The Sorrows of Young Werther
What horror shall we talk about tonight, good friends?
How about "Reserve Against Returns."
Now you know, when you sell a book to a publisher, you get a nice monetary advance. (If you don't, you're either in Special Circumstances, or Working In the Bad Part of Town.)
Now this is an "advance," which is to say, an advance against royalties. A loan. When your book earns back that money and repays the loan, only then do you get additional checks. (This is the happy state known as "earning out.")
Now publishers don't like to write checks. This is an observable fact. (I know: I've written entire novels faster than they can write a check -- I can tell there's going to be another Sorrows of the Author's Life episode based on that.) So, to save themselves from writing any more checks than necessary, they try to figure things so that how much you'll probably earn in royalties is about equal to how much they pay you as an advance. If they're wrong, if your royalties don't pay back the advance, that's okay. You don't have to repay them. (And if someone wants you to pay back the unearned portion of the advance you are definitely in the Bad Part of Town.) (Next trivia point: It's entirely possible for publishers to make a profit on books that don't earn out. Don't ask why or attempt to understand it; only know that it is true.)
But suppose they're wrong in the other direction? Suppose you earn more than the advance. Happy day, right? Money in the pocket, let's go down to Burger King and it Supersized?
Not so fast, Bucko.
Remember, bookstores don't buy books, they only display them. At any moment they could return those books for credit. If the publisher has already paid you royalties for those books, then they lose. Publishers hate losing.
So, enter the Reserve Against Returns. This is money that you've earned, that they owe you, that they hold onto on the off chance that copies of those books will be returned and it'll turn out that they didn't owe you that money anyway. What the publishers know is how many copies they shipped -- they don't know what will come winging back.
Exactly what the reserve against returns is, is a secret. They won't tell you how big a reserve is being held. But due to my skill with correlating information, keen observation, and a drop or two of sodium pentathol, I have a fair idea of the numbers.
Before we continue, you need to know that royalties are generally paid semi-annually (in November and April), and that royalties are paid on the cover price of the book, regardless of what discount the publisher gave to the distributor or the bookstore. (There are exceptions to this, but they are small, minor, and rare.)
Now ... here you are, happy writer! You have gotten a $5,000 advance for your novel, against 10% royalties, and the book is selling for $10 a copy. And, in the very first royalty period (because your book is both briiliant and exactly what everyone wants for their birthday) some 5,000 copies sold. Joy, rapture! Your book's earned out, right?
Not so fast, bucko. Maybe it has, maybe it hasn't. Maybe every one of those people who go the book for their birthday will say "Yech!" and return it to the store. So the publisher figures, in the first royalty period, a 100% reserve against returns. No matter how many people bought, you aren't going to see a dime.
How about next royalty period?
They firgure a 75% reserve against returns. (Now they've already been paid for those 5,000 copies, and they've gone back to press and shipped more, but y'know? Maybe they'll be returned.) By now 10,000 copies have shipped, but the publisher says, "Hmmm ... could be returns, y'know" and only credits you with $2,500. Your book has been out for a year, and has brought in $10,000 in royalties, but sorry, chum, that advance still hasn't earned out.
Six months later, the reserve against returns is going to be 50%. Your book continues to sell, now 15,000 copies have shipped, but only $7,500 of the $15,000 you've brought in will be remitted to you (after subtracting the orginal advance, the publisher cuts you a check for $2,500. (He'd rather have the money in his account earning interest for him, than in your account paying for macaroni and cheese.)
Another six months -- your book's been out for two years now -- and the reserve against returns is down to 25%. Say you've sold another 5,000 copies in the last six months. That is to say, by now, 20,000 copies shipped, and you should have $20,000. But reserve! You're only credited with 15,000 of them, so your royalty check is $7,500.
Finally, next royalty period, the reserve against returns drops down to 0% (they've made tons of money off you; the publisher's paid off his yacht and his kid's braces). Say you sell another 5,000 this royalty period. By now you've sold 25,000 books, total, and only been paid $15,000. So now you catch up, with a nice check for $10,000. From now on, a book shipped is a dollar, and all's well.
Except this is a very unrealistic picture I've given you. A book that sells 10,000 a year for three years? Wonderful, but books tend to go out of print lots quicker than that. It isn't at all uncommon to get the final payment, the reserve that the publisher has been holding onto all that time, at the same time you get the notice that your book has gone out of print. When none are printed or shipped for a year, and they give back the rights, it's hard for 'em to argue that they're still waiting for returns.
Shall I talk about Basket Accounting?
That's when you sign a multi-book contract. In basket accounting, no book earns out until they all earn out. Anything above the advance that the first book brings in is applied to the unearned advance on the other books in the contract. You don't see a dime until after the entire advance for all the books is paid back.
So, anyway, that's the latest episode of As the Stomach Churns, the Horrors of the Literary Life.
