Return on Assets
A number of very nice people who are deep into accounting and MBA reminded me today in letters and a couple of posts, that I was wrong as to what “Return on Investment” actually is.
Well, sort of, and I forgot to do as I often do here to say, “I am talking in general to get the idea across to those without business and accounting experience.
What I was actually talking about (realizing publishing and copyright is a very unique business in some ways) was Return on Assets, with your stories being assets.
For those of you who don’t know what Return on Assets is, here is the definition from Investopedia.
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DEFINITION of ‘Return On Assets – ROA’
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as “return on investment”.
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Notice how this is often referred to as “return on investment???”
And use of assets in judging how well they are generating earnings. Sounds like your books, huh?
I’ll explain more below as to why I used the term the way I did instead of in a production model form of recouping all costs before you get a return.
Thinking of your books as a production widget to earn back your costs lies madness for writers.
THE DAY
No writing today besides this blog. Just one too many things that needed to be done.
So started off out at the WMG store, then to WMG offices, then post office, then grocery store, then back to WMG to work on Smith’s Monthly.
Then home to cook dinner, then back to WMG to keep working on Smith’s Monthly and working on the new store and getting steps. Home before 11 p.m.
I did workshop assignments until after midnight, then watched some television and got back in here after a nap around 3 p.m.
Worked for time on a project I’ll talk about later, then went and finished getting my steps by pacing with Ella cat in the hallway. Seven day streak over 10,000 steps. Finally not so tired by doing it, but it chews up some real extra time from the day.
By the time I got back in here it was too late to start since I have a meeting early tomorrow and would love to get some sleep.
So with luck, tomorrow I’ll fire at the book hard and get it done in two or three days, when I find the ending. (grin)
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Don’t miss the last day or so of the fantastic mystery bundle that I am lucky enough to have a book in. This a stunning deal for the books involved, including a fantastic collection of Scudder stories by Lawrence Block.
Only one day left!!
And if you haven’t read any of my Cold Poker Gang mystery novels, here is a great chance to do so.
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TOPIC OF THE NIGHT: Return on Assets (ROA)
Let me repeat that definition once again.
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DEFINITION of ‘Return On Assets – ROA’
An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as “return on investment”.
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The assets of your business are your stories and novels.
Your gross earnings (yes, I know, you can use net or other factors, but for simplicity…) are your earnings. I suggested that instead of watching book number sales, people only watch the money coming in. (A number of posts back about addiction.)
Gross sales basically, hitting your accounts every month. You never have to go to a dashboard to get that. They just hit your checking or Paypal account.
Now I used the secondary meaning for this (and yes, I am well aware of the exact definition of Return on Investment) because regular people understand basic investments.
You know, investments like putting money in a 401k or buying a house.
So I didn’t do my normal “Yes I am being general” statement. I should have. To all you accountants and MBAs and others who understand this level of business as I do, I apologize and appreciate the letters. But I will still use it the way I did, with disclaimers. (grin)
Writers understand using their writing as investment.
But most writers don’t feel their work has value, so they don’t think of their work as an asset.
To most regular people, an asset is something that has value and that book they just wrote in Nanowrimo doesn’t have value.
So I have been working over the years to get writers to at least think of their writing as an investment.
And yes, you must count your time. It has value. (shaking head)
And you must count your costs such as copyediting, cover art, and so on.
So, if you do that for each book, count up all that, you get a value that a writer has “invested.”
(Yes, I know it is an asset. I think of everything I do as an asset because I also understand copyright, but as many of you are doing now, this kind of thinking makes writer’s eyes glaze over.)
They say or think simply, “My writing has no value.”
And worse yet, “My time has no value.”
(Critical voice trying to stop them, when you dig to the bottom line.)
Why I did not want to actually go into the exact definition of Return on Investment?
Simple. To actually figure accurate Return on Investment, you must pay attention to when you have earned out your initial investment. A few complained that to recoup under the 10% that I used would take ten years. Well, not exactly, and that’s even more complicated. (Writers eyes glaze.)
But the real reason is that the worst thing a writer can do is focus on getting their money back they “spent” in writing something. That puts exactly the wrong kind of pressure on a writer.
