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Tides of Cash Flow


"Bravely, they set forth to do battle... with their wits and by strength of pen, they sought to conquer the vast expanse known only as 'The Industry'. And in the end..." Well, in the end, talking economics does not top the list of most people's gaming dreams. But for that select group who wish to start a company, it's time to get serious.

In business, it's often said that cash flow is more important than profits. This is extremely true in publishing. So we'll go through a whole sample year in a company's life. Bear in mind that I have this strange, wacky assumption that game publishers are businesses as well as creative outlets. And, I'm going to ignore some of my own $1K Company column for this, to give the broad strokes.

Say you have a $25 book that cost you $1000 to print 1000 copies (a buck a copy), shipping included. So you start at $1000 in terms of investment, hoping to get paid back later, but with a nice clean bank account set at $0, and $0 cash in hand.

You print your book in early July and solicit orders from distributors. Selling them at a standard 60% discount to distributors, your revenue is $10 per book, and therefore your profit is $9 per book after you deduct the buck a book it cost to print. So in theory, you're making a profit with every book you sell! Sell them all, and you'll make $9000!

Let's assume that any product you make sells 400 in the first month. For each month after its launch, it sells half as many as it did the month previous. After 4 months, you've sold about 950 of them (and the rest were given out to reviewers, as comp copies, in trade, etc). This isn't bad for a small publisher!

You're smart enough to realize that you shouldn't think of it as "cost is a buck, with $9 profit per book". After all, you sell 1 book, you haven't made $9 profit, rather, you're still at -$991 in total profits. So you're clever. You figure that if you sell 100 of them, you've made back your costs, and then you're earning $10 in profit for each additional book past that. Congratulations-- you've found you 'break even' point.

We'll be fancier and assume you pay your writers and artists (and we're talking 'pay', not 'promise to pay'. A crucial distinction that many companies fail to make). So that's another $2000 in costs.

(Okay, maybe you wrote the book-- in which case you need to pay for an editor, since no one can effectively edit their own work. Or maybe you need to pay for a layout person. $2K is fairly reasonable for even a small operation). We'll get back to this in a minute, but this means you have to sell 200 books to break even.

But this tricky thing called cash flow is going to now rear up and bite your head off. I'll give an example as to why. Start a company with $1000 (your initial investment). Print 1000 books. You haven't paid your writers and artists yet. You now have $0.

And now you want to print a second book.

But... your distributor bought the books on a 60-day term-- they don't cut your check until 60 days after they receive the books. Suddenly, although you have $5000 in revenue coming in-- and therefore $3000 in profit, above and beyond your print costs-- you have zero cash flow. You simply have no cash.

And then the phone company bill arrives. It's a measly $40... but that now puts you forty bucks in the hole. Add in internet or web charges, merchant account fees, electricity, and even with a basic office setup you might be $200 down this month. And since you don't get paid for 60 days, you'll be another $200 down next month. Sure, you might have sold another 250 books by then-- but you won't see that money for another 60 days past that. You're always playing catch-up, here.

So you are at -$400, even though in theory you've made $3000 in profit. You have negative cash flow. And hey, GenCon is coming up and you plan to attend! That'll be around $2000 in expenses. Sure, you have the profits to cover it-- in theory-- but that'll push you to -$2400.

Plus you still haven't paid your writers. If you were clever, you may have told them "payment 60 days after publication". Okay, that means, in early September, you're going to get a check from the distributors for $5000 for that first lot of books, and lose a chunk of that to the writers.

Let's see... from -$2400, you get $5000 income, and pay out the $2000 you owe the writers and artists. Woo hoo! You have $600 in cash!

And you need to print your second book. That's another $1000 needed in cash, up front. And there you are with -$400 in the bank. And we still have lousy cash flow. And book 1 (here at the start of month 3) has 125 copies in sales (so you'll get $1250 in 60 days), and book 2 won't even start its initial sales until next month.

Sure, in another month you'll get a hefty check for $2500 for round two of the book-- but you'll also have incurred another $200 or so in office expenses. So at the start of month 4, you have $1900 in the bank-- at last, you have good cash flow, right?

