What’s the first step to being a financially successful author? Knowing where your money is going!
Historically, the intersection of art and money was infrequent and in poor taste. If you were an artist, you were expected to solely focus on your craft and not worry about compensation or financial security. Hence the stereotype of the starving artist.
Today’s world is different. There is far less stigma around artists discussing money or expecting compensation for their work. In fact, there are entire communities of working artists and creative entrepreneurs, where the sole purpose is to discuss the business side of creativity. Sure, money is still an uncomfortable topic for many, but if you want to thwart your starving artist destiny, it’s necessary to get clear on your finances and begin seeing your writing career as a business.
To get clear on your cash flow and improve your bottom line, you must implement financial systems.
It’s never too early or too late.
Depending on where you are in your publishing career, you may not see yourself as a business. You may not have published your first book yet, so you’re not seeing any revenue, or the sales numbers are small, so the income feels insignificant. You may have invested in conferences, online courses, or software, but didn’t count those as business expenses. You may have a shoebox full of receipts that you bring to your account each tax year. You may not keep receipts at all.
Wherever you are, I see you. And there is no shame in beginning wherever you are. The important thing, is that we start.
Income and Expenses
So we’re all on the same page, income is money coming in and expenses is money going out. Tracking income and expenses is the first step. Ideally, you track your money using a bookkeeping software like Quickbooks or Freshbooks, but you can also use spreadsheets.
Once you pick a tool, the next step is to input the data.
Let’s start with income. Income is all the money you earn as it relates to your writing career. In addition to royalties from your book sales, this may include speaking fees, online course sales,s ales of other rights, etc.
Expenses is all the money you spend as it relates to your writing career. It may include travel and entertainment, office supplies, software, office space, phone and internet, advertising expenses, publishing fees, and outside services.
Systems for Bookkeeping
Once you input all the data, it’s time to generate a Profit and Loss statement aka a P&L. A P&L tracks both income and expenses to see where you turned a profit and where you had a loss.
Your bookkeeping software or spreadsheets are the tools you’ll use to track your income and expenses, but you also need a system for regularly inputting data. Will you gather up your checks and receipts and input the data every Friday? Every month? And how often will you reconcile your bank and credit card statements?
If you decide to work with a bookkeeper, you will need a system of sharing information and data.
Systems for Evaluating and Pivoting
Having all the data compiled is great and will make your life way easier come tax time. But keeping the IRS at bay isn’t the only reason you need to keep track of your numbers.
You also need to evaluate what’s working and what’s not.
For example, you may have received $10,000 in royalties last month, but if you also spent $20,000 on advertising, then I wouldn’t call it a success. However, if the advertising led to increased sales for several months, resulting in a larger profit for year-end, then I’d consider doing it again.
Having the data only matters if you make the time to review it.
Systems for Banking
For the past several years, I’ve used Mike Michalowicz’s Profit First method for banking and managing cash flow. It completely changed the way approach my money and I saw an exponential increase in profit within the first year. I highly recommend picking up the book and implementing the system, but here is the basic overview:
All income is deposited into an “income” bank account Every week, you transfer money out of the income accounts into different bank accounts, similar to the cash-in-envelopes system our parents and grandparents used. You’ll have a bank account for taxes, a separate one for operating expenses, another for owner’s compensation (that’s you!), and another one for profit.
By keeping the various accounts separate, you’ll ensure that every month you are paid for your work, you save for taxes, and you turn a profit.
In addition to bank accounts, you’ll also need a system for paying bills and monitoring cash flow. As authors, you may only receive royalty checks once a quarter. That means monitoring cash flow is key!
Systems for Budgeting and Forecasting
You’ve now created a system for tracking past finances (P&L), managing current finances (banking), but what about a system for tracking future income and expenses? This system is called a Budget and Forecast.
A forecast is an educated guess of what you will earn in the coming year(s) and when that cash will come in. A budget is an educated guess of what you will spend in the coming year(s). Think of it as a P&L, for the future!
I know it feels uncomfortable to predict the future. I never like counting my chickens before they hatch, as some would say. But I’ve learned through practice.
- It’s difficult to be financially successful when you aren’t in touch with your finances
- Simply by seeing where your money comes from and what you spend it on will result in a more successful bottom line
- The initial set up is the most painful
- Headache now (setting everything up) or headache later (tax time)
- When you stick to a system, it takes less time and there’s less room for error