Exactly wrong.
The point of all this was to allow a writer to get perspective on their sales. Nothing more.
So by taking the alternate definition for Return on Assets (“…sometimes called Return on Investments.”), I tried to make this as simple as I could for those without years of business and accounting.
So the bottom line? What should you do in my opinion?
Figure what each book costs you in time and actual costs. Record that number.
(I also should have defined time and real costs. For a book to cost $2,500, you would spend $300 on a copyeditor and another $100 on mis. costs. Then if your time was about $30 per hour and it took you 70 hours to write a novel, you get $2,100.00 in time costs for a total of $2,500 costs for that book.)
Then at the end of the year, find out how much in cash that book brought in.
(Say it earned $250 gross income for you in the year.)
Divide the gross money in by the costs of the book will get you a percentage.
What to do with that percentage???
Well, 10% to 15% is great. Above that, wonderful. Under that, you are either new and don’t have a lot of inventory, or a book has gone stale on you for some reason.
And that folks, no matter if you call it Return on Investment or Return on Assets, is how you can use money to gage how your work is doing in a real business world.
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The Writing of GRAPEVINE SPRINGS: A Thunder Mountain Novel
Day 1…. 2,450 words. Total words so far… 2,450 words.
Day 2….5,300 words. Total words so far… 7,750 words.
Day 3….7,100 words. Total words so far… 14,850 words.
Day 4….2,250 words. Total words so far… 17,100 words.
Day 5….6,300 words. Total words so far… 23,400 words.
Day 6….2,450 words. Total words so far… 25,850 words.
Day 7….2,700 words. Total words so far… 28,550 words.
Day 8….2,100 words. Total words so far… 30,650 words.
Day 9….1,450 words. Total words so far… 32,100 words.
Day 10…2,750 words. Total words so far… 34,850 words.
Day 11…2,250 words. Total words so far… 37,100 words.
Day 12…1,150 words. Total words so far… 38,250 words.
Day 13…1,250 words. Total words so far… 39,500 words.
Day 14…1,100 words. Total words so far… 40,600 words.
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Totals For Year 3, Month 4, Day 17
Writing in Public blog streak… Day 828
— Daily Fiction: 00 original words. Fiction month-to-date: 45,500 words
— Nonfiction: 00 new words. Nonfiction month-to-date total: 00 words
— Blog Posts: 1,200 new words. Blog month-to-date word count: 13,800 words
— E-mail: 32 e-mails. Approx. 2,200 original words. E-mails month-to date: 383 e-mails. Approx. 22,300 words
— Covers Designed and Finished: 0. Covers finished month-to-date: 1 Covers
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You know, my eyes do glaze over when I try to dig too much into business and finances, but it’s a necessary evil. And the explanation you’ve given here for ROI/ROA always made sense to me. I think you actually used the widget analogy for books before; I thought I read that on your blog in the fairly recent past.
Personally, I’m grateful for the simplification. It makes it much more understandable for newbs like me.
And I can see how watching monetary flow versus number of books sold would be better for mental health. I’m going to keep that in mind going forward…if, y’know, I ever get any sales.
Thanks Dean!
Simple is good for me, too. I have a feeling that if I started to dissect it too far into all the accounting nuts and bolts it’ll only depress me. So for now, this is good enough.
And at this point, I am actually tracking ROI with and without labor costs (my time). I consider this a bridging maneuver to when my business is a little bigger. I will certainly count all of my time when it comes to my taxes, but it’s also encouraging to see how much actual hard cash I’ve put in versus what I get back. Gauging my time, I think, will come more into play comparing how much time I would be spending supporting my family versus working a “day job.” (But again, I will still count it all when tax time comes, ’cause I sure as hell expect the IRS to recognize my investment.)
And you were right, Dean, looking at quarterly income vs daily sales is much more encouraging!
If you ever doubt the value of your writing time, get a part-time job in a store. The novelty will be refreshing for about a week, you’ll have gathered new writing material in two weeks, and you’ll wonder what the hell you’re doing mopping floors and dealing with the public for an embarrassingly low pay when you could be writing before the month is out 🙂 My little stint in a flower shop didn’t last very long. I learned a lot, though.