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Working Capital Management


Working Capital Management
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Chapter 6: Working Capital Management

Working Capital is the money used to make goods and attract sales. The less Working Capital used to attract sales, the higher is likely to be the return on investment. Working Capital management is about the commercial and financial aspects of Inventory, credit, purchasing, marketing, and royalty and investment policy. The higher the profit margin, the lower is likely to be the level of Working Capital tied up in creating and selling titles. The faster that we create and sell the books the higher is likely to be the return on investment. Thus when we have been using the word investment in the chapter on pricing, we have been discussing Working Capital.

In the earlier chapter on Accounting concepts we showed a sample Balance Sheet. The Balance Sheet comprises Long term Assets (real estate, motor vehicles, machinery) and Net Current Assets. The word Working Capital is often used for Net Current Assets. In this chapter we will exclude Cash in Bank from our definition. Thus our Balance Sheet appears as follows:


Long Term Assets 


Working Capital 


Cash in Bank 


Total Capital 


We defined Net Current Assets as Total Current Assets less Total Current Liabilities. In this book we shall subtract current liabilities items from current assets as follows:










Customer Prepayments 


Working Capital 


Using this format we can state than any reduction in the Working Capital figure, other than for provisions for write-offs and write-downs, will generate the same amount of cash. Thus if a customer pays US$ 500 that he owes to the organisation, the Working Capital figure will fall be US$ 500, and the cash figure will be increased by the same figure. This revised format is useful when designing spreadsheet financial planning models for business plans or for internal reporting.

The Working Capital cycle, or Cash Conversion cycle as it is also called is usually expressed in terms of the number of days. This figure is the average time that it takes to turn investment in books into cash and profit. We studied Payback in the previous chapter. Payback expresses the number of days required to recoup the original investment on a single title. In the organisation’s Balance Sheet there will be the costs of paper, titles still under development, author advances of books already and not yet published. In addition there will be the cost of stocks of unsold books, Accounts Receivable, and Accounts Payable.

Example: Osiris publishers

In order to illustrate the concept I have adapted slightly the example used in the chapter on Accounting concepts. The Young scenario has the same Income Statement but I have adapted the Prepayments figure within the Balance Sheet in order to illustrate more elements of

Working Capital. I have divided the Prepayments figure of 6,000 into Prepayments to authors and Prepayments to printers. The totals are the same.


Income Statement 




Cost of Sales 




Gross Profit 


Distribution costs 






Administration costs 


Operating Profit 



Balance Sheet 


Working Capital / Sales % 




Inventory in days 




Receivables in days 


Prepayments: authors 


Prepayments in days: authors 


Prepayments : printers 


Prepayments in days : printers 






Customer Prepayments 


Customer Prepayments 


Working Capital 


Working Capital Cycle in days 


Explanation of the calculations


Working Capital figure


Inventory in days 

(Inventory / Cost of Sales) x 365 = 96 days. More correctly the purchases figure, if available should be used, in this case excluding royalties. Thus the publisher holds approximately 2 months of unsold inventory

Accounts receivable in days 

(Receivables / Turnover) x 365 = 62 days. Assuming the turnover is phased evenly throughout the year, this means the on average customers take 62 days to pay

Prepayments in days – authors 

(Prepayment: authors / Royalties) x 365 = 61 days. In practice royalties will be earned that reduce this figure while new advances are also paid to other authors.

Prepayments in days – printers 

(Prepayment: printers / Cost of sales) x 365 = 19 days. In practice part of the Cost of Sales figure would be new title pre-press costs not carried out at the printer. This item relates to cases where advance payments are made to printers as a deposit or for paper. The purchases figure if available would give a more accurate figure.

Accounts Payable in days 

(Payables /(All purchases) x 365

(9,000 / (57,000 + 18,000 + 5,000 + 2,000 + 10,000) x 365 = 36 days

The purchases (investment) rather than the cost of sales figure should be used if available. I have assumed that this figure includes money owed to authors (see prepayment: authors)

Customer Prepayments 

(Customer Prepayments / Turnover) * 365 = 4 days

Working Capital cycle in days 

96 + 62 + 61 + 19 - 36 - 4 = 198

Working Capital / Sales % 

28,000 / 100,000 = 28% 

Explanation of the figures

  • On average it takes Osiris 198 days to turn an investment into cash and profit. 

  • New tiles will use more Working Capital than reprints

  • On average Working Capital equates to 28% of turnover

  • The percentage of Working Capital to turnover varies according to the type of publishing

  • Trade publishing in developed countries may have a figure of between 35- 45 % of turnover. Academic publishing is higher. Professional publishing uses a lower Working Capital % figure

  • Working Capital is also a measure of risk

This figure may include new titles, reprints, foreign language coeditions, licence sales. The figure would be different for each of these. Within the total Balance Sheet, the Working Capital figure will vary throughout the year according to the phasing of new titles and the sales cycle. Publishers should know the typical Working Capital cycle and the level of Working Capital as a % of turnover for each market or distributor, for each category of book.

The relevance of Working Capital to publishing in young economies

In the FSU Working Capital levels were controlled at government rather than factory level. Invoices were settled on standard credit terms. Non or slow payment was not a major problem for printers and publishers. Risk was a government problem. Authors were paid standard royalty rates and terms. Inventory levels and print runs were according to a formula: in textbook publishing, 150% of the textbook requirement would be printed in year 1, the remaining 50% would be used for replacement copies in subsequent years. Publishers, printers and distributors would negotiate for annual cash budgets but did not have to concern themselves about Working Capital questions except where budget moneys were delayed. 

Printing capacity was sufficient to produce local and other agreed requirements. Thus textbook printing would commence in November for the following September. In a competitive open economy printers would have to offer discounts and credit to persuade publishers to take the risk of early ordering. Schools would demand the latest up-to-date editions. Publishers would have to borrow money from the bank or shareholders to pay for the inventory.

