Building a Better Budget, Part 5: Projecting Cash Flow from Sales

October 2010
by Marion Gropen

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SKILL SETS: BUDGETING

Building a Better Budget, Part 5: Projecting Cash Flow from Sales

by Marion Gropen

Publishing companies are more vulnerable to cash-flow crises than most other types of companies. The first step in avoiding them is to anticipate when they might occur at least a year beforehand. Most of the most painless measures for managing them require plenty of time to prepare.

To project your net cash flow a year ahead on a month-by-month basis, you need to start by analyzing the inflows from your various types of sales (see below; outflows will be covered in the next installment of this series).

Different sales channels yield different cash-flow patterns, but three common patterns are generated by:

• selling to retailers, especially retailers in the book trade; this category can be

divided into transactions mediated by distributors and transactions in which you deal

 

directly with wholesalers and/or retailers

• selling to online-only retailers and to buyers such as businesses and institutions

• selling in the back of the room at an event or lecture (called BOTR) and otherwise

directly to the consumer/reader (DTC)

Sales to Book Trade Retailers

In other industries, retailers may pay in 30 to 60 days. In the book trade, small publishing companies are lucky to be paid in 120 days, and payments are likely to be offset by returns of large numbers of shopworn copies.

The largest publishers tend to do their own distribution. Smaller ones often sign up with a distributor in order to deal with the book trade, and many use distributors to deal with other types of retailers as well. As long as the distributor is financially sound, client publishers get more predictable cash flow and probably better collection rates, along with saving on the expenses involved in warehousing, order processing, picking, packing, and shipping to offset the higher discount and distribution fees.

Since the bookstores generally don’t pay for 90 to 120 days after books are sold to them, the typical distribution contract doesn’t allow for even partial payment to the publisher until 105 to 135 days after the end of the month in which a sale occurred.

Distribution contracts also usually call for returns to be deducted immediately from payments to the publisher, and for a return reserve, usually 20 to 30 percent of the payment due, to be held for at least six months.

Many distribution contracts call for payments to be made over several months. For example, suppose that you sell $50,000, after discounts, in January. The bookstores will pay for those books, or for most of them, throughout May and June. You might get half the total on May 15, another 30 percent on June 15, and the last 20 percent on August 15. Returns will have been deducted throughout that time and may continue to arrive for several more months.

Let’s look at a detailed example. Suppose that your publishing company uses a distributor whose agreement provides for payment of 50 percent of the total at 105 days after the end of the month, 30 percent after 135 days, and 20 percent after 195 days, and suppose also that your sales budget shows gross sales, after all discounts, of $50,000 in January and $100,000 in February.

For simplicity’s sake, we’ll stop there. And, for the sake of space, I’ve written $50,000 as $50 and dropped the “,000” on all the numbers.

This is what the first spreadsheet predicting the cash flow into the company would look like:

GropenTable1Oct

To find the expected total cash flow into the company before returns, you “spread” the sales made in each month out over the months in which you expect to collect the money, and then sum down each column.

If you are not using a distributor, you will need to use your experience to come up with figures for this table instead of deriving them from a contract, and you may need to reevaluate your expectations every so often. But you can still apply the technique used above.

Notice whether your retail customers are slower to pay at certain times of the year (around tax time, perhaps, or when the bills for the holiday inventory are due), and bear in mind that you can also expect slower payment if the economy worsens.

The next step is subtracting your returns from your cash-flow figures.

First, predict the months in which you will receive your returns. The pattern will vary with type of book and type of bookstore. College bookstores return most of their books shortly after the start of each semester. Trade bookstores return books more heavily in January and February than at any other time of the year. Craft stores return heavily at the beginning of the year, after major sales periods such as back to school, and after all major holidays that involve decorating.

Second, build a spreadsheet for the returns, using the pattern that applies to your type of books. The first columns should hold the titles and other identifying data for the books or groups of books. Then the total dollar value of the returns appears, and the publication month. If you use more than one pattern to predict your returns, you may have a column to identify which pattern you have applied. And then come columns for each month covered by your budget.

Here’s an example. Suppose you have only two books in your pipeline (and remember that you are using a distributor in our example). Book A is expected to generate $20,000 in returns and is being published in January. Book B is expected to generate $10,000 in returns and is being published in February.

Now, suppose that most of your returns will happen in the second and third month after publication; a trickle—call it 3 percent of the total—in every month after that; and an extra 6 percent will be returned in January each year. So, in the first and fourth through twelfth months after release, you’ll get 30 percent of the expected total return. And another 6 percent will be returned in January, no matter when in the year you release the book. The other 64 percent of your total returns will happen in the second and third months after release, at 32 percent of the total each month.

Let’s apply that rule to Book A and Book B. Book A has $20,000 in expected returns and is released in January. The first month you would expect 3 percent of the total, or $600 in returns, except that it’s January. So you’d add another 6 percent of the total, to make $1,800 in returns that month. The second and third months after release, you get 32 percent of your total returns, or $6,400 each month, and then the rate settles down to $600 per month for the rest of the year.

Book B releases in February, and you expect only $10,000 in total returns. In January, there are no returns, because it hasn’t shipped yet. In February, booksellers return $300 worth. In March and April, you get 32 percent of $10,000 each month, for $3,200 per month, and so on.

GropenTable2Oct

It’s easy to construct a spreadsheet that subtracts the returns from the cash from sales.

 GropenTable3Oct

Among other things, this clearly shows that you’ll be paying your distributor for returns before the distributor pays you for the sales. Note that the distributor is deducting those returns from those stores’ invoices due before it gets paid for the original sales. That’s just the way the business goes.

Sales to Other Customers

I generally build one spreadsheet for sales to nonbook businesses and one spreadsheet for back-of-the-room sales and other direct-to-consumer sales. In them, I accumulate each month’s payments from all titles. But if you have already projected the sales by channel, you may want to skip building those spreadsheets and simply give these categories one line each on your net cash from sales spreadsheet.

Most sales to businesses and institutions, including sales to online retailers, are nonreturnable. Payment may be in 30 days, or it may be in 60 or even 90 days, depending on the type of business and the standard terms of trade in that industry. But whatever the terms, it’s quite easy to predict the cash flow, once you have predicted the sales.

Note that subsidiary rights fall into this category, although some portion of the payments for them will be contingent upon another company’s publishing schedule.

Back-of-the-room and direct-to-consumer sales are almost always cash on the barrelhead or credit card transactions. Payment is immediate, or nearly so, and returns are nearly nonexistent. Again, the problem is predicting the sales, but once you have your authors’ publicity schedules, that’s not hard.

The Total Cash Receipts Spreadsheet, Step 1

Now that you have made an estimate of when the cash will be received from each type of sale, assemble a total cash receipts spreadsheet with one line for each type and a column for each month. Save this carefully, as we’ll be using it in the upcoming article on incorporating outflow information as you work to project cash flow.

Marion Gropen consults with micro- to medium-sized publishers on financial and operational issues and offers consultations by the question for smaller publishing companies. She recently published the first part of her e-book series, The Profitable Publisher. To learn more, visit GropenAssoc.com. To reach her with questions about this article or other publishing issues, email Marion.Gropen@GropenAssoc.com.

Budget Building Blocks

“Projecting Cash flow from Sales” is part 5 of the Building a Better Budget series, which began in the May 2010 issue with “The Process and the Plan.” The next three installments were “Forecasting Sales,” “Forecasting Expenses,” and “Taming All Those Numbers.” All four are available at ibpa-online.org via the Independent Articles button in the navigation bar on the Home page.

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