If you're happy to write and publish without wanting any financial reward, you can go on your merry way. This post is for indie authors who want to make a living from their writing but find their business is not delivering for them. It lays out the profit process I use to run my author-business, Orna Ross Publications, and that underlies my Go Creative! in Business planning method and workshops.
How the method integrates with writing and publishing is dealt with in the book Creative Self-Publishing: ALLi's Guide to Independent Publishing for Authors and Poets. This post is all about how to set yourself set up for profit by paying yourself first.
It's for authors who struggle to understand cashflow and accounts statements, balance sheets and the like–which in my experience is a lot of us. It's definitely me. I run a successful author business and a successful non-profit membership organization but I don't do numbers or spreadsheets well and I find data difficult to absorb.
Authors who lean towards the imaginative and dreamy side are often those who most resist engaging with monetary matters. More rational-analytical types tend to tell us to get real, man up or grow up, apply willpower and discipline. In my experience, that only works for a small cohort of indie authors. It never worked for me.
For years, this led me to define myself and my writing in opposition to numbers–and to money. While wanting to prosper, I told myself I was a words, not a numbers person. I was a progressive feminist, who saw the downside of Western capitalism's hyper-sexualized, consumer culture, not a woman who wanted to play the business game like a surrogate man. I was an artist, who valued truth and beauty more than money and wealth.
As I grew older, I became suspicious of such easy polarities.
I saw that these values were not, actually, mutually exclusive. That my rejection of money was hurting me. That opting out wasn't helping anyone else either, especially my family and loved ones. When I heard the “Pay Yourself First” principle, it instantly made sense to me and was the start of me integrating my passion for words with my desire to prosper and be fairly rewarded for my work in the world.
At that time, my author business was struggling, a mess, but this mindset shift quickly turned everything around.
Over the years, in working on my own author business, in working with Philip on ALLi, and in working with other authors, I developed a quarterly creative business planning method for based around the concept of paying yourself first, while applying creative concepts and habits to business.
We can develop our business in much the same way as we develop a book. If you're a business plotter, you have no need of this advice. But if you're a business pantser, know that in these digital days, when much of the number crunching is done by tech and tools, you can take a more creative approach to your author business and see it succeed.
So long as you pay yourself first.
The Pay Yourself First Process: The Profit Mindset
I know from the conversations I have with authors that many are not paying themselves a salary, never mind seeing a profit. Many muddle along with one business bank account, checking in every so often and making financial decisions based on what’s there.
Some wind up at the end of the year without even enough to cover their tax bill. Paying themselves a decent salary, never mind dividends and pension, sounds impossible. “I have to wait until I get the money,” they say, but that day never dawns.
And likely never will. It's the wrong mindset.
As an indie author, your intention is to run a successful author-publishing business. You want to make a profit, to pay yourself a salary, to cover your tax bills (business and personal), and have enough money to comfortably cover your business expenses and grow its resources. That’s what the life of a successful business owner looks like. And as an indie author, you are a business owner (even if that's not what you set out to be).
The profit mindset that you need to adopt has three components:
- You need to believe that you can make money as an author-publisher, writing the kind of books you want to write.
- You need to understand what that asks of you, creatively and commercially, and be willing to do the necessary creative work, rest, play, and practice.
- You need to commit to paying yourself first.
The pay yourself first process works… even if you're not a numbers person. I use it to run both ALLi and my own fiction and poetry author business. And I've worked with a great number of indie authors and creative entrepreneurs who have seen it take their businesses from failing to profitable.
It's easy to understand, and is based on creating reservoirs of money that can meet your needs over the short and long-term, right from the start.
It doesn't try to change your money habits, turn you into an accountancy or bookkeeping buff, or take up much of your time. It works with your existing behaviors and aligns with the most powerful principle in the Go Creative! in Business method: applying your creative skills to your business in just the same manner as you apply them when writing.
It harnesses a different sort of impulse and energy to data-driven to-dos. The data has its place but it doesn't run the show. In the Go Creative! method we work from the same energy that fires our books.
