indie game finances

[Luke]

So i just finished doing Burning Wheel's taxes. The end result? I lost a lot less money this year than I did last year. Hurrah!

It's a good thing, but I still lost money.

My single biggest expense?
Travel to and from conventions.

Next biggest?
Convention fees themselves.

Next?
Promo items: t-shirts, bizcards, etc.

The total of those top three expenses just exceeds the cost to print one of the Burning Wheel books. These top three expenses together equal just less than half of my total expenses for the year (including shipping, websites, office supplies, etc.)

I'm reticent to give actual numbers here in a public forum, but to give a rough idea to people planning on releasing/promoting their own games: my total expenses for BW this year were less than $10k, but more than $5k.

Notably, I did not produce/print any new game material this past year, which is a big expense. Printing one of the BW books costs about $2500, not including art and editing.

Interestingly, the biggest expenses, conventions and promotions, have definitely shown marked results and have helped the game grow. So they seem worth the cost.

The plan now? Release more material. First, it's just time; I want to do it, and I think my audience wants it as well. More material will (hopefully) generate revenue to help shoulder the cost of the operation.

just sos you knows
-Luke

[Jack Aidley]

Hi Luke,

Interestingly, the biggest expenses, conventions and promotions, have definitely shown marked results and have helped the game grow. So they seem worth the cost.

I'm not sure how you come to this conclusion. From the numbers in your post (and reading between the lines a little) it seems to me that these expenses are your major loss-makers. Sure you've made some more sales, but did you make enough extra sales to pay for the cost of the conventions?

Cheers,

Jack.

[Valamir]

Hey Luke, my numbers look much the same.  If you go by just sales revenue and the all in production costs of the books, Universalis broke even and turned profitable a good while ago.  However, once you factor in 2 GenCons, assorted advertising, and taxes I've got a loss for the year.  This is really to be expected, all the more so since I've intentionally looked for additional expenses to charge to Ramshead.  Most companies do this, which is why earnings reported to shareholders is invariably higher than earnings reported to the IRS.

In calculating your loss, are you accounting for the accrual nature of handling inventory?  This unfortuneately will make your loss less for tax purposes in years where you printed, but greater in years where you didn't.  I ask to make sure we're comparing apples to apples.

I imagine my loss is less than yours, but then I've done fewer conventions than you.

Jack:  As for whether the convention expense is worth it I think the answer to that is a decisive...depends.  To the extend that promotional expenses actually builds awareness of you and your product they can generate sales long after the actual event itself.  I haven't spent much on promoting Universalis over the last 6 months (because I've been paying artists for R&R) but sales the last couple of months have increased.  This is the result of promotional activities bearing fruit.

Now that said, one needs to attempt to get the most bang for the buck.  I haven't done much with the local Con scene because I decided that the number of people I'd reach would be low relative to travel expenses.  Getting a review on a popular gaming site for free is a much more cost effective way of reaching a certain demographic (I tend to not give promo copies to reviewers out of respect for the folks who did a review based on their own purchased copy, but if I did, the COGS of a single copy still makes this pretty cheap)

On the other hand there is a whole demographic of gamers who don't surf online game sites frequently, so conventions do tend to hit a different group and demos are invaluable.  So its a trade off thing.

[Paul Czege]

Hey Ralph,

In calculating your loss, are you accounting for the accrual nature of handling inventory?

Can you explain what you're referencing here? Is it the "cost of goods sold" thing where you can't charge inventory as an expense until you actually sell it?

Paul

[Luke]

Hi Luke,
I'm not sure how you come to this conclusion. From the numbers in your post (and reading between the lines a little) it seems to me that these expenses are your major loss-makers. Sure you've made some more sales, but did you make enough extra sales to pay for the cost of the conventions?

Cheers,

Jack.

You're absolutely correct, cons and such are my major loss-makers. How ever, at least a third of my overall sales this year was from convention sales. Also, I met and befriended Mike S. Miller, Jason Roberts, Aaron Brown (from NerdNYC), Brennan Taylor (from Bulldogs who also reviewed BW for RPG.net), Don Corcoran (who's done more for the game in terms of getting it played than anyone else), Mike VanHelder (who posted a great review on gaming outpost), Ron Edwards, Alexander Cherry and Ralph Mazza. At various conventions I've been to. The contributions of these people to the overall success of the game is noticeable. They either reviewed it, played it or talked about it. Without their input and effort, the game would be, um, "underground" (to put it nicely).