For young economies, the implications are as follows.

  1. In young economies the first industries to develop are those with low or negative Working Capital % to sales. Negative Working Capital is where the organisation uses supplier credit or customer Prepayments to fund their day to day needs.
    E.G. banks and financial services, retailers, distribution, industries with cash sales or advance payments on signature of contract (e.g. printers). Organisations with negative Working Capital use the money from their customers with which to invest and to pay suppliers.

  2. Competition is fiercest among industries with low or negative Working Capital / sales % figures. Financial entry barriers are lower and these industries are easier to expand. However profit margins are often lower because of the competition (but not always!) and the failure rate among such industries among developed countries is usually higher.

  3. Banks are attracted to industries with low or negative Working Capital / sales % figures as cash and profits are earned more quickly

  4. Entrepreneurs are attracted to industries with low or negative Working Capital % figures

  5. Most marketing innovations in book publishing have come about through the application of the above Working Capital concepts to creating additional sales and expanding the market. Most of the innovations introduced at the end of the previous chapter were created by reduced the level of Working Capital and the time schedule of creating and selling books.

  6. The customers, suppliers and authors of book publishers also want to operate to a low or negative Working Capital / sales %. Thus printers ask for advance payments e.g. for paper, distributors will try to withhold payment until they have received money from their customers.

  7. Printers are loath to change from their dominant position where they could dictate prices and schedules according to price scales formulated at state level. These price scales were geared to maximum production output, not to satisfying publishers and their customers under national or international competition. 4-colour printing would cost 4-times the cost of single colour printing, despite the introduction of modern 4-colour sheet-fed presses. Printers will change their attitude to pricing and print-runs only in a crisis. In many young economies printers have not co-operated with publishers (partly the fault of the publishers) and faced near collapse as publishers have purchased printing overseas.

  8. In developed countries publishers have sometimes allowed retail groups extra credit (= higher Working Capital for publishers) in order to encourage them to expand into new outlets or sell more books. It is essential to distinguish between genuine expansion cases and opportunistic entrepreneurs. The more a publisher is actively engaged in marketing and distribution, the less likely is the publisher to have to rely on offering credit as an incentive.

  9. The concept applies equally to state enterprises and non-profit making organisations. If cash and profits are generated more quickly, new titles can be commissioned sooner, staff and suppliers paid promptly. Bank interest is reduced.

  10. Where producers are dominant, their customers will have to accept higher levels of Working Capital. Where customers are dominant, the producers have to accept a greater burden. In some young economies, the government may have a policy of holding key organisations in the state sector or as majority owned state enterprises rather than encouraging a “free-for-all enterprise policy. This may affect printers, publishers and distributors. This policy will affect the evolution of the Working Capital cycle and may tilt it more in favour of producers.

Working Capital levels in book publishing in developed countries

Working Capital is a major problem in book publishing. Most publishers solve the question on a temporary basis by negotiating credit with printers and other suppliers. Their own customers solve the problem by negotiating credit with publishers or demanding “sale or return” terms. “Sale or return” terms make planning and cash forecasting much more difficult. Most publishers rightly prefer to offer a slightly higher discount for a firm sale. Retailers will argue that they would not purchase many new titles without their risk being mitigated by a “sale-or-return” policy”

The central issues, which must be solved, are:

  • Investment decisions rely too heavily on economies of scale e.g. in printing prices, by amortising first edition costs against larger print runs

  • Publishers produce too many titles, which receive too little promotional effort and thus sell slowly or not at all.

These can be solved only through long term changes in publishing strategy and greater attention to the “value chain” where suppliers, publishers, wholesalers and retailers co-operate to mutual benefit and shared risk. On demand publishing may reduce inventory levels but does not solve the marketing aspects.

Many publishers have studied the publishing of music CD’s and cassettes, and of greeting cards with a view to finding solutions. While lessons can be learned, there are major differences:

CD’s, cassettes and greeting cards 

  • Are all high margin projects

  • Carry much heavier promotion budgets and commitment to marketing

  • Are standardised in format

  • Enjoy few economies of scale so short run and on-demand manufacture are the norm

  • Sell to a more wide variety of retailers

  • Sell on a less seasonal basis

Paperback publishers have adopted some of these aspects and have fought successfully to overcome the low price perception of paperbacks. Paperbacks can now sell in many cases at the same price as a hardback edition. The creation of “hit-parades” or “Top 10” listings has been adopted for books of different categories and has attracted significant media attention thus making books more fashionable. As a result books may sell faster, perhaps at higher prices and thus reduce Working Capital levels.

“Book Packagers”

Book packagers create books under contract to publishers, bookclubs or foreign distributors. They evolve as part of the specialisation process especially when publishers become larger and more bureaucratic. Publishers buy the rights for a territory for a period of years or number of printings (provided that the title stays in print). The financial attraction to publishers is that they can buy smaller print runs at economic cost. Most publishers will make advance payments to the packagers but may be able to approve the content and design. Most packagers prefer to sell finished books rather than licence titles on a film and royalty basis. 

Packagers buy at low prices from printers because they create only a small number of titles but each title will have a large print run. Packagers often stay loyal to printers who reward them with long credit and, in many cases, lower printing prices than those paid by their publisher customers.

In the TV world many program companies will create programs for several networks while TV companies concentrate on distributing the programs. The production companies will retain the rights and earn fees for repeat-shown programs. A similar situation exists in the multimedia field.

Thus packagers are specialists who are not involved in marketing and distribution. Subsequently a small number of them have decided to become publishers and done so very successfully after re-financing. Most stay as packagers. Compared with publishers, these packagers have little market value in acquisition terms.

