Money "At Risk" In Publishing
Posted by Michael Mindes on December 07, 2011
Recently, I have been seeing many arguments back and forth about the value brought by publishers, developers, Kickstarter, and so forth. Instead of replaying to one of the many numerous threads scattered around the Internet, I present it here, please enjoy. Right now, I will discuss this concept of "At Risk Money"
First, it is important to define "At Risk", because I see 2 different types of "At Risk".
- Profitability being at risk.
- Cash flow being at risk.
Profitability At Risk
Profitability is simple. It is a measure of if a game makes or lost money. Income minus Expenses. Clean and simple. Offsetting the risk of profitability is simple, but not easy. All you need to do is have sufficient distribution expectations (including pre-orders).
For example, if I know that I can expect to have 300 pre-orders, 700 orders in the first month of distribution, and 300 orders in the second month of distribution, then I know exactly how to price a game and what I can spend to make sure I stay profitable. It is a simple income minus expenses calculation. Remembering or estimating all of the expenses might be difficult, but doable.
At this point in time, I have sold a sufficient number (or am close) of Jab and Homesteaders (2nd printing) to know that I will be profitable on the print runs. I am however still out of pocket on the cash flow and have had that cash tied up for awhile.
Cash Flow At Risk
When it is decided to move forward with a game, and the risk of profitability is properly mitigated, then there is still cash flow to worry about. The bottom line is that it requires cash on hand to publish games. Artists typically do not work for free and get paid on royalties. Manufacturers and shippers certainly will not move forward on a project without cash in their bank accounts.
Given that the cash in a business is a finite resource, the amount of time that it takes to get back the initial investment is time that additional games cannot be worked on. There is no avoiding this type of risk or the time it takes to get from artwork and initial project starting to finished product and income. For an idea of how long it takes to get cash back:
- Artwork - 1/4 or 1/3 up front - As long as 1 year to recover
- Artwork - 3/4 or 2/3 upon completion - As long as 6 months to recover
- Manufacturing upfront costs - 1/2 of manufacturing costs - As long as 5 months to recover
- Manufacturing completion, overs, and shipping - As long as 2 months to recover
That is assuming that in the month of release there are enough sales to recover 100% of the upfront cash flow spent on a project. This would be a wonderful sign, and makes for a likely hit game which will likely sell out in the 2nd or 3rd month after release. At which point, much of that incoming cash flow needs to be put back into more manufacturing and shipping.
If you wanted to make sure that the game did not go out of stock in the mean time, then new copies would need to be ordered before the 1st printing sold out.
Overhead and Fixed Expenses
To make things more complicated and difficult, a publisher will have overhead and fixed expenses. Tasty Minstrel Games has very low overhead since there are no employees, no offices, fulfillment on performance (no warehouse expenses), and very low tech expenses. If there was significant expenses like salaries, rent, health insurance, and so forth, then it would be even more crucially important to account for the cash flow "at risk".
One such cash flow expense that cannot be forgotten is taxes. Despite being cash flow neutral, because of inventory accounting, TMG will show a taxable profit for 2011. The IRS does not wait to be paid.
When in business, if you fail to pay your expenses, then you will be in a very bad position. The unpaid bills result in liens, which result in civil suits, which result in the liquidation of product. Which leads to losses immediately instead of profits over time.
Cash Flow vs. Profitability and "At Risk Money"
Unless you have finance training or have run a business, you have probably been thinking of "at risk money" in the sense of profitability instead of cash flow. Now, armed with the importance of cash flow, I would like to address the value of Kickstarter and the claims that it is something that should be avoided by established publishers.
Given the size and scope of publishers like Rio Grande, Fantasy Flight Games, Mayfair, Queen, or Kosmos, I would agree. Sure, they might need to hold onto $100,000-250,000 in cash to meet cash flow needs, but should be able to manage that without too much trouble. Also, the size and scope of their distribution is sufficient that they do not need to worry about the profitability side.
Companies like Tasty Minstrel Games and Clever Mojo Games may have figured out and answered the initial problem of gaining sufficient distribution so as to not have to worry about long-term profitability of releasing a game. There is the ever calling need of cash flow.
Kickstarter And Easing Cash Flow Risk
The obvious benefit of Kickstarter is that you can measure the market for a game in advance of producing the game. Of course, you can also get a project funded, which is fantastic. If you have a devoted fan base and audience, then you can even get a game funded with what seems like try little information about it. I often see questions like, "How did this game get any funding given the information that is available about the game?" We do it, because we have fans, and we love our fans for it!
The hidden and amazing benefit of Kickstarter is the advance of cash flow. The cash flow exchange is reversed. The cash is in hand before much of it is due to pay for things. Not to mention that these initial sales will allow a publisher to do things like boost the total number of copies ordered which will lower their per unit price and boost their profitability.
I could go on for a long time about the importance of the cash flow benefit. However, so I avoid boring people, I list some and leave the rest up to your imagination:
- Increasing print run size
- Keeping cash inside of the company, which allows for more projects to be undertaken
- Liquidity for promotional purposes
Kickstarter And Marketing Benefits
Another benefit to utilizing a platform like Kickstarter is the advance notice and promotional results that occur as a result of using the platform. Under a typical release pattern, there is often very little information about a game before the game is even released. Once a game is released, people need to be informed about the game before they can make a purchasing decision.
Now with Kickstarter, there are probably 10x the supporters already aware of the game before the game even starts the production process. This information will lie dormant while the games are produced and finished. Then while they are shipping, the promotion of the game can begin again. Only this time, people already know about the game, and the final push of promotional efforts will be amplified.