But at the end of month 4, you have to pay out $2000 to your writers and artists. You only get a check for $660 for the last sales of book 1. You paid out another $200 in utilities. What's that give you?

$360 in cash, for four months of work. Oh, wait, I forgot. You had put up $1000 of your own money to start this. So where are we, at the start of month five?

We have $360 in cash. We're $1000 in debt (to ourselves, for our initial investment). And we haven't even given ourself a salary-- we worked for 4 months for free. Ugh.

If you want to print a book every four months, it'll cost you $3000 for writer/artist/printers, plus $800 in utilities (for 4 months). You'll be taking in $9400 during that period (for the previous book)-- but that's slightly out of sync. Basically, for the next two months you'll be hovering at having a cash flow of a few hundred dollars.

And what are we missing?

We haven't even factored in additional conventions (which suck out a quarter of a book's profits)-- go to GenCon, Origins, GTS'99, and a pair of local Cons, and that takes away a single book's profits right there. And these won't be evenly spaced-- conventions are all crowded into the summer, so in summer, forget about having any cash on hand.

We haven't included marketing. A meager $400 ad sinks your cash flow for that month.

We haven't included bad debt. If one distributor has to go an extra 30 days before paying you, you're several thousand dollars negative on cash flow. That can delay your next print run-- which, in turn, delays your chance to sell new product.

And if a book doesn't sell, well, that cuts off the money stream at its source, well before it does its 60-120 day trickle into your meager cash pocket.

But let's be optimistic. Say you skip marketing and still your books are successes. After the above launch, you get two more out during the rest of the year. All your distributors pay on time. You don't incur any extra expenses. You get one more book out, then wait for the last of the payments to trickle in (that slow 6-month process).

Book 2 sales start at the beginning of Month 5, Book 3 releases at the start of Month 8, Book 4 at the start of Month 10.

At the start of month 5, you had $340 in cash and $1000 in debt. Book 2 nets you $9600. Books 3 and 4, after costs, net $6000 each. You had 8 months of office expenses ($1600), plus an extra $800 in office costs while you waited for the last payments to roll in. Sometime around October, over a year after you'd started, you look back at it all.

16 months in business-- 10 months working, a half a year waiting (or more likely, chasing and suing) for final sales and payments. 4 books. All selling out 1000-copy print runs. You pay back your original $1000 stake. What have you made?

$18,540 in 16 months. That's $14,000/year. At least you beat US Federal Minimum Wage ($5.15/hour) by getting $6.73/hour. In that time, you were publisher, line editor, print broker, sales manager, con rep, webmaster, accounting, legal, and office clerk.

If you did all the writing, editing, art, and layout yourself, you'd only make an extra $8,000 over the year. But let's be mean for a second. We'd mentioned that writers can't edit their own work. Assuming you are uber-publisher and do _everything_ in house so you can pocket that extra $8K, well, that increases the odds of the product not selling. Much as monocultures are less resistant to problems than heterogenous tropes, so it is that team products with a good lead are better than single overworked (and often overwrought) visions.

What if book 4 didn't sell at all? Suddenly, the picture drastically shifts. You lose $9660 in revenue-- your total take was only $8880 over 16 months. That's $6660/year, or just over $3/hr. If book 3 tanks, you're $780 in debt!

On the other hand, if you do 2000-copy print runs... you increase your costs by $4000 over the year, but increase your potential profit by $32,000! Woo hoo! This is the way to go, right?

Nope. Remember cash flow? As in, the subject of this article? If you do a 2000-copy print run for book 1, well, you're starting with higher debt. And 2000 copies for book two? That kills your cash flow-- by month three, you're racking up more debt just to pay bills, and can give up on going to GenCon. That'll cut your sales, and increase the odds of a book not selling.

So by spending too much (doing too large a print run), you have not only increased debt, but reduced the money you have to spend on other aspects. If you run the numbers, about the only way to avoid cash flow problems with the above scenarios is to have an initial 'stake' of around $14200 to cover your first year expenses. At which point, putting down $14K to earn $8-$32K isn't the most sage of investments (especially given that you're forsaking other incoming during that period).