Thus packagers are very similar to many private publishers in young economies but with important differences as the table below shows:


Book Packagers

Private publishers in young economies 

- Founders are creatively rather than market driven; enjoy “freedom” 

- Founders are creatively rather than market driven; enjoy “freedom” 

- International printers offer them low prices and credit; printers have often offered credit to allow packagers to start up, sometimes with dire results for the printer

- Printers tend to give better prices to established publishers

Some publishers may be closely linked with a printer. The printer may demand advance payment 

- Packagers usually allow publishers to approve content 

- Publishers will not involve customers in the book content except in special cases e.g. textbooks and Ministry of Education, University Publishing Houses

- Receive advance payments from publishers 

- Are paid after delivery

- Hold no Inventory but reprints make high profits 

- Will often sell the total print run to a single or small number of distributors

- Purchase rights from authors and designers, and sell territorial or other rights to a number of customers 

- Sell books with no transfer of rights 

The Working Capital cycle in both cases is similar in both cases. The reason is perhaps the same. Neither the book packager nor the young private publisher is adequately financed; both enjoy the creative aspects but do not want to expand if it means losing control. There are few potential buyers for book packagers.

The cost of starting such organisations is much lower. Working Capital is lower because they are involved only in creating the books. They influence distributors, retailers and consumers only so long as they generate saleable new ideas. While book packagers can of course sell foreign rights, their potential to sell reprints is lower.

Making more efficient use of Working Capital

The table below lists items, which influence Working Capital levels favourably and adversely


Items that reduce Working Capital levels for publishers

Items that increase Working Capital levels for publishers 

- Increased profit margins

- Lower profit margins 

- Customers who pay promptly
- Advance payments by customers 

- Long print runs except where all the books are required on publication e.g. School and university textbooks

- Inventory which is sold and paid for quickly by customers after publication
- Lower Inventory levels by reducing print quantities and working with printers who will deliver quickly and produce low print runs economically

- Slow authors who deliver late and whose manuscripts require substantial editing
- Holding paper stock unless market conditions demand and the savings are large
- Slow schedules for the development of new titles 

- Successful promotion that speeds up the rate of sale

- Making advance payments to printers
- Seasonal sales except where the publishers prints only for the season 

- Licensing (but problematic in young economies)


- Paying suppliers on completion with credit
- Authors who deliver manuscripts on disk ready for computer make-up
- Incentives to staff , authors , suppliers, customers , sales staff and agents to speed up the rate of sale and of developing new books, delivering manuscripts on schedule 


The attention of readers is again drawn to the examples at the end of the previous chapter, which illustrate ways in which publishers have produced affordable books through a marketing initiative. The concepts of this chapter apply in each example.

The danger of averaging Working Capital levels

Osiris has a Working Capital to Sales figure of 28%. However the figure will be the average of the organisations different activities. Let us assume that there are three divisions that produce different types of books for different markets and use different methods of distribution. The table below shows how each division generates much Net Contribution and also how much Working Capital is used in each division. The cost of sales, royalty, distribution, promotion costs and write-off figures differ in each case as a percentage of sales although not all the costs are necessarily variable. The term Net Contribution is the amount of money that each division generates towards the central administration cost of the company and hence to profit. Items below Net Contribution is not relevant to our analysis unless administration cost vary according to each market. Interest on bank loans could however be usefully charged against each division to give an even more meaningful figure. Although a Balance Sheet item, Working Capital is shown under Net Contribution to highlight the relevance of comparing Net Contribution and Working Capital levels by division.


Income Statement 

Division A 

Division B 

Division C 







Cost of Sales 










Gross Profit 





Distribution costs 














Net Contribution** 





Working Capital 





** Gross Profit less distribution, promotion and write-offs. The contribution to administration costs and profit from publishing activities

The analysis of the above sheds useful light on profitability and use of Working Capital by division. This is discussed in detail below.

Analysis of the net contribution

The table below shows each cost item included in the Net Contribution calculation expressed as a percentage of turnover.


Division A 

Division B 

Division C 


Cost of Sales % to Turnover 





Royalty % to turnover 





Gross profit margin % 





Distribution % to turnover 





Promotion % to turnover 





Write-off % to turnover 





Net Contribution % to turnover 





Working Capital / Turnover % 






The turnover figure is the sum of the sales invoices issued during the year by division. Any returns or invoice queries would be shown separately under write-offs in order to highlight to management the extent of returns and invoices queries. The company will invoice either by charging an agreed discount off the recommended retail price, or by using an agreed unit price. If transport is included in the invoice price, the charge for transport will be shown as an expense under distribution. Free samples or extra jackets may also be included in the invoice price.

Cost of sales

The percentage to turnover is influenced by the sales mix, the balance of new and reprint titles, and the length of print runs. A larger print run might increase the gross margin % but also increase Working Capital levels and hence reduce the cash in bank figure.

Some organisations will charge new title costs in different percentages to each market. The aim is to demonstrate that certain markets are profitable, but only on a marginal costing basis. If an organisation has to increase prices to local bookshops as a result of charging all new title costs against the home market, the organisation runs the risk of losing market share and profitability in the home bookshop market

Other publishers, often the more progressive, may therefore regard new title costs as research and development, and charge e.g. 1/12th each month following publication against the Income Statement. This policy means that inventory is valued at a cost excluding new title costs and reduces the need for write-offs. This policy also gives a better view of trends in gross margins, as the figure is not distorted by changes in the new title / reprint mix. The Net Income will fall. Countries may have specific policies for writing off first edition costs against profits, as they are similar in concept to research and development expenditure.

Royalty figures

The royalty figures differ because in the case of division A and B, the royalty is charged on the basis of the retail price, while in the case of division C, the royalty payable is based on net receipts, i.e. the unit price charged net of discounts. As markets expand, the need to negotiate royalty terms based on net receipts will grow in order that publishers exploit new markets. Without such author contractual terms, publishers might have to reject otherwise profitable deals. Thus the author might lose also. It is common for net receipts royalty rates to be agreed for deals above a certain discount rate, e.g. bookclub, export deals, coeditions, and licences.

