To help indie authors evaluate the effectiveness of their writing as a business, in the second of a short series of posts US authorpreneur Karen Myers, formerly a Chief Operating Officer and Chief Financial Officer for several small-medium businesses, tells us how to evaluate our writing activities commercially and how to improve their profitability, addressing gross income, net income and return on investment.
In this post, she defines the concept of net income, shows how to calculate it, and demonstrates strategic use of that information.
(Karen uses accounting terminology from the USA business world, but all countries do similar things though the terms may vary.)
Net income or Do you actually make money?
Your business has costs, of course, such as marketing, office supplies, rent, utilities, and so forth. These costs are indirect — they're not associated with a particular line of business, or they're not required to produce the product being sold, which would make them part of COGS (Cost of Goods Sold).
Typically these indirect costs are relatively stable. They don't grow very quickly as the lines of business grow, and they're quite predictable. In American terminology, this is often referred to as the “nut”, the cost you have to cover with your Gross Profits (see previous post for a reminder of what this means) in order to be profitable overall.
Net Income = Gross Income minus all indirect costs.
Net Income is what you pay taxes on.
In a larger business, the indirect costs would include salaries for anyone not actually making or managing the products that are sold, and the related healthcare, pensions, and other costs.
Obviously your Gross Income has to be profitable before your Net Income can be, and you must pay particular attention to trying to minimize your indirect costs.
Marketing is usually applied to a particular business line, and often to one element in the line, such as an ad for a particular book. Why is that considered an indirect cost instead of a direct cost?
Part of the reason is that it can be difficult to associate a particular marketing cost with a particular sales income, but the main reason is that marketing is an optional cost. You can produce the titles, or consulting work, or whatever line of business without marketing. You may make more money if you also market it, but you don't have to incur that cost necessarily.
Coming soon: the third post will complete the financial picture by addressing Return on Investment.
Karen Myers frequently shares valuable business management information relevant to indie authors on her website, www.hollowlands.com, as well as news about her writing and publishing activities, such as a longer version of this post here.#Indieauthors - do you know how to work out your net income and how to use that data to improve your author business? Let @hollowlandsbook authorpreneur Karen Myers explain... Click To Tweet
IN CASE YOU MISSED IT:
THE FIRST POST IN THIS SERIES ABOUT FINANCIAL MANAGEMENT FOR INDIE AUTHORS