And, of course, Mike S Miller convinced me to give Ken Hite a copy of BW at GenCon (which I would not have otherwise done). Ken Hite subsequently reviewed the game and gave us an award. I  think that alone is worth the price of every rental car, every flight and every bad meal.

Conventions are an incredible opportunity to actually play your game with people you've never met before. It's a way to really see how your game works, to build contacts and make friends. All of this is an absolute requirement for me at least.

Ralph:
This is my first year of itemizing/accounting BW; you obviously have a higher Accounting exponent than I do. Could you explain your arcana to us neophytes?

(Disclosure: last year I expensed the printing and production costs of the game. This year i am crediting sales and only expensing retailer cuts, paypal and shipping.)

-L

[Valamir]

Ralph:
This is my first year of itemizing/accounting BW; you obviously have a higher Accounting exponent than I do. Could you explain your arcana to us neophytes?

(Disclosure: last year I expensed the printing and production costs of the game. This year i am crediting sales and only expensing retailer cuts, paypal and shipping.)

Starting with the caveat that the IRS is unlikely to audit a business our size, technically you can't expense printing costs until the units printed are sold.

Printing Costs, Art, Freelance Writers, Layout, all of the costs directly attributable to the actual production of the physical book fall into the category of Inventory.

Technically, these costs are not expenses (right, tell that to my checkbook).  In accounting terms what you've done is merely transferred one type of asset (cash) into another type of asset (inventory).  Since this has no effect on the value of your company (total assets on the balance sheet remain the same) no expense has been incurred.

As you sell the inventory, you get to expense the carried value of each unit as Cost of Goods sold.

For example:
1)  You print 1000 books at $3 apiece.  You write a check for $3150.  You don't have to pay sales tax on the books to the printer as long as you are a registered company in your state and send the printer a reseller form (varies by state, I'd have to look to see what the form is here in IL).  A good printer should ask you for this since if you're buying 1000 books they're obviously for resale.

2) the $150 extra was the cost to ship the books.  You can expense that.  Shipping costs are not part of the production of the book.

4) You've also payed $400 to artists, $100 to an editor/proofreader, $200 to a friend who wrote the magic rules for you, $300 to your layout guy, and bought $100 worth of fonts and graphic design elements.  The fonts and graphic design elements can be reused and were not consumed as part of the production process so they can be expensed (probably as an office expense).  You can also probably get away with expensing small items like ISBN and UPC charges related to the book.  But the rest of the $1000 in charges is considered part of the value of the inventory.

5) Now your inventory has been delivered.  You have 1000 books for which you paid a grand total of $4000 for.  Your cost per book is $4, and if you were to prepare a balance sheet for your company you'd show $4000 worth of inventory.

6) At the end of the year you've sold 300 books.  To make this simple we'll assume all online direct sales at $10 apiece plus $2 shipping and handling.  You declare $3,600 in revenue.  Your actual shipping costs (and technically you'd need receipts to declare them...) came to $480 and you get to write that off as an expense.  

7) Now you finally get to expense part of the $4000 in inventory.  300 books sold at a cost of $4 is an expense of $1200.  You deduct the $1200 from your inventory leaving you with $2800 in Inventory and declare the $1200 as an expense. On an income statement this expense would be called "Cost of Goods Sold".


So assuming no other expenses (in reality you'd have advertising/promo/travel/office supplies, etc) your income statement looks like this

Revenue:  $3600
COGS:  ($1200)
Shipping Expense: ($630)
Office Expense: ($100)
Total: $1940

(of course an accountant would pretty this up with all sorts of standard categories and subtotals, but you get the idea)

Which means according to the IRS you owe taxes on $1940.


I suspect what you did is expense everything:

Revenue:  $3600
Printing Costs:  ($3000)
Freelancer Expenses: ($1000)
Shipping Expense: ($630)
Office Expense: ($100)
Total: $(1130)

which in this example means you would have declared an $1130 loss.

The kicker of it is, on a cash basis you're still $1100 in the hole, but thanks to accrual based accounting the IRS says you owe them taxes on a $1900 profit.

If you're a sole proprietership you can take care of all of these numbers on Schedule C of the 1040.  You'll find the line items for COGS and a worksheet for determining it (which amounts to Beginning Inventory - Ending Inventory).

If you're a C or S corp or LLC, you should turn it over to an accountant to file for you.


Now in the long run, it washes out.  The next year, since you expensed all of your printing costs up front you'll wind up paying MORE in taxes because you won't have the ongoing COGS expense.  As long as you turn your inventory over fairly quickly, it won't make THAT much difference.  But if you get a large inventory and have it on hand for many years...it does make a difference and if the $ amounts are big enough the IRS could well nail someone for it.