Gross margin

Definition: Turnover minus cost of sales and royalties payable.

Gross margin, the percentage of gross profit to turnover is widely used in book publishing as a parameter for book pricing. Where an organisation produces books with a similar cost profile, in similar print runs, and with a constant sales mix, gross profit may be a useful criterion. Here the figures highlight also that the use of gross margin as a criterion is not always useful and can be misleading although the division C, with the highest gross margin, also has the highest net contribution. Use of gross margin ignores distribution, promotion and write-offs, which will usually differ by division or type of book.

Distribution costs

Distribution costs will include the following:

  • Cost of own warehouse in handling the year’s sales

  • Cost of using someone else’s warehouse for the same purpose
  • Using a contractor who handles your organisation’s distribution on a percentage of turnover basis for warehousing, transport, packing, invoicing but not selling.
  • Transport and postage costs

  • Packing materials

  • Handling returned copies

  • Sales invoicing and credit collection (in some developed countries)

The percentage cost will vary according to the method of market distribution used. If the books are sold to a distributor who buys the books on a firm-sale basis and who will sell, warehouse and transport the books to customers, then distribution costs will be low or nil. The publisher’s influence and control over the market will also however be low or zero also. In the case of a bookclub, the bookclub will demand delivery to their warehouse in bulk and distribution costs for the publisher will thus be limited to transport costs to the bookclub’s warehouse.

Promotion costs

This includes the costs of promotion and selling whether carried out by the publishers or by other companies who carry out the publisher’s instructions.

The following will be included:

  • Publisher’s own sales force

  • Sales commission to agents who sales on a commission basis only or to sales staff who are paid partly by salary, partly on commission
  • Advertising agency costs

  • Some publishers may include samples under this heading


Write-offs are provisions against things that are likely to go wrong. The rule is that bad news has to be charged to the Income Statement as soon as known whereas good news e.g. a large sales order for future delivery is not shown as a profit until “realised”

The following would be included

  • Doubtful debt provisions

  • Bad debts

  • Inventory that will not recover the cost of producing it
  • Sales invoice queries

  • Returned books (these are often shown separately as part of the turnover figures e.g.

Gross turnover 105,000
Returns provision
Sales turnover 100,000

  • Currency losses (or gains) on sales and purchase invoices
  • Royality advance write-offs

Net Contribution

Definition: Gross profit minus distribution and promotion costs, and write-offs

The Net Contribution shows the contribution from publishing activities of each division or market. While the figure is immensely useful, the percentage figure must be used with caution as both fixed and variable costs have been deducted from turnover. 

Licensing Income would also be shown, if significant, as a separate item and not necessarily as part of turnover. While licensing can be risky in young countries, it is a significant part of publishing in developed countries where the legal system or local publishing association will be active in protecting publishers ‘ rights. Showing licensing Income as part of turnover has misled publishers for years over the value of rights income to profitability and to an acceptable return on capital %.

Net Contribution from Book Sales 15,000
Licensing Income (net of royalties payable) say 500
Total Net Contribution from publishing activities 15,500

Analysis of Working Capital levels by division

After a rather long diversion we now revert to Working Capital using the same example. The table below shows how efficient each division is in using Working Capital.


Division A 

Division B 

Division C 


% Sales Turnover 





% Net Contribution /total Net contribution 





% Working Capital 





Net Contribution / Working Capital % 





Net Contribution per 1 USD Working Capital 





Explanation using division C as an example

While generating only 10% of total turnover, but 18% of total Net Contribution, Division C uses only 3.6% of the total Working Capital tied up in the company. Division C makes US$ 2.70 Net Contribution for every 1 US$ of Working Capital used in Division C.

For both entrepreneurs and for publishers unable to borrow more money from the bank or shareholders, the Net Contribution per 1 US$ of Working Capital is vital. If we were to add the Working Capital cycle (198 days in the case of Osiris earlier in the chapter) for each division, the report that we have just studied would be even more useful.

Growth opportunities

The following analysis of the same data shows the importance of Working Capital levels in generating cash as well as profit. Using the above data we can extract the following


Impact of USD 1,000 increase in sales volume 

Division A 

Division B 

Division C 


Increase in Contribution 





Increase in Working Capital 





For every additional US$ 1,000 of turnover, US$ 320 of Working Capital is required in Division A, US$ 260 in division B, and only US$ 100. It is rare that the division with the lowest Working Capital requirement will also have the highest net contribution % but that is what division C offers. Division C might perhaps consist of reprints or foreign language editions only.

Calculating cashflow using Working Capital

We can project future cashflows using the Working Capital data. We are assuming that there are no additional purchases of long term assets involved. Any other additional items of expenditure that are required to support the change would also be included e.g. an additional editor, a new personal computer.

(a) using the Osiris average net contribution and Working Capital / turnover percentages

In the first case we will calculate the future cashflows over a three-year period using the average net contribution percentage and average Working Capital % for Osiris. It shows the impact on cashflows starting with sales of US$ 1,000 in the first year.



Turnover growth % 



Net Contribution % 




Working Capital % to turnover 




Osiris Analysis 








Net Contribution 




Working Capital 








Bank figure 



As we are studying the cashflow on an incremental basis, the opening Working Capital figure, as for a new project, would be zero. The calculation for cashflow in the first year is as follows:

Cashflow: year 1 = Net Profit Contribution** plus increase in Working Capital **
= 150 +0 – 280 = (130)
Cashflow: year 2 = 165 +280 – 308 = 137
Cashflow: year 3 = 182 + 308 – 339 = 151

** Plus any purchases of long term assets and additional administration expenses required as a result of the decision. Net profit contribution is used instead of profit because we are studying the impact on cashflow of increasing sales turnover. Only incremental costs and sales are included.

