Royalty Statements

What my quarterly royalty statement tells me.

I make my living as a writer. Sure, I do other stuff and bring in money doing it, but when it all gets down to dollars and cents, the money I receive from writing is what pays the mortgage and puts food on the table.

With a new royalty statement in my hands, I thought I’d take a few moments to explain to folks interested in writing how the royalty part of writing works and what can be learned from a royalty statement.

How a Typical Writer Receives Income

Money from my writing work comes in three ways:

  • Payments for articles. When I write an article for publication, I normally get a check within 2 to 4 weeks of publication. The amount is agreed upon in advance, so I know what to expect but not exactly when to expect it.
  • Advances for work in progress on books. When I sign a book contract, it includes a payment schedule for advances. I like my advance paid in three or four installments that are due when certain parts of the book are submitted to my editor(s) — in other words, when I achieve completion milestones. A typical arrangement might be 1/3 on signing, 1/3 on 1/2 completion, and 1/3 on completion. Depending on the publisher, the checks usually arrive within 2 to 4 weeks of the milestone. Again, I know how much to expect but not exactly when to expect it.
  • Royalty payments. When I sign a book contract, it also includes a royalty percentage. The percentage is applied to the wholesale price of the book. So, for example, if the royalty is 12% and the book retails for $20 (about average for my books), the 12% is applied to the amount the publisher sold the book to retailers (or book clubs or direct order customers) for. A good rule of thumb is about 50% off the cover price. So I’d get 12% of about $10 or $1.20 per book. This royalty rate is applied to all sales of a title to come up with a royalty due. The amount of advance is then subtracted — remember, that was an advance on royalties — and if the result is a positive number, the book has “earned out” and I get a royalty check. My publishers pay royalties quarterly, although not on the same schedule. I know exactly when a royalty check will come — well, within 3 days of an exact date — but I never know how much I’ll get.

After doing this for 15 years, I’ve come to think of advances as my “bread and butter,” payment for articles as “fun money,” and royalties earned as “icing on the cake.” I won’t write a book unless the advance is enough to cover the amount of time and effort I put into writing the book. (I turned down two low-advance projects just last year.) This way, if the book doesn’t earn out, I’ll still make enough to keep paying the bills. If it does earn out, great. And since I don’t do a lot of work on articles — it’s just too much effort to get the work lined up — I don’t rely on that income for anything. That’s kind of unfortunate, because I can usually bang out one or two articles in day, so the income would really be great if I’d get get more of that kind of work.

As you can imagine, royalty statement time is a big event at my house — especially when Peachpit royalties are due. The statement comes in a big fat envelope. The reason: there are lots of pages. But one of the first pages of the package is the royalty check. And a quick peek tells me just how much icing I’ll have to spread around for the next three months.

How Many Books are on the Books?

The reason my Peachpit royalty statement comes in a big fat envelope is because there are lots of pages. The statement sitting in front of me right now is 61 pages long. I can’t even get a staple through it for filing.

The first few pages — 4, this time around — is a summary of the ISBNs covered by the statement. This list of ISBNs — 34 of them this quarter — are the books the publisher still has in its accounting system.

I need to make a distinction here between titles and ISBNs. A good example is right on the first page. My 2004 title, Creating Spreadsheets and Charts in Excel: Visual QuickProject Guide, is listed three times: the original title, the German translation, and the French translation. Sometimes translations get their own ISBN and sometimes revenue for a translation is listed for the main title. It depends on how the translation rights were sold. Also, since Peachpit is now selling PDF versions of some of my books, those versions appear on a separate line.

Still, a quick count of titles on this quarter’s statement shows 28 titles listed. Whew! Even I think that’s a lot.

In my case, the vast majority of my work these days is in revisions. So each statement might show multiple versions of the same book. This is especially true for titles that are still “alive.” For example, my America Online: Visual QuickStart Guides (a 2-part — Macintosh and Windows — nightmare completed for version 3.0 years ago) are “dead” titles. They came out, sold poorly, and were not revised. These book are dead and buried and the only reminder that I ever did them are the author copies of each book on my author copy shelf. But my Excel for Windows: Visual QuickStart Guide is alive and kicking — in fact, I just finished the revision for Excel 2007 this week. Three editions appear on my royalty statement: 2000, 2002, and 2003. (2007 will appear on the next statement.) And my Mac OS: Visual QuickStart Guide takes up the most lines: seven editions going back as far as the edition covering Mac OS 9.

For a title to appear on the royalty statement, it must be either earning money or losing money (by returns) with a more recent edition to suck up the losses. This is an important clause in book contracts — one that’s important enough to discuss in a little more detail here. Commonly known as cross-accounting or cross-deductions, it means that returns on one title can be applied to net revenue on another. So, for example, if my share of returns on an old edition of my Excel book was $43.54, that amount could be deducted from or charged to royalties on a more recent edition. That’s normally why books stay on royalty statements for so long — there’s still accounting for them.

