Writing The Financial Numbers

One of the most important lessons I learned from CNBC’s “The Profit,” where millionaire Marcus Lemonis invests his own money to help failing small businesses, is the financial numbers. If you don’t know the numbers, you don’t know your own business. My modus operandi for many years was to figure out the numbers in March or April, fill out the tax forms, and shove the paperwork into a manila envelope. That always worked well for the short-term, but not for the long-term if you want a profitable business.

November is a good time for looking at the numbers. With the last quarterly payment from Smashwords at the end of October, monthly payments for Amazon ebook sales from September and October being paid in November and December, and no foreseeable first serial and/or reprint sales, I earned my income for the calendar year. Expenses are the only thing I can control for the next several months, and prepare for tax reporting next year.

I spent several Saturdays entering the numbers into a Microsoft Excel spreadsheet to determine my income, expenses and cash on hand. With pen, paper and calculator in hand, I rechecked all the numbers to make sure that nothing was amiss with the spreadsheet. That’s the easy part. The hard part was printing out the invoices to cross-check the transactions with invoice numbers.

What do the numbers reveal?

Missing Money From Among Invoices

One vendor allows customers to buy credits in advance to automatically pay for renewing services. I had four invoices that zeroed out the credit account and presented a balance due, and four invoices where I paid the full amount due. That meant I was missing $5.19 USD from the credits account. After opening a support ticket with the vendor, I got reimbursed the next day for $6.00 USD. If I haven’t checked the numbers, I wouldn’t have caught this.

Too Many Transaction Accounts

Most transactions got paid from the business checking and PayPal accounts. A few transactions got paid out of personal accounts (i.e., checking, credit cards and PayPal). I’m going to simplify the bookkeeping by having all transactions handled through the business checking account.

Profits (Or Lack Thereof)

Will I make a profit this year? I thought I was within $10 USD of making a profit by having income exceed expenses. Alas, digging deeper into the transactions, the gap to profitability grew larger. Unless I can write a lot of content in a short period of time and find publishers to cut checks in a shorter period of time, I won’t have a profitable year.

If you’re on top of your numbers, updating your numbers should take a few minutes to a few hours of your time each week. I should have my business tax return penciled in on New Year’s Day, saving me the headache of scrambling to put everything together at the last minute. With this year’s numbers in hand, I can figure out ways to reduce expenses and make more money next year.

A Profitable Writing Business

One of my favorite TV shows is “The Profit,” which I first watched in Las Vegas last year, where Marcus Lemonis spends his own money to turn around failing product-oriented businesses. His focus is People, Process and Products. You can run a business with two of three P’s, but you need all three to make a profit. Unlike too many reality TV shows, he isn’t afraid of walking away from a bad deal and ending the show on an unhappy note.

After my father passed away from lung cancer in 2012, I opened a living trust and split the writing business into two business entities: a California LLC for blogging and ebook publishing, and a Wyoming LLC for an Intellectual Property Holding Company (IPHC) to license my copyrights. After changing my workflow, this worked out quite well for a year-and-a-half.

And then I lost my non-writing job last October.

Since the two businesses doesn’t generate enough free cash flow to cover the cost of their respective business entities, and I needed every dollar of unemployment benefits for living expenses, I couldn’t afford to carry any more business losses. The California LLC got dissolved this past December. The Wyoming LLC will get dissolved at the end of this month. Now that the writing business is once more a sole proprietorship, my actual business expenses are quite low without the extra overhead.

The major expenses I have are web hosting and stock graphics for ebook covers. The predictable cash flow of ebooks sales can easily pay for those expenses. Cash flow above and beyond expenses becomes profit. Once you have excessive profits, you can pay for the self-employment taxes that come with being a sole proprietorship and build up a cash reserve. One of the problems I had with an out-of-state LLC is that I didn’t have the $3,000 USD minimum to open a business checking account for the IPHC.

Despite dissolving the separate business entities, I haven’t combined the internal structures for the two businesses. Blogging and ebook publishing is one business line. Licensing copyrights—first serial and reprints—are another business line. The accounting and related paperwork for the two business lines will be kept separate. Once cash flow reaches a critical mass, I’ll resurrect the two business entities and split everything up again.

