Originally posted on www.tenuredgames.com
Accounting may not be every game designer’s favorite topic, but keeping track of the finances associated with the development of our board games is really important. By following where our money is going, we can set achievable financial goals, identify and correct over-spending, and take measurable steps to grow our businesses. I’ve spent the last year taking graduate level accounting courses and developing a financial model tailored to board game designers specifically.
If you like the model I’m using in this article, you can have it for free! Sign up for our newsletter at www.tenuredgames.com and verify your email address, and I’ll send you a link to download the file. This is the simplest model designed for independent game designers. For details on a more complicated model, check out our expansion accounting article, which will be published soon!
I made some simplifying assumptions when developing this model to help make it as user-friendly as possible, while still providing everything an independent board game designer will need. Here is a list of simplifying assumptions:
1. Point of Sale
I assume that all sales and purchases are point of sale, meaning money is transacted and inventory is supplied in a relatively short period of time (within one year). I’m assuming that the time it takes to pay, or receive payment, is not significant to the overall picture of your business’ health.
2. Not Publicly Traded
I assume the designers using this spreadsheet are not publicly traded companies, and so do not need to keep track of stock or dividend payouts.
3. No Debt
I’d discourage most independent designers to leverage debt to finance their board game development. Unless you have a proven game and a list of customers to sell directly to, there is a good chance debt is not the most financially advantageous strategy. Try crowdfunding to raise the upfront capital needed to fund your game first. Therefore, I do not track liabilities in this model.
4. No Capital Expenditures
Capital expenditures include funding property and equipment needed to perform business activities. Beyond a possible laptop or printer, most designers do not need to spend capital on equipment. This eliminates depreciation and amortization from the model.
The expansion model, which will be released soon, does account for all four of the previously listed assumptions. The excel template is free to download, and the article discussing the added features of the template will be published soon.
The Foundation of Accounting
All of accounting is founded on one equation:
Total Assets = Total Liabilities + Stockholders’ Equity
In this simplified model, we assume no debt and that all transactions occur in short order. Therefore, there are no liabilities. This means that you the designer and your team, the stockholders of your game development, own the entire value of your company in the form of all of its assets. In this case, assets are predominantly made of cash and inventory. A quick look of what you have in your bank account and what you have on your shelves will tell you quickly if you’re growing or going out of business, but analyzing your finances just a bit more can help set you up for success. Here’s how to do it!
Or Captain’s Log, as I prefer to call it, is a notebook. Yes, accounting was so exciting I threw homework in there too. The Ledger is where we keep track of every time money exchanged hands and product was bought or sold. When income is generated, the listed cash value is positive. When money is spent, then the listed cash value is negative, represented by values in (parenthesis).
Figure 1: Example Ledger
We currently use over 30 categories to organize our ledger and properly link our finances throughout our spreadsheet, but the most important categories are:
· Cost of Goods Sold (i.e. game components, box, etc.)
Sales is the most important category because if you don’t have sales, your company isn’t long for this world! The sales value is the total value you receive from a customer in exchange for your game. From that number, you will subtract everything that is cost you to make the game, leaving profit.
Cost of goods sold (COGS) includes expenses needed to bring your game to market. This encompasses the cost of all the cards, dice, or other pieces to your game, the sales tax you paid your supplier to acquire those components, shipping from a supplier to you or a fulfillment center, handling and fulfillment fees, and more. If you needed to pay money to be able to physically offer it to customers, it is part of COGS.
Marketing is a costly example of an expense that is needed to make your game a success in the market, but does not directly contribute to your game’s creation. It will be subtracted from your sales like COGS, but is a separate category as it is a sunk cost. A sunk cost is one you cannot recover after you spend it. For example, COGS creates inventory you can possibly sell, but marketing costs are gone once they are spent.
The ledger needs to be continuously updated throughout the year as the details in the ledger will feed into every financial statement produced!
Resulting Financial Statements
There are four standard financial statements – the Balance Sheet, Income Statement, Statement of Cash Flows, and Statement of Stockholders’ Equity. These four statements together provide a holistic picture of the financial health of your business. However, given the simplifying assumptions in this model, most of those financial statements will show a series of zero dollar entries, which isn’t particularly useful. Therefore, we will focus on just one financial statement – the Income Statement.
Figure 2: Example Income Statement
If you’re using our template and properly filling out the ledger, it will perform these calculations for you. Figure 2 shows an income statement as filled out with the data shown in the ledger in Figure 1, assumes a 19.8% tax rate, and rounds to the nearest dollar.
The income statement is used to track your profitability after all expenses are paid. It starts with your sales. Sales represents the price a customer paid for your game. Other revenue, for example advertising income if someone paid you to do a game review, is also recorded here.
To see the gross profit you made on your game sales, you need to subtract out what it cost you to make the game, which is the COGS.
Next, you subtract any additional expenses you had just from running your business. These often include salary and advertising. This will show you your pre-tax profit (or loss).
If you made a profit, you’ll have to pay taxes on it. Tax rates change all the time and there are a lot of possible rebates or deductions you may be able to take advantage of. For a simple estimate, just google the income tax rate in the current year for individuals or small businesses, as applicable to you. After you subtract out tax from your pre-tax profit, you’ll be left with Net Earnings! Net Earnings is the amount of money your business gets to keep. It can be split out amongst those who have ownership in the business or reinvested into your next project.
Here are the two key takeaways:
1. The simplified stockholders’ equity for an independent game designer represents the total value of your business, which is made mostly of cash and inventory.
2. If your Net Earnings is positive, you are profitable! If you are only profitable because you are discounting your own time by not providing yourself a salary, your business will not be sustainable unless you generate more profits, cut your expenses, or offset your personal income with another source of income.
Looking into the Future
Now that we know how to simply track our finances on a day to day basis, we can use that information to make guesses about the future.
Figure 3: Future Income Prediction Model
In the model above, I’m using the same data as shown in Figure 2. Additionally, I made some guesses about the future. For example, I’m guessing that the growth rate in sales for my game is 12% per year. I’m also guessing I will slowly decrease my cost of goods sold by 2%, because by selling more copies I can afford larger print runs and get the price per game reduced. There are other categories you can tweak to see what overall impact your changes will have on the future profitability of your business.
If you’d like this template for free, please sign up for our newsletter! If you are interested in the expanded model, check back soon. We will put a link to the new model in this article once it is complete and ready for publishing.Recommend0 recommendationsPublished in