The Pay Yourself First Process: How It Works
You take a preset percentage of your business income from every sale and allocate it to bank accounts that you've set up for the process. First, you deduct your profit allocation (to your profit hold account), then your salary (to your personal bank account, then your tax allocation, income and company tax (to your tax hold account). Now what’s left in your business income account is what is actually available to you for expenses. Call this your Business Income and Expenses (IncEx) Account.
Twice a month you make a percentage payment from your IncEx Account to your profit, tax and salary accounts.
At this point, authors often see that this makes sense but feel they can't do it yet. “I’ll start it as soon as I'm turning a profit,” they say. This is wrong thinking. Your business becomes profitable by employing PYF, not the other way round.
Yes, you must now find ways to meet your expenses with this actual amount of money, or borrow in an orderly fashion, rather than blind borrowing from funds that should have been allocated to tax funds, or yourself. And yes, it may curtail what you might do next.
But it's actually more likely to have the opposite effect. You can use this honest and open engagement with where you truly are to spur you on to achievements you'll never enjoy so long as you think you have more money than you have in the bank. So long as you're failing to engage. So long as you're shrinking from the truth.
By first allocating money to different accounts, by ensuring you can’t “borrow” from yourself without it being clear and obvious, by checking in twice a month with profitability uppermost in your mind, your business will become financially stronger.
As your business grows and becomes more profitable, you will in time be able to take more money out of your business and be rewarded for your earlier investment of time, effort and energy. Otherwise, you are giving yourself away to your business. It is draining you, not feeding you.
Paying yourself first plugs the drain, so your energy can be harnessed in a way that is nurturing to you.
The Pay Yourself First Process: Getting Started
To benefit from planned profit payouts, rather than scrabbling to catch up under the stress of empty bank accounts and the taxman and bill collectors calling, PYF requires you to have four bank accounts–three separate bank accounts for your business, in addition to your personal account:
- Business income and expenses account
- Tax hold account
- Profit hold account
- Your existing personal expenses account
PYF is based on making twice-monthly percentage allocations to the relevant accounts. When you receive income into your business, you feed your own accounts first. Profit first. Then salary. Then your tax allocation (business and income taxes). Then business expenses.
Here's how to set up:
1 If you don't already, open a business income and expenses account dedicated solely to the movement of money in your business. This is the account number you'll give to Amazon, Apple et. al, that you'll hook up to your PayPal, and/or other transaction banks, on your website, to which your clients transfer payment–and so on. All you business monies move through here.
2 Open a tax hold and profit hold account. Both of these can be savings accounts and need not incur any bank charges. While on that topic, if you already have a business bank account now might be a good time to ensure your rates are good on your main business income and expenses account–and your personal, home life account.
3 Decide on your allocations: The order in which you allocate is 1. profit hold 2. salary and 3. tax hold.
- Profit Percentage Allocation
Profit is usually retained and paid as a dividend at the end of the year.
Determine the intended percentages for your business, as an ideal, and then begin with the actual percentages you feel you can afford this month. Most authors keep it simple at the start and divide in three: one third to tax, one third divided between salary and profit, one third for business expenses.
I know that some of you are panicking just reading this but take a breath and consider. We’re looking at taking percentages here. If you earn one dollar, you'll allocate 33c. A hundred dollars and it's 33 dollars. A thousand and it's 330. It's only ever a percentage.
I recognize that this can be a scary thought. You may already have financial commitments that make a 33.3% allocation feel impossible. The most important thing, if you’re feeling that way, is to get used to dividing up your business income into allocations, so set a lower percentage for now—as low as 10%, or 5% or even 1% if you want—just to see how it is far less painful than you think.
- Salary Percentage Allocation
Setting your salary depends on your location, your industry, your profits, and how much you want to earn, month by month. Too little and you struggle to survive. Too much and your business might be at risk.