If you're even pulling in $15K/yr now doing 9-5, it's a no-brainer. Risk $14K and lose your $15K in income in order to make, at best, $32K (or, more or less the same sum that you would have had at the end of that year anyway), with a good shot of losing money tossed in, and longer work hours?

("But it's work I love!" Well, sorry, creating works is great. Publishing is business, which means work. If you really want to create, find a friend who knows business to handle the other aspects of the company... at which point you are now splitting the profits, but having more fun.)

But let's get back to our lesson on cash flow. On paper, you only need to sell 300 books to cover a 1000-copy print run, or sell 400 books to cover a 2000-copy print run. But in actual operations, you'll find that cash flow dominates your economic decisions. It's not a question of how much you might eventually make-- whether you live or die is entirely based on how much cash in pocket you have at the start of any month.

Without cash flow, you can't attend Cons. You can't print new books while interest is still hot. You can't do effective marketing. Cash flow is king.

The counterpart to cash flow is debt. By increasing debt (sinking more of your money into the venture, say), you can rapidly boost cash flow. This increases the total risks for losing money (you can't loose what you don't spend, as they say). The balance between being undercapitalized (and thus unable to bring products to market in a timely fashion) and being overcapitalized (and thus overextended in terms of debt and risk).

Now, to be upbeat. In the $1K Company we pointed out Lightning Print, which can do books on demand. Some of their terms have changed since that time. In particular, that they require you have some expertise in printing because they aren't a 'free help bureau'. There are different terms for being carried by Ingham versus just being printed. And their turnaround times are much longer than the original ones specified. But in many ways, they-- and other on-demand printers like them-- are still the best bet for the small publisher.

Not because they're fast, or cheap, or of higher (or lesser) quality. Not because they give free help to newbies, or are especially good at game books, or are well networked with distributors. No, they are a useful link in the publishing chain for one reason, and one reason only.

Similarly, a lot of start-up publishers offer less pay to the writers, but also offer royalties (a percentage of sales). This (in almost all cases), can result in less money for the writer, alas. If you are a publisher looking at royalties, a good way to set a rate is: pay 1/4 of your 'per word' rate up front, then set the royalties so the writer should make the same as if they were paid the full 'per word' rate, once you sell half the print run. That way, their risk is minimized and the total risk is shared. If they have a really good book, they make twice what they would have. If they have a really bad book, you're only out about half what you would have otherwise been forced to pay them. Either way, they get a least a minimum up-front to bank.

Royalties in general benefit the publisher-- the writer has to wait a long time to get paid. (Whether writers always have to wait a long time is a rant for another day). Royalties do have other advantages-- much like stock options with internet companies, they provide an added incentive to do better work, to write works that are less self-indulgent and more market driven, and so on. Whether these are intrinsically good or bad is irrelevant, though, because royalties for small press are a good reason for one reason, and one reason alone.

And, there's investors. Having investors has downsides-- loss of control and higher expectations on returns being two of them. Investors can be a pain to work with, and ultimately do have to be paid back. What they are doing is shouldering much of the fiscal risk in return for a good chance at making a significant profit. Really, investors don't invest in companies-- they invest in people who they think will use the company to make money. They are not that common to the RPG industry, alas, but they are useful, for one reason, and one reason alone.

All three of these cases, with their flaws and merits, are in the end useful to the small publisher for the one distilled reason. Because they solve the problem of cash flow.

There we have it-- perhaps the dryest, most boring topic on gaming entirely. In fact, if you made it this far, congratulations! Really, it's almost like a game.

Let's Fight the Dragon!

  1. Let's have a quest!
  2. Look, footprints!
  3. We'll need gear...
  4. Okay, let's make sure we pace ourselves and have enough spells to last the combat!
  5. Ha ha, success! We're famous and rich!

Let's Start a Company!

  1. Let's start a company!
  2. Look, an idea!
  3. We'll need startup money...
  4. Okay, let's make sure we have good cash flow so we can sustain a steady print run!
  5. Ha ha, success! We're famous and rich!

Hmmm... all said, I'd rather be gaming.

Good luck!
Sandy Antunes

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