I’m going to be referring to what you’re up to as your business. Even if you haven’t formalized your enterprise with a state charter of formation or articles of incorporation.
You’re in the business of writing if you intend to earn a living from your writing. Regardless of your decisions around how you publish, you’re going to need to think about what you’re doing as a business.
The obvious question is, what does that mean?
I had an experience where an author said to me, “I know that I need to treat my writing like a business, but when I really thought about it, I didn’t know what that meant.”
The statement “treat your writing like a business,” or “put your CEO hat on,” gets thrown around in forums and conferences, but there isn’t much clarity as to what exactly that means or how to do it!
I’ll give you my take on it right now.
There is the actual formation of a business; a legal charter by a state recognizing the establishment of a legal entity. In this case, one that would transact and conduct operations to publish and sell books.
This is not what I’m talking about.
Yes, we’ll cover sole proprietorship and incorporation a bit later, but at this point, what we’re discussing is the business operations, and function of the business. How to use business practices to optimize the results.
Specifically, I’m talking about a process that turns your creativity into cold, hard cash. In its purest form, you write a story, and someone pays you for the right to read, hear, or see that story.
Today, your chances of making a sustainable living from your story creation are better than ever. As you produce these stories and gain success, you create more and more value. There will be a further exposition on this topic in the next foundations,” the Golden Age of Content Creation, and “the Reader-Writer Relationship”. “The value you create is in writing the story, but to capture that value and convert it into cash, you need to sell the use of that story to someone who sees its value.
The Value of Any Business
Let’s talk about what makes a business valuable.
All businesses are valued on free positive cash flow. There are generally accepted valuation methods used to determine the value, and they always go back to the positive free cash flow produced.
- Earnings per share; the portion of profits attributed to each share of stock
- Multiple of EBITDA, based on the industry
- Discounted Free Cash Flow
When a business is for sale, the buyer and seller will negotiate on what they feel the company is worth. The seller is focusing on the certainty of future cash flows, while the buyer focuses on the uncertainty of those cash flows. No one is arguing about what is being valued, just on what credibility we can give to the cash flow projection.
The point is that a business’ value is tied to the amount of reliable and repeatable cash flow it produces. Now, in your case, you’ll produce a positive cash flow from publishing books. Eventually, we will broaden this to selling our content, and not limiting the business to just books. The way you make money (as long as it’s legal) isn’t what we’re talking about. This is about you embracing the idea that what you are setting out to do is all about generating a positive cash flow.
The more cash flow your business can create, the more it is worth. The more that others can project into the certainty of that cash flow continuing, the more the business is worth. Now you know the only way to value the business is the cash flow it generates.
Once your creative process begins producing a profit, things get complicated. You must pay income tax on the net profit. The keyword is “net”. The IRS understands that a business has expenses in the process of making a profit, and expects you to pay taxes on that profit.
Revenue – expenses = profit
But profit isn’t cash flow. Free cash flow is the actual cash the business has generated after paying all its bills and taxes. That cash can stay in the business to pay for growth initiatives, or come out to you.
Here is where we begin to unpack what is meant by treating your writing like a business.
Some authors take the approach that they don’t look at how the business is performing because
– They hate to see how they are doing,
– They don’t know what they are looking at,
– They have an accountant that does their taxes for them at the end of the year
– They trust their spouse to do the right thing for the family
The head-in-the-sand approach of only looking at your expenses when tax time comes means you will pay more than your fair share in taxes. Furthermore, you’re not using the tax code as a tool to maximize your cash flow.
You see, when you’re getting started, you need every dollar to be focused on working capital.
What you’ll learn in this book is that, rather than being reactive at year-end, a good businessperson uses the tax code proactively. What I mean by this is understanding what you’re trying to do, and then finding the tax code that gets the best result for your investor. Sometimes that may mean paying more in taxes, but more on that later.
You see, using business tools helps to make the business more efficient. Efficient at what?
Producing Cash Flow.
The more we conserve and create, the faster you can get the business to stop looking to you for money and grow enough to start paying you. Reduced tax liability will provide more cash for you to fund your business operations, and scale up faster to hit your goals.
This is a mistake many new entrepreneurs make in saying “I’ll worry about that stuff when I get bigger”. By not being proactive, you slow your growth. In the beginning, each dollar that we can keep to reinvest gets us to our goals faster.
This brings us to a key concept: function and success for your business.
I’ve come up with five statements about the function and success of your business. In statement one, I qualify how the firm will produce a positive cash flow for publishers. If you were to take out the first statement and the word “publishing” from the other statements, then the remaining four could apply to every business.
1. All publishing businesses are built on the reader-writer relationship (Keystone Mutualism); without a substantial and growing base of readers that enjoy your work, the business can’t function.
2. A functioning business produces enough positive cash flow to fund its operation and achieve investor goals.
3. A successful publishing business funds and delivers investor goals.
4. Most businesses fail because they lack functionality.
5. Most businesses don’t succeed because they haven’t defined success.
Your goal is to create a functioning and successful publishing business. It is functioning when the cash flow is positive and supporting the business and investor goals. We will be clear on what success is when we identify what the investor expects from the business.
That’s really what this whole book is about. If you’re treating your writing like a business, you’re looking for your writing to produce a positive cash flow. That cash flow is used to fund the business, and to deliver a return to the investor—in this case, you. That means the investor may need some help getting clear on what the expectation is from the investment.
If I were investing in your business, I would be looking to get a double-digit return on my cash. If it was a start-up venture, I might be looking for a multiple, like two or three times my money back. For you, it’s different. You’re getting the benefit of living your dream as a writer, and that can cloud your judgment. This isn’t personal or unique; just about every business owner ignores the needs of their investor. The CEO of your publishing company is also likely to be a lousy employer, having you work long hours and not providing pay or benefits.
You also have a unique situation, where you’re able to get a return through cash as well as other benefits that may be more tax advantageous. We will explore how you can do just that. Finally, as we will discuss further in the “Roles” section, as your business changes and your life stages progress, what you’ll need from the business will change. Being clear on what the business needs to deliver will be liberating.
If your situation is like most authors, you don’t have much, or any, business experience. You don’t know what you don’t know, and as you begin to learn, you have anxiety about blowing up your chance as a full-time author with rookie business mistakes.
That all changes now, because this book is all about the business of writing.
A big part of what we will be doing is understanding the investor expectations. In some cases, rather than you as the investor imposing your expectations, you’ll need to get your mind right about the reality of your business. For example, in the beginning, all publishing businesses need to transition from the investor (you) being the primary source of capital, to generating that working capital from book sales. Understand how long this will take and that, until this happens, your desires for what this business will do for you are on hold.
Treating your writing as a business means using business tools to optimize for functionality and success.
A functioning business produces enough positive cash flow to fund its operation and achieve investor goals.
A successful business delivers on investor goals.
To be a good investor means having clear and realistic return goals.
Your measurement for business success is in the amount of free cash flow you generate.