The mistake I made two years ago was making an emotional decision and not a business decision. The emotional decision was protecting what’s mine from relatives who were eager to take everything my father owned after his death. The business decision would have taken profitability into consideration. After being in the writing business for eight years and the ebook publishing business for four years, it’s time to have a profitable writing business.

Opening Checking Account For IPHC

Jeph Jacques, the webcomic artist of “Questionable Content,” recently related the difficulty he had in opening a checking account after telling the clerk what the business name was, where the clerk looked at him funny and asked if the business sold marijuana over the Internet. I ran into the same problem when I tried to open a checking account for my intellectual property holding company (IPHC), except no one accused me of selling marijuana over the Internet.

The people at THE BANK were more than happy to open a FREE small business checking account for my IPHC until we got into the nitty-gritty details.

The purpose of an IPHC is to separate my copyrights away from the writing business and myself personally. If someone sues me, wins a judgment and tries to go after my assets (i.e., royalty income from copyrights), they would have to file a lawsuit in Wyoming since I incorporated my IPHC there. Even if they won a judgment in Wyoming to receive income from my IPHC, I’m not legally obligated to distribute any income and they would have to pay taxes on “phantom income” that they would never receive.

The business name for an IPHC should never include your legal name to make it difficult for ambulance chasers to casually search databases for easy targets to file frivolous lawsuits against. Wyoming doesn’t even require owner’s name on the public record, if done through a registered agent. (You still have to reveal the name of your IPHC in a court of law to avoid criminal accusations of hiding assets during a lawsuit.) Most IPHC names are typically unrelated to what the business actually does.

Even after I explained the logic behind the name and the purpose of the IPHC, THE BANK viewed my small business with suspicions. Banking regulations have tightened since the aftermath of 9/11 to prevent terrorists from creating shell companies to launder money into the United States. (Never mind that corporations and Wall Street create shell companies to hide all kinds of activities, legitimate or otherwise.) Since I was clean-shaven when I walked into the branch office, no one accused me of being a terrorist.

With some major misgivings, the branch major submitted my application. We spent the next three weeks going back-and-forth over whether my IPHC was a legitimate business. THE BANK didn’t like my business formation documents because none of it was in my legal name, I didn’t have a corporate website, and used a personal email address. THE BANK refused to accept documentation from my registered agent because it didn’t have a fancy letterhead. I couldn’t set up a cooperate website and email addresses until I had a checking account set up.

The application for a checking account was eventually rejected because my IPHC wasn’t registered with the Secretary of State (SOS) office to do business in California. I did a face-palm when I heard that. Registering to do business in California would require revealing my identity to every ambulance chaser in the state and paying an annual $800 USD franchise tax on income earned over the Internet. That would defeat the purpose of setting up an IPHC.

THE BANK did approve opening a business account for my writing because all the business formation documents were in my legal name, I had a corporate website and email address, and registered with the California SOS. With all my ducks lined up in a row, I got approval in 15 minutes.

As for my IPHC, all my transactions go through PayPal. That’s fine for now. But PayPal has a reputation of randomly freezing accounts with substantial balances, especially if the account wasn’t linked to a checking account, and takes months to resolve. If I ever open a checking account for my IPHC, I would have to fly into Wyoming and present the paperwork in person. That, of course, would be a business tax write-off.

Taking A Summer Break 2013

Last year I took a three-month summer break to restructure the writing business where I didn’t publish any ebooks while writing a business plan (didn’t happen), re-branding existing ebooks (done), and filling up the ebook buffer (didn’t happen). I’m surprised that I got one out of three done, as re-branding the ebooks with updated cover art, internal navigation structure, and front/end matter got very expensive and time-consuming.

This year I’m taking another summer break by suspending the publication of new ebooks for three months. Here are my three new goals.

1. Fixing the Content Pipeline

I’ve spent so much time learning the ropes of ebook publication over the last few years, the content pipeline ran dry and nothing is available for first serial submission or ebook publication. What I had on the bottom of the barrel wasn’t worth my time and effort to scrape up for publication.

Being an ebook publisher is fun, but I’m a writer first.