(b) using the net contribution and Working Capital / turnover percentages for Division C which has both the highest net contribution % and the lowest Working Capital / turnover %



Turnover growth % 



Net Contribution % 




Working Capital % to turnover 




Division C Analysis 








Net Contribution 




Working Capital 








Bank figure 




Thus an expansion in Division C of USD 1,000 in turnover, and thereafter an increase of 10% per year cumulative, generates USD 773 of additional cash as compared with USD 158 in the average scenario for Osiris. The difference is explained as follows:

Increase in Bank figure: Osiris average 158
Additional net contribution from division C 397
Cash improvement due to lower Working Capital % in division C 218
Closing Bank figure for division C : year 3 773

Most of the increase in the bank position is the resulting of higher profits but the lower level of Working Capital in division C also results in an additional cashflow improvement of US$ 218.

Notes on the Cashflow calculations

In practice we would add back to the net contribution figures that part of write-offs that was included for future problems. This is because such provisions do not affect cashflow.

We can apply the same concepts for the preparing of spreadsheet-generated Business Plan forecasts. In such cases all Income Statement and Balance Sheet items would be included. Cashflow can be forecast using the Balance Sheet rather than through a tale of Receipts and payments. The resulting cashflow figure will be the same under either method. Using the Balance Sheet figure above, different scenarios can be studied, as the spreadsheet model can be “parameter” driven. Thus changes in credit terms, inventory levels, margins can be studied quickly.

Pareto's Law - the 80/20 rule

This “rule” states that invariably time, sales, costs, or problem areas occupy a disproportionately high percentage of time or money. In publishing we might use the rule as follows:

  • 80% of inventory held is for only 20% of the titles published
  • 80% of our profits are made by 20% of the titles we publish
  • 80% of our turnover is made from 20% of our customers
  • 80% of our slow payments are caused by 20% of our customers
  • 80% of our Working Capital relates to 20% of our list or 20% of sales turnover.
  • 80% of out time is spent on 20% of our titles

This general rule can be applied in so many ways to financial management in book publishing.

A detailed Look at the elements of Working Capital


Inventory will consist of:

  • Un-printed paper

  • Flat printed sheets

  • New books and reprints under development

  • Finished Inventory

  • Publishing plant (discussed in chapters 4 and )

Unprinted paper

In young economies paper may represent 40-50% of the price of a book while in developed countries the percentage may be 10 – 15% of the selling price. Thus in young economies, economic purchase of paper is a major issue. In some countries paper is a scarce commodity with prices at a premium.

In developed countries publishers will uses several printers in different countries. The normal procedure for book publishers, except for publishers of standard format paperbacks is to negotiate prices with printers, which include an agreed paper specification. Newspaper and magazine publishers, who print to a single format using reels will normally purchase paper in order to secure the lowest possible prices and in order to guarantees supplies.

Paper is a commodity, but, unlike most commodities, is not traded on commodities' exchanges across the world. Attempts are being made to develop a Futures Market for pulp. As a result there is no “market price” for each paper grade. Large users will negotiate significant discounts on published price lists. but such data is not published. Only for newsprint is there an open discussion on prices. Countries with strong economies and currencies will negotiate the best prices, while countries with no local pulp industries will distort price levels by panic buying.

Young ambitious economies will require increasing levels of paper, as education, packaging and advertising become high priorities. Where a country has an indigenous pulp and papermaking industry, this increase in demand causes paper shortages and leads to higher prices. Consumers become more demanding and require higher quality papers, which are not available locally. Controlled paper distribution means that local users may pay a higher price for local paper than their counterparts in developed countries. Unless subject to special trade agreements or supported by their local governments e.g. for credit risk, foreign pulp and paper mills may charge higher prices to young economies because of the credit risk and because they do not always represent a major market to the mills. Local distributors are unlikely to inform publishers that world paper prices are falling. Local distributors will often seek to limit alternate sources of supply. There is thus often a large difference between prices charged by local distributors and those charged by the foreign paper mills who are prepared to supply direct.

Many publishers in young economies will not purchase paper through the printer for two key reasons. Printers will often make a surcharge of up to 25% as well as demanding advance payment. In addition printers may give priority to customers prepared to pay higher prices for printing and paper and thus jeopardise printing schedules.

Thus publishers in young economies face three problems:

  • Paying no more than market prices for paper (with guaranteed quality)

  • Guaranteeing supplies of paper and thus books. Printers may give priority to publishers with paper stocks.
  • Finding cash or loans to pay for the paper

Much of the comment on book inventory applies also to paper stocks. It is cheaper and less risky to hold an inventory of paper than of books.

Flat printed sheets

These are flat printed sheets, which can be bound as hardback, paperback or other editions at a later date. By not binding immediately the publisher also delays the cost of binding but will usually have to pay the printer for storage. Wastage rates are higher when the binding is not carried out as a single run.

Many publishers of short run editions will print extra 4-colour covers for later printings. A further use is where 4-colour illustration sheets are printed for later over-printing in other languages.

New books and reprints under development (Work-in-Progress or WIP)

This represents all the costs of creating new titles and reprints up to the stage where the books ready for sale. Editorial and design salaries will be included. As competition among publishers increases, publishers are forced to create more added value to manuscripts and this increases the amount of new title costs and also WIP levels.

Faster schedules will reduce WIP levels. This can be achieved by better scheduling, use of in-house DTP and scanning equipment, offering incentives to authors (for supplying manuscript on disk) or to staff and supplier for shorter lead-times. One publishing survey indicated that those publishers who worked to short schedules also had the lowest levels of typesetting corrections. Seeing the finished book on which they have worked motivates certainly many publishing staff.

