What’s Your Novel Worth? NPV and Cash Flow

In 2015, I’ve decided to devote about half my professional time gathering and analyzing data to find the best author marketing practices. I’m looking for AROMI–Author Return On Marketing Investment. There’s no fee, but there is a price: Fill out surveys to share your sales and marketing data so I can analyze it. More here: www.BookSalesNumbers.com. Together, we can find ways to market more efficiently and raise the NPV of our books! –Jeff Posey

This post has been picked up here: Some Fun Calculations by Dean Wesley Smith and What’s Your Novel Worth? NPV and Cash Flow by Passive Guy. See particularly the comments section.

For better or worse, I have an MBA in corporate financial analysis. That means when I think of royalties earned by an author’s novel, I think Net Present Value (NPV) of future cash flows: your “novel worth” in financial terms.

It’s easiest to imagine NPV in reverse. Let’s say you go to a bank and ask their financial wizard how much you’d have to give them to get, say, a $50 check every month for forty years. The number they give you is essentially the NPV of the future cash flow of $50 per month. NPV has a long track record in business and law.

We’ll make these calculations over forty years. Too long, you say? No. It’s not. Copyright is the life of the author plus seventy years. That’s way longer than forty. But forty is the outside horizon for useful NPV calculations in the business world, and it’s about how long I expect to live. But I have made one grand concession to reality: after twenty years, I assume you’ll stop writing and publishing. A twenty-year run is a good one.

To calculate your novel’s NPV, you have to come up with a few numbers:

  • What is your average monthly royalty per title across all venues? If you guess, go low.
  • How often do you publish new titles? Number of new books published per year.
  • How big a boost does publishing a new title give your existing titles? If you guess, go very low.
  • What is your cost of production? Do you hire or buy anything to publish your book?

From that same information, we can also calculate an estimated net monthly cash flow, though we’ll project only twenty years into the future. Beyond that is rather ridiculous. We’ll see little graphs of those. It’s an interesting curve.

Remember, this is not reality. This is a simple projection. Your results will most certainly vary. And if you’re impatient and want to run your own numbers, go ahead and download my NPV Novel Microsoft Excel Spreadsheet.

Example 1

Let’s say it’s your first novel, you intend to write another one every five years come hell and no water, you’re going to do everything yourself and hire nothing done, you feel certain you can earn $15 per month royalty, and you think there will be so much demand for your literary skill each new book will boost your sales 20 percent.

            NPV: $7,249

That’s the financial value of your novel. If it takes you five years to write, say 250 hours a year, then you are a very slow writer earning $5.79 an hour in NPV dollars. Pretty classy.

Cash flow is even better:

Example 1 Book Net Present Value and Cash Flow

 You’ll live like a fast-food burger-flipper king.

Example 2

A more serious one. You’ve published five books that earn, on average, $50 per title per month average across all sales venues for the past year, you are committed to writing and publishing two books per year, and you spend $2,500 per book on professional production services (editing, cover, print interior design, ebook programming, etc.). Each new book boosts your overall royalty earnings by what you consider a barely measurable 5 percent.

            NPV: $55,618

If it takes you 500 hours total, you’re earning $111 per hour in NPV.

And cash flow gets really interesting around Year 10.

Example 2 Book Net Present Value and Cash Flow

A fellow could live on something like that.

Example 3

You’re a seasoned writer with a dozen books earning an average $150 per title per month and you have perfected the craft of publishing three books per year by spending $5,000 each on high-end production. Also, your accountant claims each new title released boosts overall royalty income by 5 percent—you think that’s way too high and use 3 percent instead.

            Answer: $145,015

Yep. More than $500 an hour if it takes you 250 hours to write each novel.

And those twelve novels already in the hole give you a boost in cash flow.

Example 3 Book Net Present Value and Cash Flow

What NPV Tells You

In each of these examples, the NPV tells you the present monetary value of your intellectual asset if it generates the expected cash flow over the next forty years. It emphasizes the value of long-term steady flows of small amounts of cash, and also helps quantify the value of your time investment (you only have to write a novel once for it to earn income for forty years or more).

What is NPV not? It’s not cash flow. See the next header for that discussion.

Let’s say you’re weighing whether to take a second job and put all those earnings into a retirement account or not take the job and write another book. The money you save for retirement this year is the NPV of that financial asset. Compare that to the NPV of writing another novel.

If you write under, say, two pen names, one thriller, one fantasy, your average royalty is different for each, and you can write only three total books per year: What mix makes the most financial sense? NPV helps you decide.

Also, if a traditional publisher comes calling, you can compare your NPV to their financial offer. Good rule of thumb: Never sell a cash-producing asset for less than its NPV unless you get something you really want in exchange.

And finally, it’s good for explaining to your significant other why you’re sitting alone in a room with a keyboard so much. “But honey, I’m making $106 per hour!” Just watch your checkbook. Cash flow and NPV are not the same thing.

Cash Flow

This is a cumulative figure, meaning if you stick to your plan of frequency of new titles and cost of production per title for twenty years, this is the total monthly cash flow you might see.

It disappoints you, doesn’t it? You want to write a few novels and the money start coming fast and hard. It might. Probably won’t. But if you work at it, find enough people who read more than one of your books and recommend them from time to time (also called a fan base), you can build a nice income. If you’re persistent. Talented. And patient.

Cash flow that arcs up in a graph, that accelerates over time faster than the cost of money (interest rate) is an extremely valuable financial asset. You expect to earn more wealth relative to inflation every year. How many jobs pay like that? Not many.

Most importantly, this whole exercise drives home a message: The most productive thing a publishing writer can do is write and publish. Even in Example 1, you earn nearly $6 per hour in NPV dollars. How much do you earn per hour by “marketing” on Facebook and Twitter (if you’re very perceptive and keep good records, you can figure this out)? And in Example 2, what kind of other (legal) job could you possibly find making more than $100 per hour?

Lesson: Write more, do other stuff less.

Finally, you can discover how much intellectual property asset value you create each year. In Example 3, the author is creating nearly a half-million dollars in NPV asset value annually. In Example 2, it’s more than $100,000 per year.

Try it yourself. Download my NPV Novel Microsoft Excel Spreadsheet and punch your own numbers. What do you get? What is your novel worth? How can you use your Novel NPV to improve your publishing decisions?

Jeff Posey is a project manager for Lucky Bat Books, the kind of publishing company writers want—they don’t take a percentage, ever. He offers a free fifty-minute consultation over phone or Skype by appointment. If you’re interested, send an email here: Free Book Publishing Consultation.