It was kind of a good thing that my AOL books didn’t have more recent editions. Neither title earned out, so the money I was overpaid for those books could be deducted from future editions, had they existed. Instead, the publisher cut their losses by not doing new editions (a wise move) and simply stopped accounting for the existing books when the numbers stopped coming through. The books “fell off” my royalty statement.

(If you’re ever given the opportunity to negotiate a book contract, do not sign a contract with a clause that says all of your books can be pooled together for cross-accounting. (I don’t know the exact wording of a clause like that because I’ve had it removed from every single draft contract it appeared in.) Agreeing to this may prevent you from ever getting a royalty check if you write multiple titles for the same publisher and any or them are dogs. If you’re really lucky, you won’t even have cross-accounting for the same edition of a book — I was lucky to have that situation with one of my Quicken titles years ago. But I think it’s fair to do cross-accounting with different editions of the same book, so I don’t mind signing for it. I just brace myself for the returns every time a new edition comes out.

And returns, in case you’re wondering, are returns from retailers/wholesalers, not consumers. If Barnes & Nobel buys 1000 copies of a book and sells 200 of them in the time they allotted to give the title shelf space, 800 copies come back. That’s a bad thing for the author.

What the Summary Numbers Mean

Still with me? Here’s a bit more that the summary pages tell me.

For each ISBN, the summary page has 6 numbers:

  • Previous Balance is the amount owed to me (positive number) or the publisher (negative number) for the ISBN. There usually aren’t any positive numbers; if the publisher owned me money, they paid me last quarter. So books that are earned out show zero in this column. If I owe the publisher money — for example, the book hasn’t earned out or subsequent returns have put the ISBN in the red — that number appears as a negative value. Zero is good, negative is bad.
  • Earnings/Subsidiary Rights Earnings is what the book earned me during the quarter. That’s the royalty calculation applied to net sales. Positive numbers means they sold more books than they received in returns. Negative numbers mean they got more in returns than they sold. Positive is good, negative is bad.
  • Credits/(Deductions) is the amount paid out during the quarter for advances or, if the author is paying for indexing, the amount paid to the indexer. I’ve never seen a positive number in this column.
  • Cross Deductions is where they take returns from one title and apply them to royalties earned on another title. So, for example, if the net earnings on my Word X book were -$53.47, that amount would appear as a positive value in this column for that ISBN and a negative value in that column for a later edition — perhaps my Word 2004 book. If you add up the cross-deductions column, the net amount should be zero.
  • Payment Due is the net amount owed to me for the ISBN. This number is either zero or a positive number.
  • Balance Forward is the amount that needs to be earned out to get more royalties on the ISBN. It’ll be zero if there was a payment in the previous column or a negative number if zero was in the previous column. That value is carried forward to the Previous Balance column in the next statement.

Of course, this is the format Peachpit uses. Other publishers may use other formats.

So when I get a royalty statement, the second thing I look at is the summary. (The first is the amount of the check, of course.) The summary tells me which books are earning money for me. That’s usually current editions of books. This is where I can see at a glance whether a new title has earned out. I can also see which books are earning me the most money — the titles with bright and happy futures. The bigger the payment due on a title, the more likely that title will be revised in the future. (Unless the software publisher decides to kill the software, as Adobe did to PageMill years ago. That book was doing very well when it was killed.)

Sometimes I get pleasant surprises. For example, my Excel 2002 book is still selling. That book was published five years ago and it earned $262 for me this quarter. Okay, so that isn’t enough to host a big party, but it’s a nice thing, a good thing. After all, the average life of a computer book is 18 months. So to have one that’s still bringing in a few bucks for me after five years is great.

The summary statement also tells me which titles are dead. These are the titles with previous balances that are negative numbers and no revised editions to earn more revenue. Sometimes these titles have ugly negative numbers in the Earnings column, indicating returns. My QuickBooks Pro for Mac book is in this situation. Although it’s the only title covering that software, there simply aren’t enough users interested in buying a book to make the book earn out. So when my editor says the publisher is not going to revise the title, I can look at this royalty statement and understand why. The book is dead.

Want more detail? The summary pages are also a table of contents for the 57 pages that follow them. That’s where I can find information about units sold, subsidiary rights (like translation rights), and where the books were sold: U.S., Canada, Export, etc. To be honest, I don’t look at these pages for every title. Heck, I have enough to do in a day.

What I Learned this Quarter

Looking at the royalty statement is like peering into a crystal ball. I learned that there are certain topics I probably won’t be writing again and other topics I’ll be writing about for years to come. I learned which of my books is doing best for me (still Tiger, after two years!) and which ones I might want to promote a bit more to liven up.

But with 61 pages to review, that’s about all.

What do you think?