Transcript – Episode 14

 

Hey, fellow indie authors, welcome to this week’s episode of the Indie Author Biz Guide Podcast. This is the fourth and last episode in our Financial Basics for Authors series. In this episode, I talk about knowing what your business owns, what it owes to others, and your equity in it. And this information is shown on your balance sheet. Listen to the end for a free resource you can download to help you in your indie author business.

Welcome to the Indie Author Biz Guide Podcast. I’m Tora Moon, genre bending fantasy and sci fi author, indie business author, and entrepreneur. Here we talk about the business of self-publishing, or as I prefer to call it, indie publishing. As an indie author, you have entered the wonderful world of entrepreneurship. On this show, I guide you through the rocky waters of the indie publishing industry.

I share business basics and principles you can apply to your author business, really any business. Other indie authors share their experiences and expertise to give you insight in your career and build your business. You can download your free indie author business checklist, find additional resources, and the show notes at Indie Author Biz Guide dot com. And now here’s today’s episode.

 

EPISODE INTRO

There are two basic financial statements that give you a picture of your business. In episode 13, we talked about your income statement and tracking your money coming in and going out. And that’s like a video of your business. It shows your activity over time. In this episode, we’re going to talk about your balance sheet and it shows you what you own, what you owe, and what’s leftover or your equity of your business.

This document is very important because it tells you at a glance if your business is thriving, doing okay, or if it’s underwater and it’s struggling to survive.

A balance sheet is as of a certain date. You can think about it as a photograph of your business. It’s taking a snapshot of your business as of a certain period of time, whereas your income statement is giving you a video of your business and you need both statements in order to get a complete picture about your business.

The format of your balance sheet can look a little bit differently if you are in the U.S. or if you are outside of the U.S. and are doing your accounting under international standards. All of the information is the same. The order may be just slightly different.

For those of you who are just listening, I have a sample balance sheet and income statement available that you can download at Indie Author Biz Guide dot com slash resource. I encourage you to download it to look at it while we’re talking about these different sections.

 

What a Balance Sheet Tells You

 

Under Generally Accepted Accounting Principles in the U.S, this is how you will see a balance sheet laid out.

 

ASSETS – What You Own

 

Your first section is your assets. These are the things that you own. If you needed to liquidate your business, these are things that could be easily sold.

It includes, of course, your cash, that includes any checking account, savings accounts. Your PayPal account is actually, in this instance, like a checking account. If you have a balance of money coming in and going out, it’s a checking account, and you can keep track of that like a checking account in your accounting software.

It would include your accounts receivable. This would be the amounts that Amazon and the other retailers owe you for the sales that you made 60 days later (earlier), like we talked about in episode 12.

It would include your inventory, which would be any books or merchandise you have purchased to sell either on your website or at in-person events.

Some of the less common things that you may have on your in your assets section, but they do occur in our publishing industry, you may have prepaid expenses. And these are things that you’ve paid ahead of time and the person hasn’t delivered that service or those goods to you. This can occur if you give a deposit to an editor or a cover designer. They haven’t worked on your book yet, and if they don’t, if that’s a refundable deposit, then it’s a prepaid expense because you can get that money back from them.

It would include payment for a booth that you’re going to attend. Most of these you’re paying for that booth months ahead of when you attend it. You don’t want to record that expense when you book that booth. You want to record that expense when you attend so that you can match the sales that have come from that event with the cost of that event.

If you’ve booked the cost of that event when you booked it, say February, but the event isn’t until September, you have an extreme mismatch of your income and expenses. So you would put that as part of your prepaid expenses.

And you may have fixed assets and this would be computers, office equipment, cameras, that kind of thing. In most cases, businesses will have a capitalization policy. If it’s under X amount, $500 is usually what companies use, they just expense it rather than taking the expense of doing depreciation. All of these are added together and that’s your total assets. The total amount of what you own.

 

LIABILITIES – What You Owe

 

Your next section contains two parts, and that’s your liabilities and your equity. And your liabilities are the things that you owe. This would include you’ve received an invoice from your editor, but you haven’t paid it yet. That would be a payable, so you’d have some accounts payable.

