Whether you are a self-publisher, a small publisher, or a published author, you need to have a basic understanding of the financial machinations that lie behind publishing a book. Here are some useful definitions of common financial terms that are used in the publishing industry:

Net Revenue - the amount of money that is left after the discount is given to the wholesaler or book store. For example, if your book retails for $20.00, and you give a 40% discount to a bookstore, the amount you receive is $12.00 (100% - 40% = 60% x $20.00 = $12.00). If you give a 60% discount, then the amount you actually receive is only $8.00. If you give no discount, you will receive the full retail price.

Returns - In one of the (many) anomalies of the book publishing industry, bookstores and book wholesalers have the right to return the books they don't sell, and receive full credit as if they had never purchased them in the first place. The average return rate for the trade publishing industry is about 35%, and if a book doesn't do well, the returns can run even higher. While you don't have to sell your books on a returnable basis, most bookstores and wholesalers will shy away from buying books that aren't returnable.

PPB - stands for paper, printing and binding. This is the cost of actually printing the book. As you will see, the printing cost is only one of many costs that go into making a book.

Plant - all the costs that go into putting the book together. Plant costs include whatever is spent on proofreading, interior design, cover design, translations, artwork, etc. as well as the cost of creating a camera-ready disk for the printer.

Freight In - the cost of shipping the book from the printer to the publisher's warehouse, fulfillment house or distributor.

COGS - stands for Cost of Goods Sold, and includes all the costs of producing the book and getting it ready for sale. So COGS includes Plant, PPB, and Freight In. It also includes another important element, the Author's Royalty.

Margin - Usually shown as a percentage, this is the portion of Net Revenue that is left after you subtract the Cost of Goods Sold. So using the first example, if you sell a $20.00 book at a 40% discount, you receive $12.00. If it costs $4.50 to produce that book (taking all of your COGS into consideration), then after your costs, you receive $7.50. So your margin is 62.5%, or $7.50/$12.00. (That is pretty good, by the way.)

Selling Expenses - what is costs to market and sell the book. Selling expenses include, among other things, the fees you pay to your fulfillment house or distributor, commissions to sales reps, freight charges you pay for the customer, and advertising and publicity expenses.

Overhead - what it costs you to run the company. Overhead includes employee salaries & benefits, rent, insurance, and the cost of keeping the lights on and the phones working.

Net Operating Profit - what is left after you pay all your expenses, but before interest payments and taxes.

In a very simple form, this is the way it works:

Retail Price less Discounts and Returns = Net Revenue
Net Revenue less COGS = Margin
Margin less Selling Expenses = Profit Before Overhead
Profit Before Overhead less Overhead = Net Operating Profit

You will see these terms over and over again as you set up your publishing business, and you will need to have a working knowledge of them if you want to hold your own in discussions with wholesalers and distributors.

Additional Articles

To learn more about book distribution, read What's the Difference Between a Distributor and a Wholesaler? and Am I Ready for a Book Distributor? For instructions on how to create a single-title Profit & Loss Estimate, see Five Steps to a Productive P&L.

Deirdre and Gary Smerillo are the owners and founders of Smerillo Associates, a consulting firm focusing on the business and financial needs of small and independent publishers. Based outside of New York City, they can be reached via .