Finished Inventory

Entrepreneurs and bankers are not attracted to many types of publishing because of the high Inventory levels. In developed countries these are still high, but falling, for the following reasons:

  • Profit margins in publishing are not high

  • Printers offer significant economies of scale for longer print runs. Publishers are persuaded to print too many copies for too long a sales period. Publishers believe that book prices must rise if they pay a higher unit cost for printing. Most publishers in the FSU also share this view
  • Publishers will not always look at the Cashflow and Balance Sheet implications when making decisions on print runs
  • Publishers price books on the basis of a single printing
  • Publishers are optimists

  • Publishers do not invest heavily in promotion

  • Most publishing courses teach full-cost costing for the pricing of investment decisions
  • Book sales are highly seasonal

  • Production staff are chosen for their design and technical rather commercial skills. The trend in most industries is for professional buyers, not (printbuying) specialists in a particular industry

In younger economies publishers face a different scenario. Publishers in developed economies will print in several countries either for financial reasons or in order to print at a source close to customers e.g. North America; Asia for the Australasian markets. 

Printers in young economies will seek to export printing to developed countries to earn hard currency In order to break into these markets they will quote low prices on short print-runs in order to enter the market. However, their local publishers are often forced to operate to the printer’s terms of trade and pay higher prices. In order not to lose sales by being out-of-stock, publishers may print excessively large print runs. In addition, the culture of printing for 3 or 5 years as was the norm in the FSU, prolongs these attitudes especially among state publishers.

The subject of inventory levels and optimum print runs is so central to book publishing that it is discussed in great detail in chapter 7

The following will assist in reducing inventory levels:


Ways of reducing Inventory 


Closer co-operation with “partnership” printers 

Publishers co-operate closely with one or 2 printers; contract on an annual basis; forward plan together. A partnership but with no final investment in the other partner. 

Market Research and advance selling 

Pre-selling before books are printing allows publishers to fix more exact print runs

Increased promotional activity promotion 

Promotion and greater sales effort in less obvious areas e.g. smaller towns, may cost less than interest payments to banks

Use of series and standard formats 

The use of standard (or a small number of) formats means that capacity can be booked with printers, paper purchased in bulk. The exact print quantities per title are fixed later on a monthly basis.

This is used for standard format paperbacks. This policy is as much about purchasing policy as printing machinery constraints. 

Selling stock firm to an exclusive distributor 

This was the procedure in the FSU. Today most of these state distributors have collapsed or split up. Distributors will demand large discounts for carrying the risk. In many cases they will sell in the capital city and large towns only. The distributor is needed for expanding sales into smaller towns and rural areas. The use of more than a single channel of distribution encourages competition and improved sales

Sales Incentives, discounts 

It may be appropriate to offer larger discounts or incentives to customers and distributors

Printing contracts 

The negotiation of price schedules with equal emphasis on low make-ready costs 

Accounts Receivable

Obtaining money promptly from customers is a major problem in publishing (and all industries) worldwide. Market leaders and dominant organisations will be paid more promptly as their customers fear losing the profits that they earn from such sales.

In many countries over 10,000 new titles are published each year. Bookshops will sell several thousand titles. The rate of sale of books is slow.

In order to encourage booksellers to stock titles credit is offered. With newspapers and magazines the product has a short shelf life but the cash cycle is short. In addition there are only a small number of magazines or newspapers relative to the number of books published. Customers ask for their regular magazine or newspaper.

When selling to more distant customers e.g. in another country, credit is offered to take account of the time required to transport and distribute the books.

In some countries the supplier has the statutory right to demand interest on overdue invoices. These schemes are in practice less useful than they appear as customers may use suppliers as a bank.

Another key reason is that most customers in the book trade are under-financed. Rather than raise additional share capital or bank loans, they use trade credit with their suppliers, the publishers. This is partly because many customers may be privately owned but also because the low return on capital from bookselling does not attract investment easily.

In order to encourage booksellers to buy new books, publishers will often offer to sell on a “sale-or-return” or “sale and exchange” basis.

Under sale-or-return basis the bookseller may send back stock not sold after an agreed number of months. The bookseller must settle the invoice on the agreed date and will subtract returns from subsequent invoices. In the case of “sale-or-exchange” the bookseller may return unsold titles in exchange for purchasing the same number of similar new titles. This is used widely for paperbacks and is particularly prevalent in North America for hardback editions also. The Accounts Receivable figure must take account of the fact that the amount invoiced may exceed the amount that will later be paid. This makes cashflow forecasting difficult. Most publishers prefer to agree larger discounts but sell firm.

Booksellers who pay late are in fact taking a larger discount. If the publisher earns a 25% Return on Capital, or approximately 2% a month, the bookseller is thus taking an additional 2% discount for every month that payment is delayed.

Incentives are frequently offered for prompt or early payment. Many customers will pay late and take the discount, however! 

The value of such discounts can be assessed either by using the IRR or NPV function on a spreadsheet or by the following formula:

The supplier offers credit terms of 30 days from delivery and acceptance. The supplier will accept a 2.5% discount of the invoice amount if the invoice is settled in 7 days.

The following ways of reducing Receivables are used in book publishing and other industries in developed countries




High Margin products 

If Retailers make a large profit from selling a supplier’s goods, they may lose that profit if they do not pay on time

Market leadership 

As for high margin products

Credit checking before the contract is accepted 

This checks the credentials of the customer. Many Associations of Publishers operate a credit committee for their members. Banks offer a credit reference service also

Frequent and prompt delivery 

If customers know that they can obtain books quickly and reliably, they can hold lower levels of inventory. Many publishers focus on selling books into rather than out of the bookshops

Formal methods of payment 

Bank drafts, Bills of Exchange, Letters of Credit, guarantees. Bonds 

Retention of ownership 

In some countries ownership does not pass to the customer until the goods have been paid for.

The accounts department 

Invariably the accounts department will be expected to chase customer payments. Private publishers will give it high priority and owners will do it personally. It is quite different to most financial accounting work and is a key priority for firms. Firm persuasion is needed rather than accounting skills.

