What’s Your Novel Worth? NPV and Cash Flow

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.

43 Comments

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43 Responses to What’s Your Novel Worth? NPV and Cash Flow

  1. What is your writing really worth? (Hint: The best advice here to spend more time writing, less time doing the… http://t.co/rUJasZeYWt

  2. KjM

    Hi Jeff, a long time since I used to read your #fridayflash stories (though I have Anasazi Runner on my Kindle in the to-be-read pile.)

    I came here from Dean Wesley Smith’s and your entry makes for great reading. Clearly I need to publish more! Thanks for the very handy tool.

    Best regards,
    – KjM

  3. Pingback: Write more and sell more | Gwen Bristol

  4. My inner MBA is geeking out over this :). MT @thecreativepenn: What’s Your Novel Worth? via @Jeff_Posey http://t.co/xB7UORLI3d

  5. This is deeply reassuring stuff, especially for someone like me at the beginning of the process … and if I feel the need to justify the way I’ve decided to spend my time either to myself or anyone else!

    Of course nothing is guaranteed: the equations can’t account for the quality of what I write, but it’s good to be reminded that it is at least possible to get a decent return, and I really shouldn’t resort to get a job stacking shelves at the local supermarket.

  6. What’s Your Novel Worth? NPV and Cash Flow via @Jeff_Posey http://t.co/tulzbM11Dy

  7. What’s Your Novel Worth? NPV and Cash Flow http://t.co/yFFcNTjD75

  8. Found this on Dean Wesley Smith’s site. Very cool. Calculate the value of your novel. http://t.co/UaBlQWdO8M

  9. Pingback: Professionalism and Future Earnings | Edmond Barrett

  10. What’s your novel worth? Jeff Posey shows how to calculate it. http://t.co/CKKUtYfYRk

  11. Jeff,
    This is absolutely lovely. Thank you so much for doing this. I’ve been using a handwavy calculation to try to estimate this–this is a much, much more robust solution. Okay if I include the link in workshops I give?

    One more thing: I’m going to make an argument that you should adjust your spreadsheet to peg to year 35. The reason is that at year 35 under copyright law you can grab your rights back from a publisher under the copyright recapture provisions.

    So if you’re trying to figure out if you should sell to a publisher, you’re only giving it away for 35 years, no matter what the contract says.

  12. Thanks for posting this!

  13. Interesting post with a lot of food for thought and further comment just one suggestion. Perhaps offer a version of your spreadsheet in XLS format since there are likely a lot of people who only have access to the older versions of Excel.

  14. Thanks for finally talking about > What’s Your Novel
    Worth? NPV and Cash Flow | Jeff Posey < Liked it!

  15. Interesting reading for authors who want to know if they can live on their writing income. http://t.co/5quOVc18Le

  16. Jo

    Hey thanks for the spreadsheet. It’s very interesting academically but I’m not sure how to apply it.

    I guess it’s because I’m asking it the wrong question. My main ‘money’ question is at what point will I have cash flow enough to support myself through writing.

    Unfortunately that seems to be not so answerable. If I can get $100 a month from 20 books, and my income is increasing as I keep writing, I could probably swing it. I have low expenses. I figure I could write 20 books in a couple of years, maybe.

    The unknowns include my writing speed and how much I can actually be making once I get a dozen or more titles up.

    I’ve only ever written short stories, derivative fan fiction. Great practice, but of little monetary value and they tell me nothing about what my output might be over the long term.

    With so much chaos and unknown, I figure your last piece of advice is what’s most important. Get to the writing. Writing everyday is all I can really control. So I’m going to get back to that right now. :-)

  17. Hi Jeff,
    From one MBA to another, I appreciate this analysis!
    Best,
    Jan Moran

  18. Jeff, what wonderful advice and thanks for the spreadsheet to crunch the numbers. I’m a bit older than you, so I modified the calculations to 20 and 30 year NPV.

    Nice post!
    Rachelle

  19. This was so cool! Thanks for doing all the work. I now have something to help me write my business plan, I’ve been struggling with predicting sales and revenue. Yippee!

  20. Pingback: Thinking about a book as an actual investment | Digital Tiller-The 21st Century is no longer the future

  21. Interesting article on Jeff Posey’s blog about what your novel is worth: NVP and cash flow. http://t.co/CfdAttwgE7

  22. Very useful information here, especially for people like me who have a couple of Master’s degrees already for which a spreadsheet never came into play. While it may be too late to get an MBA in corporate financial analysis, if I persevere I may master the information in this article.

