will set the price for books they accept based on the author’s reputation and/or their assessment of marketability and projected sales.  Magazines, journals and on-line publications pay either a set or per word fee for a writers work, unless the writer happens to be a recognized best seller or expert in the field, in which case he or she may be able to negotiate a fee with the buyer.

Whether you are a new or experienced writer, keeping a good set of books will stand you in good stead, and it will help you determine profit or loss, itemize deductions, and generally keep you out of trouble with the IRS. It’s a good idea to start a good set of books early in your career. It forms good habits and it is a lot easier to do it at the outset than wait until you have a file drawer full of receipts to figure it out. Another good practice is to scan all of your receipts and catalog them appropriately, as well as keep expense reports for travel by trip in an electronic filing system by year.

So there you have it. Maybe this will help some of you. I hope so. It beats learning it in the school of hard knocks. Feel free to copy the indirects if you like, just bear in mind the numbering system isn’t set in stone. You can make your own, or your software may generate numbers for them.