It could be any credit card balances. If you have a credit card that you use to pay business expenses, the balance of that credit card that you haven’t paid yet is a liability, something that you owe to that credit card company.

If you’re selling direct, or whether that’s in person or on your website, most likely you’re collecting sales tax or VAT. That does not get shown on your income statement. That isn’t income! That’s a liability. You owe that to the taxing authority. You don’t want to record it on your income statement. That’s going to inflate your sales. You only want to show what you sold. Even if you’ve at an in-person event and you say I’m selling including tax. When you book that sell, you’re going to have to take that amount, that tax amount, out of your sales and put it into the amount that you owe for sales tax.

Depending on your account, you may not pay your sales tax until the end of the year or the end of the quarter. You only have a small amount, your state may set you up that you only pay your sales tax at the end of the year. You’re going to have to keep track of all of that sales tax so that you can pay the appropriate amount when it’s due. If it’s quarterly, you’re going to have to keep track of all those quarterly ones. Some states and some instances you’ll have to pay monthly. That’s usually if you’re just first starting or if you are making a lot of sales. They want to get that sales tax money as soon as possible.

If you have employees, any payroll taxes that you’ve withheld from their paycheck, you need to account for that because you owe that money to the state or the federal taxing authorities. You’ve withheld that in a fiduciary responsibility to your employees, and they are depending on you to remit that when you need to, and that is shown as part of your liabilities as an amount that you owe.

Another one that authors may have is if you do a pre-sale of your books, that’s called deferred revenue. If you have a presale that’s only 30 days, you probably wouldn’t need to book this. If you have a pre sale of a year, three months, all of those presales of your book go into this liability account. So you know how much you owe to people that if you don’t deliver the book as you said you were going to, you’re going to have to refund that money to them. You would book those presales when you ship that book out, when you release the book.

And all those liabilities are totaled up, so you have total liabilities.

 

EQUITY – What You’ve Put Into the Business

 

And the last section is what’s left over. It’s your equity. And this includes any money you’ve put into the business: owner or partner contributions, or shares issued, which we talked about on episode two. It includes any money that you’ve personally taken out of the business as a owner or partner withdrawal, how you’ve paid yourself if you’ve a DBA or partnership, and if you have an S-Corp, it would be any dividends.

Your equity includes a cumulative net income or loss of your business from the time it began. If you’ve been in business for ten years, that number may be quite large.

And it also includes your current period income or loss. So if you’re doing your balance sheet as of January 31st, that current period net income and loss would be your January income. If you were doing it as of June 30th, that current period would be from January 1st to June 30th. It’s for the year.

 

Why It’s Called a Balance Sheet

 

And it’s called a balance sheet because your assets have to equal your liabilities and your equity. They have to balance.

 

The Health of Your Business

 

A healthy business is when there are more assets than liabilities. That means you have the ability to pay your bills and your equity is positive.

A company or business that is in trouble doesn’t have enough assets to cover their liabilities and what they owe. They owe more than they own. Their equity is in a negative. And when I was doing financial auditing, that would be called a going concern. We as auditors were concerned that that business could continue going because you can only sustain that for a short period of time.

 

Resources To Help You

 

My book Business and Accounting for Authors includes a section on what you own or your balance sheet. I go into a bit more detail on what is your balance sheet, what’s on there. It’s available on my website, print, e-book, or audiobook, or on all the platforms. Or you can order it from your library.

If you need help with your business and setting up your business and your business planning, I now do Author Business coaching. You can find out more information on that at Indie Author Biz Guide dot com slash ABC.

 

I hope this episode and these past four episodes have helped you understand your financial statements a little bit better. I hope you have an amazing, awesome day!

Thanks for listening to this episode of the Indie Author Biz Guide podcast. I hope you found value in it.

You can get your free business checklist, find more information, and any downloads mentioned at Indie Author Biz Guide dot com forward slash podcast.

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Thank you and I hope you have an amazing day!