I’m clearing off the back burner of manuscripts that I’ve abandoned after I started writing or stopped editing. The last time I did this was five years ago when I kicked everything out to face a cruel world of rejections in the snail mail slush piles. This week I wrote a new short story from beginning to end in a mad rush that I haven’t experienced in years. Between the old and the new, I’m hoping to find the right balance to fill the pipeline.

2. Building a New Business System

Like many small business owners, I have way too much stuff going on to think about the big picture and plan for the future. This was why the content pipeline broke down. After seven years of shoving everything into envelopes and hoping for the best, I need a new business system.

I recently became a fan of growth hacking, where you make a change, measure the result, and make more changes with the business processes to go from okay growth to exponential growth. This appeals to me because I have a testing and programming background. Being able to slice, dice and document a big problem into smaller, workable problem was second nature. I can’t fix everything at once, but I can fix one problem and move on to the next problem.

3. Going On A Real Vacation

After I got a new non-writing tech job this year, many of my coworkers started talking about their summer vacations even though spring hasn’t arrived yet. All this talk came about because HR changed the accrued vacation time policy to force everyone to take time off, as some techies never go home much less take a vacation. As a contractor, this didn’t apply to me. But, not to appear as another antisocial techie, I said I was going to Las Vegas for my birthday in August.

Why Las Vegas?

Besides the obvious fact that I have never taken a real vacation, I have never taken an airplane trip to somewhere far, far away from Silicon Valley that I couldn’t reach by car. That the world’s largest Star Trek convention will be in full swing while my roommate and I are in town is purely coincidental. This is also a research trip for future essays, short stories and maybe an urban-fantasy series about the erotic underworld of Las Vegas.

Which of these goals will get completed this summer? I think all of them are quite likely to happen. The first two are separate sides of the same coin and the Las Vegas trip ties everything together if I hit the jackpot. This summer break will be better than last year’s.

Shredding The History Of Old Manuscripts

As a teenager destined to write the next Great American Novel, I wrote for history and saved every single page (including pages I should have crumpled up and tossed into the waste basket). Generations of English majors would toil to trace my inspirations through the voluminous pages of my old manuscripts. And then the REAL WORLD™ intruded. Becoming a writer became a childish fantasy. All those old manuscripts from my teenage years were lost when I became an adult. The story ideas from that time continued to bang around in my head for years, which drove me crazy at times.

When I became serious about writing in my mid-thirties in 2006, I still wrote for history and saved every single page (except for those that I crumpled up and tossed into the wastebasket). I eventually wrote 80+ short stories, a 25,000-word novella, a 120,000-word unpublished first novel and several aborted novels. This filled out a four-drawer filing cabinet in my office and four storage boxes in the closet. I also have stacks of file folders with unfinished manuscripts on a back table in my office area.

Keeping paper manuscripts made sense back in the snail mail submission days when I had 50+ manuscripts circulating in the slush piles, spending $100 USD a month on office supplies and postage, and visiting the post office every six weeks. Drowning in paper came with the job. A successful writer would have numerous filing cabinets lining a long wall in his office.

When I stopped writing literary short stories and started writing speculative short stories in 2009, snail mail submissions gave way to email submissions. Soon I had 30+ short stories published in anthologies. Those published short stories later became ebooks. I slowly embraced the mythical paperless office as I used paper less often for editing my manuscripts.

After my father passed away from lung cancer this past May, I went through and tossed out 98.8% of his stuff. A sad reality when you consider that we go through life to accumulate stuff that our heirs will toss into the dumpster after we die. I brought a heavy-duty paper shredder to destroy his financial and medical paperwork.

I recently realized I was no longer writing for history but for business. As a small business owner, I have numerous problems with writing new content, publishing ebooks and maintaining websites that needed solutions now. Writing the next Great American Novel was no longer a practical business goal. History can sort itself out and generations of English majors can suffer without my help.

Besides, if my heirs will be tossing out 98.8% of what I owned at the end of my life, I might as well get a head start by shredding my old manuscripts. Before I shred a set of manuscripts, I made sure that I consolidated all the electronic files into my DropBox folder. I’m planning to move the file folders off the back table into the filing cabinet and destroy any working papers after a year. The mythical paperless office might become a reality in 2013.


