Today I’m talking about money – and specifically the difference between income, profit and cash flow. You can read the full article or watch the video below or here on YouTube.
Why is this important?
I see a lot of comments on Facebook groups and social media, blogs, podcasts etc about how many books authors are selling, sometimes with screenprints of their rankings or their KDP BookReport Dashboard.
I welcome the transparency of sharing, but it can give a skewed picture of the realities of running an author business. I have a whole section on finance in my book Business for Authors: How to be an Author Entrepreneur, but I also wanted to cover these key aspects in a video so you’re clear on the differences.
Raw data can give the wrong impression.
The author selling the most books does not necessarily equate to the author who is making the most income. The author who is making the most income does not necessarily mean they are taking home the most profit.
Disclaimer: I am not an accountant and this is not financial advice. I will also be keeping it pretty basic. My perspective is based on running my own businesses for 18 years and my author business has been profitable since 2011.
What is income?
The money that comes in, also referred to as revenue, sales or turnover. For indie authors, this includes:
- Ebook income from Amazon KDP – and each of the stores pay separately, so you get a lot of payments from Amazon for books sold and page reads if you're in KDP Select, and possibly bonuses
- Other ebook income from distributors like Kobo, iBooks, Draft2Digital, PublishDrive, B&N/Nook
- Print sales from KDP, Createspace and LightningSource for Ingram Spark
- Audiobook sales from ACX, Findaway Voices, AuthorsRepublic and more.
It might also include traditional publishing income, and subsidiary rights licensing – as well as direct sales if you sell direct from your website or use sites like BundleRabbit or StoryBundle.
I think you should have multiple income streams – but we’re going to keep it simple for now and just focus on books.
Your income will depend on:
- How many books you have
- How many stores you sell in
- How many formats you sell
- How much you price them for
- How well they are selling
- The royalty rate you get e.g. traditionally published authors will get a lower royalty than indies, but they get it in advance and they might sell more copies
Who is the most successful? The author who has sold 100 copies or the author who has sold 1000 copies.
Author A prices their ebook at 99c and sells 1000 copies at 35% royalty rate. They make 35c per copy so their income is: $350
Author B prices their ebook at $9.99 and sells 100 copies at 70% royalty rate. They make $6.99 per copy so their income is $699 – double that of Author A.
If Author B sold 1000 copies, their income would be $6990.
So in this example, if you hear about two authors, one who has sold 1000 copies and the other who has sold 100 copies, who would you think was the most “successful”?
Most authors would look at the number of copies sold or ranking, whereas I’d personally prefer the money!
Fiction authors can charge that amount for box-sets, so you can price higher and sell fewer copies to make the same money.
What is profit?
Profit = income minus expenses.
Expenses are what many authors don’t take into consideration because the screenprints of author dashboards are income, NOT profit.
What do you have to spend in order to sell 1000 copies of a book?
There are sunk costs regardless of what you sell including editing, book cover design, website, email list, and training courses.
Then there is the marketing budget, which ranges from author to author. Let's keep it simple.
- Author C makes $2500 income from books after spending $1500 on advertising, marketing and other expenses. Total profit: $1000
- Author D makes $1500 income from books after spending $200 on advertising, marketing and other expenses. Total profit: $1300
It looks like Author C is “more successful” but Author D made more profit and has more money in the bank.
I urge you to consider doing a profit and loss (or P&L) for your author business. What are the income streams and what are the expenses? You can even do this per book as you become more experienced.
What is cashflow?
Cashflow is about tracking the inflows and outflows of a business, when the money comes in and when it goes out, because clearly, you need the money to be there in order to pay the bills.
This is critical when it comes to paying expenses as an author, and underestimating cash flow can kill a business really fast.
As an indie author, you will receive income from book sales 60-90 days after the sale, so you will be paid for May sales at the end of July, so pretty much August, especially if there are foreign currency transfers.
But the critical thing is that you will have to pay upfront for editing and cover design and other sunk costs. If you use paid advertising, you'll also have to pay upfront for things like BookBub Featured Deals, and at the end of the month for Facebook and Amazon Ads.
So you might have a big ad bill in May and not get any money until end July.
This understanding of money flow is called cash flow forecasting – and it's critical if you want to run a business.
The good news about money for authors
Being an author is fantastic as the expenses are relatively low compared to any other business. Just check out how badly the high street retail stores are being hit right now because of store rents, physical stock and employees. The overheads of a brick and mortar business are huge, so we're lucky to be able to sell our books online with no physical stock, no employees, and low overheads.
But if you want to run a successful business as an author, you need to be aware of the difference between income, profit, and also watch out for cash flow ebbs and flows over time.
You can find out more in Business for Authors: How to be an Author Entrepreneur, available in ebook, print, and audiobook formats – and in fact, I narrated this audiobook – the only one I’ve done myself!
Do you have any questions about money for authors, specifically around income, expenses, or cash flow? Please leave a comment and join the conversation.
This is an excellent description of income, profit and cashflow. EXCELLENT. It would work for nearly any business. They hype blinds us to the reality, which is sad. I’ve seen it in nearly every small business (small mom&pop shops to home businesses). Thank you for a great article! I’m keeping this one to share. Your explanations are simple and clear to hopefully get one thinking about the reality rather than the hype. Again, thank you!
Thanks Ellie, and yes, it’s relevant to any business. Lack of cashflow still brings down some of the biggest companies!
Thank you for making the video on this. I picked up your book and definitely need to read it.
As a CPA (Certified Public Accountant) and an Indie author, I say “Well done, Joanna!”
Thank you for sharing so generously –
Thanks 🙂
Thank you for this reality check. It’s so easy to get lost in the effort of just trying to sell more books at any cost.
Glad it was useful 🙂
Thanks, Joanna for this thorough explanation. 🙂 — Suzanne
I appreciate the candor and reality presented in articles such as this one. That does not help, or ease the negative feelings one takes away from them. One cannot expect to write, submit to agents, markets and then have a paycheck coming in it seems these articles express.
No, according to these articles, one needs to be independently wealthy to even consider writing, due to all the “overhead” costs associated with writing and submitting a product. In that sense these articles express the adage, “it takes money to make money”.
An aspiring new comer to attempting write and sell work then feels defeated. The hopes of the aspiring are to use writing as a means of gaining income. The reality seems they need to pay money out to write. Perhaps they have no money, ergo, choosing to use writing as means to gain money.
See the vicious cycle of money presented? It really smacks of “no, you cannot do this”.
I am not independently wealthy — I supported my writing through my day job for the first 5 years of my writing career (2006 – 2011) and then have used multiple streams of income made through my writing and this website to support my art. This is absolutely normal for most creatives. Most authors have a day job. Only the very top echelons make a full-time income from writing books alone.
But why should that stop you from writing?
What kind of software do you uses to track the different books you write and the different formats you have so I can use it to make future decisions on ads etc.
I just use a spreadsheet. There is no one piece of software that everyone uses, unfortunately 🙂