The Business of Writing: Finance

4. Finance – This has to do with all the monetary aspects of a business.

The financial end of the writing business needs and deserves a lot more attention than many writers give it absent emergencies. Especially the taxes part. I’ve said before that editors don’t do house-to-house searches …but the IRS does, and they’re not nice about it, either. Finances include a lot of record-keeping, starting with the must-do stuff for the IRS. They still like paper trails, so keeping receipts and printed records of income and expenses is vital.

However, Finance for writers isn’t only about keeping good records for your taxes and making your estimated tax payments on time. This is easy for a lot of writers to overlook, because writers don’t need a lot of cash flow to maintain the business – paper and pens don’t cost much, and once you’ve gotten over the initial outlay for a computer and software, you’re set for years. Really, the main thing writers need money for is their own income, and most think of that as a personal thing, not a business matter.

The trouble is that if you don’t pay attention to where the money is coming from – which titles and formats are selling, which publishers pay more and on time, etc. – you can easily end up missing opportunities and/or find yourself suddenly unable to pay your bills.

It is also perilously easy to live in the moment if you don’t have a reality check. Publishing tends to have a much longer pipeline than most jobs, and if you aren’t shoving stuff in now, you can easily run out of cash three or five years down the road and have to scramble – or start hunting for a day job – to cover day-to-day expenses. Paying attention to one’s projected future income lets you know that this was the last of the advance payments, and you only have until it runs out to sell a new proposal to someone.

Expenses are another problem area. I cannot tell you how many people have said to me “But you’re a writer, so that’s tax deductable; why aren’t you buying it?” What they don’t get is that “tax deductable” does not mean “free.” It means it’s an offset to whatever I made; if I didn’t make money (or if I’ve already accumulated enough expenses this year), the benefit is zero this year and maybe a loss carryforward next year…IF I make enough money next year to cover it. And you don’t want to pile up too many losses in a row, or the IRS gets interested and you may lose all your business deductions for several years.

The rule of thumb I use is “If I wouldn’t buy it on sale for 20% off, I shouldn’t buy it just because it’s tax deductable.” This is a little conservative, because as a self-employed person in the US, I pay both halves of the FICA (that’s Social Security tax), which adds up to 15%, and on top of that goes whatever my marginal tax rate is likely to be that year. So really, the “buy it if it’s on sale” rate should be a bit more than 20% off, but I prefer being conservative. Writers in countries other than the U.S., of course, have to work out their own percentages based on their particular tax situations.

If you’re self-publishing or hand-selling your own books, you have a lot more record-keeping because you’ll need to track inventory (unless you’re only doing e-books) and sales. I know more than one writer who’s gotten caught at tax time because for some reason they thought that as long as they spent all their sales income on more inventory, it wouldn’t count as income. If you are one of these, run, do not walk, to a reliable accountant and get them to explain to you what you can and cannot do and how to do it, or you will end up paying a whole lot more than you have to in taxes.

There also seems to be an unfortunate tendency for writers to underestimate how much they’re going to need to live on. They overlook things like insurance and emergency funds and retirement savings when they’re figuring out how much income they need to generate. But if you only include the expenses that come around weekly or monthly, and you spend your entire advance on them, you’re in for a nasty surprise when the car, homeowners’, or health insurance bill arrives, or when you have to spring for Christmas presents, or when the car breaks down. If you aren’t making enough from writing to cover this stuff, then you need a day job, and you’re far better off admitting it than pretending that the car will never break, you’ll never get sick or have an accident, and that Scrooge was right about the whole “bah, humbug” thing.

Cash flow is a particular concern for most writers, because either you know how much money you’re going to get (advance payments), but not when you’re going to get it, or else you know pretty much when you’re going to get it (semi-annual royalty payments), but not how much they’re going to be. What this means is that a) you shouldn’t count on having money to spend unless it’s actually in the bank (I know writers who’ve had trouble making rent or mortgage payments because they charged a large purchase, figuring the advance would come in time to pay for it…and then the advance took another three months to arrive), and b) you need to budget what’s in the bank to last for however many months it’ll be until the next payment is likely to arrive. Getting a $5,000 advance check doesn’t mean you can spend half of it on a new laptop if you aren’t likely to get any more income for the next ten months (unless you really can live on $250/month – do the math).

An especially vital aspect of cash flow management is putting aside enough to pay the taxes. I generally dump half my incoming checks straight into the tax account (which I keep in a separate bank from my regular checking account, to make extra-sure that I’m not likely to tap it for day-to-day expenses and then end up owing the IRS hundreds or, in a good year, thousands of dollars, and being caught short). It’s hard to do, but boy, does it make quarterly estimated tax payments less painful…and if I’m going to have to live on beans and rice for three months in order to make those payments, I know it right away, instead of having it come as a nasty surprise.

And then there’s the other stuff: checking royalty statements, keeping track of advances and subrights sales so you can bug the publisher if the payments are taking too long, watching sales trends so you can tell which of your publicity efforts are having an effect and/or figure out when it’s time to ask for new covers, a reprint, or a new push for a title (or do some of that yourself). A lot of writers consider this optional, mainly because they don’t want to bother with all the record-keeping and reviewing.

I don’t consider any of this optional. Especially checking royalty statements; over the years, I’ve found something like $5,000 worth of errors (all of which the various publishers corrected promptly and without argument when they were pointed out). And the unexplained discrepancy that looked at first glance as if I owed the publisher $300 turned out to be a more complicated error that meant they actually owed me $1,000, so yes, I report everything I find, whether it looks as if it’s good for me or for them. Computerization has eliminated errors in addition and subtraction, but it has resulted in a lot more data entry problems, so the checking still needs to be done.

Keeping good records allows you to know how your business is doing financially – and quite often why, which can give you an idea what to do about it. It also provides essential input into lots of decisions, from whether to attend a bookstore event/autographing, to whether to change publishers or agents, to which of two equally tempting ideas might be better to work on next.

Note that I didn’t imply that all of these decisions should be made strictly on financial grounds. You may be well aware that the autographing at a local bookstore will take three hours (what with driving time), and you’re only likely to sell two hardcovers to folks who wouldn’t have bought them anyway (meaning you’re working for around $1.30 per hour, less gas money), so financially it’d be a dead loss. But you may want to do it anyway, for the publicity, for contact with your fans/readers, for goodwill with the bookstore and its employees (who may be more willing to hand-sell your book once they’ve met you), or just because you get such a lift out of doing this kind of thing that you always come home and write six times as much for the next three days.

On the other hand, if you’re paying $300 to fly to another city for a similar autographing, the expense is so much greater than any goodwill generated that it’s probably not worth doing. On the third hand, if you’re going to be in some other town anyway, it may well be worth the good publicity to set up a couple of local autographings or unpaid library appearances (especially if you can do enough of them to justify deducting some of the travel expenses).

Crunching the numbers is something many would-be writers think of as boring and uninteresting, but it is surprising how fascinating all those figures can be when it’s your book, your sales, and your money.

Next: Administration