A Fraudulent eBook Purchase At Smashwords

I get email notifications whenever someone purchases one of my ebook titles at the Smashwords website, which is less common than the sales I get from Amazon. About 99.98% of my sales on Smashwords come through the third-party premium catalog (i.e., Apple, Barnes & Noble, Sony, and many others). I was happy to have a sale. And then I read the notification email. Five copies of my newest flash stories ebook in a single transaction. This was a fraudulent ebook purchase.

How did I know that this particular transaction was fraudulent?

All my direct sales through the Smashwords website are single-copy orders for an ebook. Although it’s possible to purchase multiple copies of a single ebook to gift to other Smashwords readers, five copies in a single transaction was irregular. Even more so when I don’t have a large enough fan base to send copies flying off the virtual shelves. If I did, such a transaction would be buried—and perhaps undetectable—in a lengthy sales report.

If you’re a Smashwords author, you have to read the site updates on a regular basis. Reports of credit card fraud appears from time to time when such activity impacts numerous writers, usually after the sales reports gets updated and prior to the quarterly payments being paid out.

Why would someone use a stolen credit card to buy ebooks? The two most common reasons are:

  • Buying single copies of numerous ebooks to post on an illegal download website for others to read for free.
  • Testing the buying limits of the stolen credit card by purchasing multiple copies of a single ebook.

After I logged into the Smashwords website and clicked on the comments link at the top of the page, I reported the transaction as being suspicious. My sales report got updated forty-eight hours later to reflect that the original transaction voided due to a fraudulent credit card payment and the $4.05 USD I earned from the sale reversed.

Traditional authors were often advised to go through their quarterly royalty statements with a fine-tooth comb and report any irregularities to their agent or publisher. Indie authors must do the same with the sales reports from the ebook retailers. Credit card fraud hurts everyone in this business.

The 99-Cent Business Model For SHORT eBooks

Some writers on Twitter were discussing about other writers who priced their full-length ebooks at $0.99 USD, therefore ruining the market for ebooks priced at $2.99 USD or higher. I kept reading that pricing ebooks at $0.99 USD doesn’t work. Actually, it does work—for SHORT ebooks featuring short stories and essays. The $0.99 USD price point appeals to IMPULSIVE SHOPPERS who want a quick read for a buck.

I stumbled upon this pricing scheme by accident when I became frustrated that the short story reprint market was dead. My short stories saw print once and only once. Placing my reprints elsewhere became too much work. All the editors wanted new content. The few editors willing to consider reprints were so damn picky I’m not sure why they bothered. Unless you’re selling books like Stephen King, a traditional publisher won’t even look at a short story collection.

My reprints found new life as short story ebooks in late 2010. Due to the short length (my minimum word count is 1,000 words), these SHORT ebooks could only be priced at $0.99 USD. Since then I started adding more short story and essay ebooks to my catalog. My income from Amazon and Smashwords grew with every little sale to become a predictable income stream that was larger than my first serial right sales.

My current business model is to add a new SHORT ebook every other week. I should have 40 SHORT ebooks for sale by the end of this year. Most will be at $0.99 USD, some will be FREE, and the omnibus ebooks will be $1.99 USD or higher. The more SHORT ebooks I have for sale, the more sales I’ll have.

This business model isn’t risk free. I’m putting time and effort into a business model that is nothing more than throwing mud at the wall and seeing what sticks. I really don’t know what will work and what doesn’t work. From what I learned so far—reprint sells better than original content, essays sells better than short stories—I can make reasonable readjustments over time to gain more sales.

The serious downside of having too many ebooks available for sale is when the newest generation of ebook readers require high-resolution covers to take advantage of the high-definition displays. Updating the ebook covers over the summer put me into the hole for $300 to $400 USD (still working on this project), wiping out what little profit I had for this year. The uniform covers and formatting should spur an increase in sales.

What annoys me the most with having too many ebooks for sale are the whining reviews that the SHORT ebooks are TOO SHORT. Never mind that word count listed in the description. Never mind that the SHORT ebooks area available for FREE. (I have yet to see a whining review about a paid SHORT ebook.) This is almost as bad as writers complaining about how other writers are pricing their ebooks too low.