- Tax Percentage Allocation
Taxes are non-negotiable and a bigger-than-expected tax bill can really blow a hole in your business. Your tax allocation is set for you by the government of the country you live in, but it may take you a little time in business before you work out how much you need to pay over, in your particular circumstances.
Err on the side of safety, then when tax time comes round, you’ll have allocated enough, or perhaps even more than enough, money to cover your bill. If you do have money left over in your tax hold account, you can either carry it forward, or take some money out of that account as a profit dividend. The ideal allocation for taxes for most authors is 33% but you will need to take into account your country's tax regime.
Promise yourself that, as soon as possible you will allocate one-third of your business income to profit and salary, one third to taxes, and one third to expenses and recognize that for now, you’re making a beginning.
Pay Yourself First Process: Profit or Salary?
The decision-making process is easy for taxes but your personal balance of salary, dividends and pension will decide your allocations to the salary and profit accounts.
As an indie author, you spend many years at the start earning a lower salary than that commensurate with your education, talents and skills. Writing books takes a long time. Publishing too is a long-term endeavor. The difference between the salary you pay yourself at the start and the salary you’d be entitled to on the open market is put in as “sweat equity”, the investment of your energy and belief in your books and your business.
This makes you an investor in your business, probably its only investor, and as such you deserve a return on your investment. You will get the many creative rewards that a productive writing and publishing business brings but you also deserve financial returns in the form of dividend and pension payments. Your profit account is what allows you to make such payments
The percentage you allocate to salary and profit changes as your business grows and if your author business is mature, you may want to discuss the balance of salary and profit allocations with your accountant. If you're just starting out, begin by dividing it in three for now. The most important thing when starting is just to get used to doing the allocations.
Salary is paid monthly and dividend and pension payments are allocated from the profit account at the end of the year.
Note now the allocation percentages that your business can reasonably do for each account for the remainder of this coming quarter.
Profit Account Allocation: __%
Salary Account Allocation: __%
Taxes Account Allocation: 30%
IncEx Account Allocation: __%
Each month and quarter in our Go Creative! Business Planning Workshops we log our actual payout amounts this month and map our intended percentages for the month following.
3 Allocate the payments twice a month, on the 5th and 20th of the month (mark it out in your calendar as a task). Get the income amount over the past two weeks, calculate the relevant percentages for profit, taxes and salary, withdraw from the income-expenses account, and allocate to the profit, tax, and salary accounts.
Please note: None of the advice in this post (or elsewhere in the Go Creative! in Business method), replaces the need for accounting and wider business planning.
Pay Yourself First Process for Indie Authors: FAQs
Questions about profit and the profit hold account
What do you mean by profit?
In the Go Creative! in Business method, “profit” means a pot of money from which the business owner can draw dividends, or choose to invest further in the business
My business isn’t profitable yet. Don't I need to wait until I make more money?
Generally speaking, that’s the wrong way round. Your business will become profitable by paying yourself first.
Profits are created like anything else in writing and publishing land. Sometimes the good stuff just shows up but you greatly increase the chances of that happening by showing up yourself first.
If you’re at the very beginning and just starting your first book, of course you need to wait until you have a product to sell. Arguably you are still in training as an author-publisher up to the publication of your third book. By then, you should have set up a business model for a profitable author-business.
What is the function of the profit account if I'm already paying myself a salary?
There are three ways to pay yourself as a business owner: salary, dividends, and pension payments (see below “How should I take income from my business?”) A mixture of all three is usually most beneficial. Dividend payments compensate yourself, financially, for your years of upfront “sweat equity” as an indie author. And a pension income protects you in later life when age and illness make it possible that you won't be able to work. In most jurisdictions, both have some tax advantages. Your profit account is what allows you to consider dividend and pension payments from your business, in addition to salary.
This all sounds very long-term. I need money now.
PYF doesn't teach you how to make you more money, or how you might spend less. It just ensures that you have a clear picture of what's going on right now and ensures that you don't think you have more money now than you actually do have. If you're spending profit, salary and tax money upfront, you're going to hit a money crisis shortly. You are also likely out of touch with what would actually be the most profitable activities for your author business.
