Accounting and Financial Terms for Authors | What You Need to Know About Making Money as an Author

by | business, Self-Publishing

Hello, Writers!

 

I’ve been threatening to write an article defining a few important financial terms for authors for a while. And the day has finally arrived.

 

So, what pushed me to write another informative rant?

 

The other day, I found a blog post with the headline “How Much Do Authors Make?” and the headline also promised examples of salaries inside the blog post. Let’s just say I was more than intrigued, clicked, and scrolled to the data. To my inner finance nerds horror, the blog post referred to the royalty you would receive from the sale of a book as income. I was so horrified that I wanted to gouge my eyes out with a spoon.

 

How I Wrote This Article

Yes, I’m a tad melodramatic, but as someone who has worked in the field of accounting and finance for even years, I was annoyed at this miss information. And I immediately knew that whoever wrote that post did not understand the financial terms they were using. Even as I wrote this post, I went to many different websites and checked every term multiple times; I didn’t want to rely solely on what my little grey cells could recall from my decade of experience. I wanted to make sure the facts were accurately represented. And there were conflicting definitions, so I had to consider the real-life applications of these terms.

 

Why Should You Listen to Me?

As I said, I’ve had eleven years of work experience in accounting and finance, dating from March 2005 to September 2015. During this time, I have worked as an Accounts Payable Clerk to an Assistant Accountant in many different industries, including sports retail, clothing retail, restaurants, publishing houses, funds management, and film and television companies. But, I do not have a degree in accounting; I worked my way up the old fashion way. As you can probably tell by the numerous industries that I’ve worked in, I preferred taking contract or hourly-rated work over a permanent role because I enjoy variety. And I‘ve worked both in Australia and the United Kingdom.

 

My Work Experience

The duties I performed in these roles included paying invoices, reconciling bank accounts, payroll, managing the cash in the bank accounts and in the ledgers in multiple currencies, and reconciling the cash received into the bank with the individual store takings for the day, just to name a few. So, understanding these terms was important to my day-to-day tasks as I worked in these companies.

 

Without further ado, let’s get into the definitions.

 

But first, that all-important disclaimer.

Disclaimer

The information provided in this blog post is not intended as financial or legal advice. Before submitting take returns or managing your own accounting as a sole trader or small business owner, please consult the advice of an accountant in your country.

 

The article you are about to read is for educational purposes and is aimed to provide you with a basic understanding of financial terms for authors, not how to manage your accounts or examples of what you can claim as a business expense.

Cashflow

So, what is cash flow, and why is it a relevant term for an author to know?

 

Within a business, cash flows in two directions, in and out. The cash that flows into a business is referred to as Revenue. And the cash that flows out is referred to as expenses.

 

So, if you were to set up your own publishing imprint or house as a limited company or whatever the equivalent is in your corner of the world and you were to pay yourself a salary or wage, then that would be an expense; it’s not a separate cash flow of its own. Before I explain a few simple financial terms, it would be remiss of me not to set the stage and discuss the movement of cash within a business. And I’m using the term business as a loose term to describe everything from a sole trader set up to a limited company.

 

Revenue

In super simple terms, Revenue is defined as the total money coming into your business in any given period. It is also known as the amount that is deposited into your bank account direct from the sale of goods and services. Notice how I’m not using the word “income” here; that’s a separate term with a very different meaning. And it’s important for you to distinguish the difference between the two because I’ve seen this word used in place of the word “royalty,” which is grossly incorrect.

 

To avoid confusion, below is a list of examples of revenue that you might receive as an author.

  • An advance from a publisher
  • Royalties (from Amazon, Kobo, Draft2Digital, Apple, Google Play, etc)
  • Sale of books sold directly from your website
  • Merchandise sales
  • Payments from sales of affiliate products
  • Payments received from coaching or consulting services offered by you
  • Payments received from the sale of online courses

 

All of these streams of cash are examples of revenue in your author business. Often what you’ll see when people talk about how much they make as an author or when Forbes creates those sensational headlines about a writer being paid half a million dollars a year from Amazon; this is what they are referring to—revenue, not net income. Or they’ll use the term Gross Income and drop the “gross” altogether. But these articles are written in such a way that the general population is led to believe its net income.