Joint promotions, merchandising 

These may expand the market and cost less than bank interest payments 

Methods of payment

Banks, suppliers and their customers are forced to find more complex payment methods in order to gain competitive advantage. These are needed to expand trade and to give confidence to encourage suppliers to enter into contracts. In order to stimulate credit trade, banks created more formal payment methods. These are only as good as the financial standing and reputation of each bank, supplier and customer.

The aims of these payments methods include the following:

  • To protect the supplier 
  • To encourage the supplier to offer credit and more attractive prices
  • To convince the supplier that he will be paid once the customer has taken delivery
  • To act as collateral to the supplier in particular to obtain bank overdrafts or lower rates of interests
  • To reinforce the legal contract between supplier and customer
  • To encourage foreign trade; to obtain governmental credit insurance

In practice young publishers are more likely to encounter formal methods of payment when negotiating with foreign printers.

Typical documents include the following:


Method of Payment 


Bills of Exchange 

Checks drawn on the customer by the supplier for payment at a future date. The supplier will hand over delivery and customs documents once the Bill of Exchange has been signed by the customer (for new customers) or perhaps immediately with trusted customers. The Bill may be deposited with the supplier’s bank and allow a lower rate of overdraft interest. Alternatively Bills may be endorsed in order to pay a supplier.

Bills normally assure prompt payment but do not guarantee payment

The use of Bills of Exchange must be agreed by both parties during negotiations

Letters of Credit 

The customer signs these at contract stage. The customer undertakes to pay in full provided certain listed conditions are fulfilled. The conditions must be capable of clear non-subjective interpretation by courts.

They are widely used in North America. In other parts of the world they tend to be used for larger and longer contracts than Bills of Exchange. They are usually regarded as more reliable than Bills of Exchange.

Bankers checks 

A bank, after debiting the customer’s account, will issue a check to the supplier drawn on the same date. 

The situation in young economies is quite different. Many of the items in the first table concerning the collection of Receivables may not apply. Banks may not offer financial instruments such as Bills of Exchange. Cash or deposits may be demanded wherever possible but distributors survive on supplier credit. Often government departments will be slow payers. Publishers must therefore take carefully researched risks and enter into alliances of mutual benefit.

Author royalties

Authors receive advances against future royalty earnings. They serve also to pay the author while writing. In most cases they are non-returnable. Thus if sales are low or slow to emerge, the advance may be in excess of earned royalties and perhaps paid 2 years before the total sum is earned from sales. In developed countries, trade publishers and paperback publishers will expect to write-off large amounts of unearned royalty advances each year. The payment of high royalty advances, as publishers bid for market share, is cyclical. The advance will be against earnings over the term of the contract which will be for several years and several printings and editions.

In many types of publishing, the publisher will find an author who will be contracted to write to a specification; Artists, photographers and photo agencies will be contracted to provide illustrations and photographs. The publisher than provides more added value by the author. In such cases the level of advances and royalty rates will be lower. In other fields, e.g. academic publishing, authors may write for no or minimal advance as the incentive is to increase their academic reputation.

Publishers should regularly e.g. quarterly or twice a year, review those titles where advances have not been earned. Reprints may require the payment of no further royalties in cashflow terms.

In young economies the local Society of Authors may insist on standard royalty terms and advances regardless of the type of book or print run. The terms appropriate to approved textbooks (print-run 100,000 plus) are quite different to those suitable for university publishing (print-run 500-2000) or to authors of original novels. Established authors benefit hugely but resist competition from new authors. Subject to the laws of the country and the availability of good authors, most countries will need to study variations on standard author contracts if authors, publishers distributors are to benefit from expanded book markets.

Computer programs exist for the monitoring and payment of author royalties. These are suitable for publishers with large number of titles with complex contracts. However for most young publishers a spreadsheet can be used to calculate the royalties earned, and payments due.

Prepayments to supplier

In developed economies publishers may buy coeditions for the exclusive licence to publish in a language from foreign publishers or book “packagers”. Packagers concentrate on creating multi-language titles but sell the language rights to foreign and local publishers; they do not involve themselves in the marketing or distribution of books. Typical contractual terms for packager and coedition contracts involve stage payments, on signature, on approval for press and on delivery. Publishers who buy from coeditions or packager products can publish smaller print runs more economically and without using their own editors. For rights deals, the publisher will purchase film and pay a royalty advance.

In FSU countries, many printers still demand payment in advance whereas in developed countries 60-90 days credit would be given to publishers. These are also Prepayments.


In developed countries where printers compete aggressively on an international basis, credit of 30 - 120 days is used to encourage publishers. Private publishers will remain loyal to one or more printers who offer substantial credit. This credit reduces Working Capital levels and replaces loan capital in many cases. Private publishers will often negotiate lower printing prices than larger publishers will.

Customer payments in advance

Coeditions have already been discussed under Prepayments. Where publishers sell coeditions to foreign publishers they will receive advance payments which will be “owed” to their customers until the books are delivered and accepted.


In developed economies, companies are forced to find innovative ways of reducing Working Capital levels in order to maintain an acceptable Return on Capital Employed and in order to survive. In most cases those companies, which are most market, oriented and involved in market distribution e.g. retail groups will dictate terms to the producers. Where such compa-nies are successful in expanding the market, the suppliers may benefit also. 


In developed countries retailers of high priced items and items with slow stock turn, may refuse to purchase inventory and will accept only merchandising deals where the inventory belongs to the supplier until the products are purchased by a consumer. The retailer is this acting as a commission sales agent only. The supplier is paid once the goods have been sold.

Investors, banks and suppliers support such companies provided that they are successful and expanding. In many countries professional retailers are taking an increasing market share of bookselling proving that bookselling is attractive to entrepreneurs. Booksellers compete against other successful booksellers, against supermarkets, bookclubs. Printers, publishers, wholesalers and retailers operate in a value chain.