I haven't got enough money to do this, should I take a loan or bootstrap?
If you're just starting an author-publishing business, you might not turn a profit during your first year, or even your first two years. This doesn’t mean you shouldn’t pay yourself.
For some reason, authors and other creatives go into business without expecting to invest. Running a digital publishing business has low upfront costs compared to, say, opening a café but it does have costs. You don't do yourself or your writing any favors if you don't acknowledge that.
If you've got somebody (a loved one, an arts council, a prizegiver) who'll support you while you get on your feet, great. Otherwise, take a loan, take yourself seriously and start selling from the off.
Once you're selling books on Amazon, your own website, or elsewhere you're in business.
You are a publisher. It's time to be a good one.
Undervaluing your time and the work you’re doing can be incredibly undermining and creatively draining. Pay yourself enough to live in prudent comfort from the start and work out how you're going to make it happen.
Questions About Bank Accounts and Payments
How should I take income from my business?
Owners of companies and non-profits pay themselves in three ways: salary, dividends, and pension contributions from the company.
Paying Myself A Salary
It’s generally a good idea to take a salary from your business:
• You build up qualifying years towards your state pension and retain other state benefits to which you might be entitled as an employee e.g. maternity benefits, unemployment benefits should you hit hard times.
• You can make higher personal pension contributions.
• It can be easier to apply for income-based services like mortgages, certain insurance policies, critical illness cover.
• You reduce the amount of business/company tax due (as salary is an allowable business expense).
• You can take a salary even if your business makes no profit in a particular year.
There are drawbacks to taking a salary, though. It means both you and your company have to pay state insurance contributions and a salary generally attracts higher rates of income tax than taking a dividend.
This tax advantage is why many business owners choose to take the majority of their income in the form of dividends.
Paying Myself Dividends
There are certain limitations and pitfalls to watch out for.
• Dividends can only be paid out of profits
• Relying too much on dividends can make your income unpredictable
• Dividends are paid after corporation tax has been deducted (unlike salary, which is a tax deductible expense)
• In many countries, dividends don’t count as relevant earnings for the purposes of tax relief on pension contributions that you make yourself.
If you plan to rely on dividends for some or most of your income, then ensure you have a rigorous accounting function in place to declare profits and account for dividends in good time. Your accountant can also help you work out which method of payment is most tax-efficient for both yourself and your company – as this can be quite convoluted.
Paying Pension Contributions
A third possible way to receive tax-efficient remuneration is in the form of pension contributions directly from your company. This is different from pension contributions you make yourself from your salary. This is a business pension contribution.
In most countries, such pension contributions are an allowable business expense that is not counted as personal income, so doesn't increase your personal income tax bill. This benefit is not limited by the size of your salary. As an individual, you are not allowed to pay more into your pension in a year than your salary for that year. Therefore, if you are taking a small salary plus dividends, you can’t pay very much into your pension.
Employer pension contributions are not limited in this way. They are usually limited by an annual allowance set by the state. (Here in the UK at the moment, for example, it’s GBP£40,000). So my author business can contribute up to this amount into a pension, even though the salary I pay myself is small.
You can’t access your pension until at least the age of 55, older in some states.
Talk to your accountant about the most tax-efficient ways for you to pay yourself, under your current circumstances.
Do I really need four bank accounts?
How often should I allocate my bank payments?
Twice a month, on the 5th and 20th.
Why every two weeks? Why not monthly, or weekly, or as needed?
By allocating your accounts and paying your invoices twice monthly, you get the benefits of batching, which is more efficient, while staying in touch with your accounts at a rate that allows you to see what’s going on with cash flow. It’s the perfect balance between constant checking, which wastes time, and doing it too rarely to pick up on cash flow trends. I do mine on the 5th and 20th of each month.
If you'd like to integrate your profit planning with a wide author business plan for your books and other products, join my monthly membership which includes resources, live workshop and Facebook accountability group