This is why periodically companies with alot of really old inventory that they don't have much hope of ever selling will destroy the inventory...that releases the stored inventory value as an Inventory Writedown expense (instead of COGS).  This is also why in the book trade they rip the covers off of destroyed inventory so they can't then sell the books they claimed to have destroyed on the side.


Was that clear, or did I confuse things more.

[Luke]

very interesting, didn't confuse matters at all.

And, even more interesting, I am following the advice of my accountant. If I am not mistaken (and I might be), she had me expense production last year and just write it all off as a big ol' loss.

As I said, my loss this year is much less. Anyway, I'll ask her about this and see what she says.

-Luke

PS and in case you don't have one already, an accountant really helps in these matters.

[Valamir]

And, even more interesting, I am following the advice of my accountant. If I am not mistaken (and I might be), she had me expense production last year and just write it all off as a big ol' loss.

Not surprising.  There's a reason why GAAP stands for Generally Accepted Accounting Principles.  If you assume your inventory turns over in a year for instance (which mine did in 2002) the numbers work out the same anyway.

[Brennan Taylor]

PS and in case you don't have one already, an accountant really helps in these matters.

And adds another expense. Accountants don't come cheap. :)

[Paul Czege]

Hey Ralph,

I had no idea that art costs fell into COGS. I was going to expense them. I did three small POD runs of MLWM last year. And I'll surely print more books this year. How the hell do I know how many copies of the book to apportion the art costs across?

Paul

[Lxndr]

And how does artist (and other) "COGS" work when you're pdf publishing?  Since, y'know, there's not really anything like a print run (or inventory) and the like?

[Matt Snyder]

I'm utterly clueless on most of this stuff, but I offer an observation (maybe more of a query) about artwork:

Wouldn't it depend on the nature of your license to use the art? That is, if you have full-rights for the art, whenever and wherever you please, then isn't that just like a font or graphic design thingy you could use again and again?

However, if you have 1-time use for the publication, then perhaps it's part of the cost of goods sold.

[Valamir]

Hey Paul.  As with most accounting issues, all you'll find are guidelines and rarely hard answers.  Most accounting issues come down to making an arguement on general principals, and if the case is made well enough, its usually not a problem.  Alot of accounting convention consists of CPAs argueing over application of principals until somebody like FASB comes down and issues a guideline.  This is how companies get into trouble with some of their more aggressive tax shelter schemes...their accountants arguements aren't good enough to convince the IRS once the IRS decides enough people are doing it to warrant looking into it further.  The IRS and the companies argue about it in court and then FASB issues a guideline after the fact.


You can certainly make a good case for expensing art and free lance work.  You could also make a case for including as part of the COGS for the first print run and not for the next.  In a lot of these cases its more important to be consistant in application and document it when you change.

These issues, of course, are hardly aggressive or leading edge, so a local accountant with good small business experience should be familiar with what the current best practices without too much fuss.


My example was intentionally a very "text book" answer since, not being a practicing accountant, I wouldn't want to be making arguements on principals that professional accountants are better suited to make.

[Mike Holmes]

Another thing to consider, Jack, is that certain costs of the convention - not the most costly, certainly - but certain costs these guys would be spending anyhow. At least for me, I can say that I go to these conventions whether or not I have a product to sell. They're fun, you know. It's just nice to be able to say that those costs are expenses in these terms.

Thought of one way, these games paid for these guys to go to game conventions last year. I'd call that a big profit.

Mike

[jdagna]

On the issue of expensing COGS, the advice I received (from an accountant friend of my father's) was to include only factors of production that could be described as per unit or per run charges.  So, for example, a freelancer doing cover artwork would be expensed as labor (as a one-time expense that doesn't relate to units), but hand-painted covers would (because they'd require x amount of time/expense per unit).  In general, I've even left shipping charges as part of COGS because I usually have plenty of deductions from other areas and figure that I'd rather expense those charges during years in which I've sold more product and have more profits to offset.

For those who are interested, my numbers match up pretty closely to Luke's. Each of the following items made up about 15% of the total budget:
- convention fees
- travel/lodging for conventions
- contract labor (last year, I had artwork done for four books, which will take me through the end of this year).
- advertising (which includes promo items)
- office expenses

Only office expenses include anything I'd normally pay for without the business.  And I'm going to put big cuts on conventions and advertising, focusing on more local cons and dropping Origins.  Still, I think conventions are good advertising expenses, even if they don't pay for themselves (yet... my budgeting for this year predicts that we should be able to make them pay for themselves).