However in young economies there is little understanding of the value chain or teamwork. Printers, publishers, distributors and bookshops operate independently for survival. In the FSU, printers, publishers and distributors operated like watertight compartments with no overlap of responsibilities and reporting to different ministries. Working Capital was not a significant problem for individual enterprises

Printers are accustomed to operating large factories and have to possess management, commercial and accounting skills. Their long-term assets may be used as collateral for loans. At the other end of the chain many state distributors have collapsed, as their vast inventories became unsaleable; many book retailers deserted bookselling to sell higher margin goods. The publisher is the least experienced business member of the chain: printers have business skills, distributors have a short Working Capital cycle and collect cash. Publishers’ Balance Sheets offer little potential for bank collateral. As a result publishers in young economies may feel initially at a disadvantage to their printers and distributors.

Working Capital characteristics of different types of publishing



Developed country 

Young economy 

School textbooks 

Medium. High WIP but for a small number of titles; low but seasonal Receivables; Author advances low; Payables average and seasonal 

High WIP; Low Inventory if books are successful; Receivables low and seasonal. Printer advances high as print runs are often long. However printers are attracted to the long runs and the guaranteed market and will start to offer credit

University textbooks 

Medium. Similar to school textbooks; larger lists. Pricing competitive 

High. Publishers will print for several years. Receivables low as many books are sold for cash in university bookshops.

Professional books 

Low. High WIP but small lists; Receivables low as many books are sold direct 

High WIP and Inventory. Professional may pay a high price for imported books but not for local books

Trade Publishers 

High perhaps 35 – 40% of turnover. Large inventory due to need to sell to a wide market and due to use of colour; High author advances and Receivables compensated by high Payables 

Medium if books are sold to distributors on publication: high WIP as many titles; high author advances. Low Receivables. 

Academic publishers 

Very high. This is making the Internet and other electronic medium attractive to Academic publishers and their customers 

Very high. Similar characteristics to university textbooks but Working Capital levels higher 

Factors that reduce Working Capital levels

From the table above we can infer the following checklist of reducing Working Capital level in developed countries

  • Small numbers of titles
  • Need to buy rather than want to buy titles with unique information
  • Use of standard formats for paper printing and binding
  • Direct marketing 
  • Closer involvement in market distribution
  • Publishing for clearly identifiable markets e.g. schools, doctors, accountants, lawyers
  • Short run printing
  • Book packaging 
  • Titles where printing costs are a low % of the selling price

Whether the same list will apply to young economies will depend on average wages levels and other economic data such as the percentage of urban population to rural population. In developed countries profitability for such publishers is linked to their ability to charge a premium price for need-to-buy books. Computer books are a typical example: a typical PC will cost in excess of US$1,000. Thus the selling price of a book that assists the user to make better use of the computer and its software is linked to the benefit. In many young economies that may not yet be the case.

The Value Chain - Supply and Marketing Decisions

This chapter concludes by applying these concepts to the Value Chain – printers, publishers, distributors and retailers and concludes by studying in detail the title investment decision.

Most market innovations have arisen through co-operation between suppliers in the Value Chain, and by the application of Return on Capital pricing. In general the supplier taking the greater risk will be relieved of much of the Working Capital burden in order that the risk taker can invest in selling and promotion costs to enlarge the market. 




Implications for publisher


Fixed costs are high. Profit Contribution % is high if labour is regarded as a fixed cost. Working Capital % of turnover low. (assumes that publishers supplies paper). Printers now compete on an international basis using similar machinery. Many reproduction prices have fallen by over 1000% in the last 15 years. 

Even if a printer adds only a 10% profit margin, the return on capital may be high. Fast jobs are very profitable when measured in terms of return on Working Capital. Because of the large fixed costs, printers can vary prices if they need to attract more work to fill their factories. Book printing is regarded as one of the more profitable parts of the printing industry

Distributor (who stores, transports and sells) 

Profit Contribution % low. Working Capital as % of turnover also low. Payback period short. 

Distributors will usually have a very low capitalisation. If they do not sell enough books, they cannot pay publishers or buy new stock

Distributors will concentrate on selling the more saleable titles into the largest towns. Therefore many titles are never seen in many parts of the market unless the territory is divided up between distributors. 

Commission Sales Agents 

Low profit per 1USD of turnover but almost no Working Capital involved 

Only one profit margin is added as the publisher sells directly to the retailer rather than to distributors. The publisher carries the total Working Capital burden.


Contribution % quite high, Working Capital % of turnover medium if the shop is reasonably successful. 

The prices and profit margin on books are both low. 


Low Receivables; high Inventory; Very high entry costs before bookclubs make a profit and generate cash. Advertising costs high 

Bookclubs create and maintain a customer base 

Publisher’s own sales force 

Higher fixed costs as salary costs have to be paid but faster turnover of inventory follows if sales turnover increases 

Publishers can sell direct to the larger shops in large towns 

Direct marketing 

Higher fixed and variable costs but, if successful, this is amply compensated by the absence of a discount to distributors of retailers 

Higher contribution and reduced Working Capital levels. Higher Break-even point 

Possible Solutions

In financial terms there are three main choices:

  • To raise more finance in order to be able to take a longer term view of publishing

  • To develop innovative solutions involving the use of Working Capital to make books more affordable to more people and hence expand the market. This has to be linked to a marketing campaign carried out jointly with distributors, bookshops and other sales agents.

  • To change publishing policy and publish for different more attractive markets; develop teamwork with partners who have common needs

It is interesting to note that many publishers in young economies have chosen to diversify into trade book, often in colour and with long print runs, in order to pay for overheads. As the table above shows, trade publishing, based on the developed country model, usually has the highest level of Working Capital


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