 

Expenses

As you might have guessed, expenses are exactly what you expect. These are the things you need to pay to keep your author business running every week or month. Within a business, there are many different types of expenses.

 

The most common are:

  • Fixed: paid every week or month in a predictable cadence.
  • Variable: expenses that change from month to month but are not predictable.
  • Accrued: expenses that are not yet paid.
  • Operation: expenses that are not associated with the cost of selling goods.

 

For instance: if you have a monthly subscription to Microsoft Office, that’s a Fixed Expense. Whereas the one-time purchase of Scrivener or the purchase of an update is considered a variable cost.

 

And Facebook Ad spend for a pay-per-click ad advertising your lead magnet is considered an operational expense because it is not an expense that results in a direct sale. In the same vein, a Facebook ad to book on an online store, both paid and free, is considered an operational expense and not associated with the cost of selling goods, partly because you cannot prove that a click resulted in a sale.

 

Cost of Goods Sold

So, why have I listed this as a separate term of its own? The reason is simple. When you create a book, there are certain things that you need to pay for along the way that make the product possible.

 

These expenses include the following:

  • Book cover art
  • Book formatting
  • Proofreading
  • Copy or line editing
  • Developmental editing
  • Manuscript assessment
  • Paid beta reading services

 

Please note: you don’t necessarily need to use all of these services to publish a book, but they are a list of examples. For instance: I’m a book cover designer and design my own covers, so that’s not an expense I pay, but I do pay for proofreading line editing, and I hire a paid beta reader/s and format my own books using Vellum. But, because vellum is a one-time purchase, it’s considered to be an operational expense.

 

Income

So, what is income?

 

In its simplest form, income is the total revenue received by a business. But it’s not as simple as that; there are two types of income within a business. These are referred to as Gross Income and Net Income. And it’s important to understand both of these terms.

 

Gross Income

The Gross Income is the total amount a company makes before accounting for any expenses.

 

And this is the figure that most people share because it’s sexy. It sounds so much better to say that I made fifty thousand dollars from ads this month when in reality, you spent forty thousand to make that fifty thousand. Ten thousand a month is still A LOT of money, but it’s more honest and less glamorous than the gross income figure.

 

Net Income

The amount a business makes after taking into account all expenses within a particular period is your business’s net income.

 

It’s the net income that determines whether you are making a profit or not. And, in my opinion, it’s the correct answer to the “how much money can you make as an author” question. It’s almost pointless to solely discuss revenue and not even talk about the money you need to spend in order to make said revenue.

 

So, how do you work out your net income as an author?

 

I’m so glad you asked.

 

Below is a simple formula to help you figure this out:

 

Net Income = Total Revenue – Total Expenses

 

Concluding Thoughts

I hope this helps you better understand these important financial terms for authors and demystifies the often complex discussions about how much money writers make and the often sensationalised articles written in the media dropping outlandish figures.

 

As always, I have an important question to ask you. Is there a financial term that I didn’t cover in this post that you would like me to discuss? Let me know by sharing your thoughts in the comments section below.

 

Thank you for listening, reading, commenting and sharing with such enthusiasm. 

 

With love,

Amelia xx

 

 

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Amelia D. Hay

Written by Amelia D. Hay

I’m Amelia. When I’m not hosting the Authorpreneur Podcast™️ and the Book Nerd Podcasts, I write Mystery Novels under the pen name A. D. Hay. And, I’m the author of Suspicion, the Lawn, and the Candidate.

On this blog, I help new writers to finish their first draft, prepare their manuscripts for professional editing, and when they get stuck in the first draft phase or are confused about the revision process.

Right now, I’m editing and preparing my soon to be published mystery novels, Suspicion, Duplicity, 24 Hours, and Immunity for publication.

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