The Month-Long eBook Promotion That Wasn’t

Smashwords had their July Summer/Winter Sale last month, where I offered a 50% off discount on three omnibus ebooks and a half-dozen ebooks were automatically enrolled as they were already FREE. (See the new free ebook page for list of titles.) The results are in—drumroll, please—it’s, meh.

That’s not surprising. Nearly all my ebook sales from Smashwords are through the third-party distribution network (i.e., Apple, Barnes & Noble, Sony, etc.). Sales through the website itself are very rare events. The 50% off discount went over like a lead balloon. The FREE ebooks, however, went flying off the virtual shelves. The Post-It note with the pre-sales numbers disappeared, so no breakdown of how well the FREE ebooks did for this promotion.

July was such a distracting month that I couldn’t do any active promoting.

I spent three weeks trying to get a small business checking for my intellectual property holding company (IPHC). US Bank didn’t like my anonymous limited liability company (LLC) from Wyoming, or the supporting documents provided by my registered agent to represent me in Wyoming, because my name wasn’t officially listed anywhere. After three trips to the branch office and several heated arguments, the manager denied my application.

This isn’t an uncommon problem in the post-9/11 era. The stricter banking standards are to thwart terrorists, organized crime and Wall Street from opening accounts for money laundering. Not that this actually prevents that from happening. The practical application is to prevent the little guy from getting a leg up on big business. I’ll have to shop around until I find a bank or credit union that will accept my out-of-state LLC.

US Bank, however, had no problems opening a business checking for my writing business with a California LLC as my name was on all the documents. Providing a copy of my DBA statement also proved that my writing business had existed since 2006. Opening a new account still took two more trips to the branch office to get it done. The manager became shocked—shocked!—to find out that I wasn’t kidding when I told her that I was operating a “small business” with lowercase letters. I hope that will change next year.

The Economics of New eBook Covers

This week I started updating my ebook covers to meet the new requirements by buying newer stock graphics at a larger size since the smaller stock graphics don’t scale up well. Since I’m also restructuring my writing business, I’m also thinking about the economics of the new ebook covers in terms of breaking even and making a profit.

With the average price per stock graphic going from $1.67 USD to $8.35 USD for each ebook cover, I’ll need to sell more short story and essay ebooks at $0.99 USD each to offset the increased cost. Unfortunately, I’m not able to raise prices on my ebooks since I specialized in the shorter and less expensive end of the ebook market. If the price per ebook can’t change, I need to change something else to become profitable.

I was recently followed by Bibliocracy on Twitter and invited to submit my ebooks for sale at Bibliocracy. Since I’m already on Amazon and Smashwords, and in the process of abandoning Scribd for nonexistent sales, I’m reluctant to put time and effort into another market with uncertain prospects. But I did check out Bibliocracy and found one unusual requirement. The minimum word count is 2,500 words (ten pages), which disqualified most of my short story ebooks (the average length is over 1,000 words).

The more I thought about this market, the only suitable ebooks I have for Bibliocracy  are the omnibus ebooks (i.e., multiple ebooks collected into a single ebook) at $1.99 USD each. With two omnibus ebooks available, I can try out this market with very little effort. Unlike Amazon and Smashwords with a vast ocean of titles, Bibliocracy is a small pond with a growing list of titles. My omnibus ebooks should sell well here than elsewhere. A new market for higher priced ebooks will help decrease overall costs.

With Bibliocracy’s 2,500-word minimum requirement, and if Bibliocracy becomes a viable market for my titles, can I really afford to publish a short story ebook with less than 2,500 words? Maybe, maybe not. Like my 500-word flash stories, I might be bundling a handful of short stories into an ebook. Perhaps these short story bundles will sell better together than as individual ebooks at $0.99 USD.

Looking at my ebook publishing calendar for the next 18 months, I decided not to publish a new ebook per week. I’m still working at a full-time, non-writing job to pay the everyday bills. With blogging four times a week, building up the ebook buffer, and writing new material in between, I need more slack time in the schedule to keep everything on track. With each ebook cover costing $8.35 USD, I can only afford to do three ebook covers per month. I’m returning to my previous schedule of publishing an essay and short story ebook every month, with a free blog posting ebook tossed in.

Like my early days of being an over-the-transom short story writer, my carefree days of being an ebook publisher are gone.