  23. Interesting article on Jeff Posey’s blog about what your novel is worth: NVP and cash flow. http://t.co/lNgCl4UwCR

  24. Here is a very interesting post for authors, about taking a long term view on writing more, doing other stuff… http://t.co/J9OTTZt0xv

  25. Jeff,
    Would you agree that the average royalty per copy sold is assumed to be constant in your spreadsheet? That’s my interpretation and it would be an easy figure for folks to derive (divide their avg. monthly royalty income by the avg. copies sold).

  26. Ryan Petty

    Jeff,
    It’s awesome of you to share this analysis. I’ve done much simpler calculation of NPV (similar to the Passive Guy’s) for a book I’m writing and appreciate your sophistication here. Tip of my hat!

  27. Pingback: Saturday Fiction Writers and Indie Publishers Round Up 33 | J.J.Foxe.com

  28. This is a fantastic tool, Jeff. Thanks so much for sharing!

    One small note: if you don’t have any existing titles, the chart doesn’t work, presumably because it’s trying to calculate a 5% increase of 0. ;) So maybe that should really just be set to a limit of 1–even if you haven’t published anything yet.

    Still, fantastic stuff. The lesson clearly applies…

  29. Brilliant article Jeff! It gives some tangible evidence that long-haul persistence does in fact pay off for novelists. And this is the icing on the cake:

    “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.”

    Thank you for this brilliant post!

  30. Pingback: Books by Tim

  31. bill

    The heck with these ‘examples’, I have some real world data to share:

    -14 existing titles
    -$600 per month earnings per title on average
    -5 new titles per year, publishing every 10 weeks
    -1% boost of new titles to other sales
    -$500 cost of production each title

    Jeff’s projections show this author making $80k per month in 5 years, which sounds ridiculous – but she is currently making $20k per month and made an avg of $7k monthly in 2012, after $4k per month in 2011.

    Conclusion: Jeff doesn’t have an MBA in Finance for nothin’. Her new releases each earn $10k in the first month, something this NPV isn’t able to factor into the equation.

  32. http://t.co/CAJlqbwzxG a good review to price your novel and read some statistics. Its very informative :-)

  33. bill

    Thanks for this Jeff, I have a real life example to provide from a family member/indie writer:

    -She has 14 novels currently.
    -The worst performing (at 2yrs old) still earns $600 per month.
    -She publishes new novels 5x per year.
    -Each new release makes several thousand in the first month, but conservatively I estimated the effect on other books at just 1%.
    -With editing and cover design, each release costs just $500.

    Holy cow, your spreadsheet estimates $80k per month in Year 5 and $1.3million per month in 20 years! That sound crazy, but thus far she earned an avg of 7k a month in year 1, and $15k a month in year two – so your projections seem to be realistic….

  34. Where do writers earn money? By writing. A calculator to prove it: http://t.co/L0rFVZYIOx #amwriting #authors

  35. The Passive Guy sent me here. This is fascinating… and rather unbelievable. I mean, I believe you! But using your calculations, I’m going to be a millionaire one of these decades, if I keep doing what I’m doing. Which my husband would certainly encourage.

    Of course, everything depends upon the self-publishing opportunities (accessibility, royalty rates, affordability of publishing new titles) staying the same, or even improving, which could happen.

    Thanks for the shot in the arm. What am I doing reading blogs?? I have to get back to writing!

    Patrice, preparing for a life of luxury as one of those self-pubbed millionairesses

  36. A business analysis of book monetary value over time. Pretty weird. http://t.co/4U7oCGPOLb

  37. I found this via Dean Wesley Smith’s website. Looks very interesting/helpful. Thank you for creating this – I love playing with statistics!

  38. Interesting tool. It’s very easy to use and self-explanatory. If nothing else, it’s a morale-booster for those days when the wrods don’t seim to floe.

  39. Pingback: What’s Your Novel Worth? NPV and Cash Flow | The Passive Voice | Writers, Writing, Self-Publishing, Disruptive Innovation and the Universe

  40. What’s Your Novel Worth? NPV and Cash Flow | Jeff Posey http://t.co/JlzRcg5PW4

  41. Isto sim faz-me repensar os preços que tenho cobrado pelos meus livros (maioritariamente à borla)… http://t.co/9QPpQtHJqK

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