| Set-Up Screen: Counting, Calculation and Structuring Methods |
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General Information on Counting, Calculation and Structuring Methods The way royalties will be calculated are determined by the selections you make in each of the three method boxes which occupy the bottom half of the Set-up Screen: Counting, Calculation and Structuring. Choices are made by clicking on the appropriate radio button. In the third box (Structuring Method), you'll also enter the desired royalty rate. If you choose Simple Structure, it's just a matter of entering the royalty rate in the blank provided. If you choose Variable Structure, however, you'll need to enter several royalty rates depending upon the number quantity breakpoints or discount ranges you've chosen. To enter the rates, click on the button on the bottom right hand corner of the screen. The royalty will be calculated based on the selections you make from the method boxes. For example, you can calculate a royalty based on cash received, the retail amount and a simple rate of 10%. Or you can calculate a royalty based on accrual accounting, the net amount, and a rate that varies with number of products sold. Many combinations are possible. Having the ability to choose different combinations and rates helps you fine tune royalty payments to match the royalty holder and the product.
More information on each of the three Method boxes is found below: Counting Methods Counting Method refers to the way in which the products are inventoried for a royalty report: based on accrual accounting or cash received. Before explaining the Counting Method in more detail, it's important to understand that when royalty reports are generated, they are created for a given time period. You'll indicate the desired time period of the report in the report generator. For instance, if you do royalty reports an annual basis and your fiscal year is based on the calendar year, you might indicate that time period of the report will be from 01/01/14 to 12/31/14. More information on the two Counting Method choices follows: Cash. If you select CASH, then the products counted will be those products sold and for which you have received payment during the designated time period of the report. This is a common way for a business to set-up a royalty payment system since they want to make sure they've been paid before paying royalties to the royalty holder. A cash-based counting method enables you to do this. For more information on how items are counted, see Cash-based Counting. Accrual. If you select ACCURAL, then the products counted will those products invoiced during the designated time period whether or not they have been paid. Some businesses prefer to handle royalties this way since it matches the way they do their annual inventory for tax purposes. The total numbers of goods sold on inventory reports will match the numbers appearing on royalty reports. Using the Accrual Method means that you may not have received payment on all the products reflected on the royalty report. Those who use this method, however, feel that the amount required for royalty payment balances itself out, particularly as more time passes and more products are sold.
Calculation Method The Calculation Method determines how the formula for royalty calculations will be factored. Calculation factors include retail price, net amount, flat amount, or profit: Retail Amount. If you select Retail Amount, then royalties will be based on the retail price of the product. If a product's retail price is $20, then $20 will be used in the royalty calculation formula. For example if you sold 100 copies of a product priced at $20 and you have a simple royalty of 8%, the royalty formula would be: 100 x .08 x 20=$160 Retail Amount has often been used by businesses because it is easy to work with. All that is necessary is to get a total count of products sold, and the royalty is derived by taking the number sold times the rate and the retail price. Retail Amount Option: You can change the term that AnyBook uses on the printed royalty report. In the "Calculation Method" box on the Royalty Set-up Screen, just to the right of "RETAIL Amount" is a field called "Label to Use" which allows you to enter a substitution for the word: "Retail."
First some background information: under the default configuration of the program, the printed royalty report includes the label: "Retail." For example, if you select the "Retail" calculation method, the report would include the following: Royalty = Net Total x Retail Price x Rate (.05) If desired, you can change "Retail" to another modifier by typing the desired alternative word in the "Label to Use" field. For example, you might type in "List." In that case the report would include: Royalty = Net Total x List Price x Rate (.05) Keep in mind that only the adjective "Retail" is changed. The word "Price" remains. Whatever you designate should modify "Price" as in "List Price." Note also that there's a limit of 10 characters. To change the name on this royalty record, type the desired name in the "Label to Use" blank. If you'd like, the default can be changed so that EACH time a new royalty record is created, the program will use the label you designate. To change the default, first click on the "H" button. You'll see a place to enter the new label. It's recommended that you use title case: capitalize the first letter and keep the rest lower case. All new set-up records created will use the new label. Net Amount. If you select Net Amount, then royalties will be based on the amount you receive for the product minus the discount. For example, let's say during the year you sold 100 products. The product has a retail price of $20. Among the products you sold, 50 were sold at retail ($20) and 50 were sold at 50% off ($10). That means that the net amount you received was $1500 (50 x 20 + 50 x 10). Let's also say you have simple royalty of 8% on net. Thus, the royalty formula would be: 1500 x .08 = $120. Net Amount is often favored by businesses in calculating royalties since it reflects what the business actually receives for the products. Many books in the publishing trade, for example, are sold through distributors which require large discounts. By using the net method, the amount going to the royalty holder automatically adjusts to the discount. The advantage of using a net amount system can be readily seen when it is compared with the retail method (described above). With the retail calculation method, the discount has no bearing on what goes to the royalty holder. The royalty holder receives the same amount whether the product is sold at the retail price or whether is sold at a 65% discount. With the Net Amount system, however, the amount going to the royalty holder is higher when most products are sold near or at retail and it is lower when most products are sold at a discount. In the past, many small businesses didn't use the Net Amount method since it mean extra accounting time keeping track of the sales of each product. With AnyBook, however, calculating royalties on net is just as easy as using the Retail Method. Flat Amount. If you select Flat Amount, then royalties will be based on a constant dollar amount per unit sold. Let's say, you agree to pay the royalty holder $1.00 per unit sold. That's a flat amount. Calculations are easy. You take the total number of units sold times the flat amount. As an example, let's say you sold 100 copies of a product and the flat amount is $1.00 per unit. The royalty is: 100 x $1.00 = $100. Flat amounts don't take in account the amount of discount that you provide to your customers, and thus they don't reflect the amount you actually receive. The advantage of a flat amount, however, is its simplicity. It is easy to calculate, and it is easy to understand. Profit. The profit method bases royalties on gross profit. Gross profit is the difference between revenues and the cost of the goods sold. A quick note on terminology. The terms net and gross profit are often used interchangeably. Some people may use the term "net profit" to refer to this type of royalty calculation. Technically, however, "net profit" refers to profit after deducting all operating expenses, notably fixed costs or fixed overheads. "Gross profit," on the other hand, refers to the difference between sales and direct cost of product or service sold--which is the situation in this case. To calculate gross profit, AnyBook subtracts the cost of the product from revenue. The revenue figure is the actual amount that you've received (in other words, after any discounts), and before any tax or shipping is added. Once AnyBook finishes with those calculations, it takes the Gross Profit figure and multiples it times the royalty percentage. For example, let's say one of your products generates a gross profit of $3,000 and the royalty percentage is 10%. The royalty formula is: $3000 x .10 = $300. You can make adjustments to the gross profit figure by removing invoiced fees, sales commissions, and/or credit card fees. That's done by selecting the appropriate choices in the "Options" box. Note that the Profit Calculation method is only available with Simple Structure.
Structuring Methods The Structuring Method is the last of the three methods making up a royalty payment system. You have two basic choices: Simple and Variable. Simple Structure. Simple Structure, as its name suggests, is the easiest. You simply type in a percentage rate or flat amount into the blank provided. If you are dealing with a percentage amount, type it in as a whole number. For instance, let's say you're paying an 8% royalty on cash sales on the retail amount. It should be entered as 8.00% in the box, not .08%. You can fine tune your rate up to one hundred of a percentage point. For example, the program will calculate royalties based on 8.55% if desired. If you're entering a flat amount in the simple rate blank, enter it in dollars and cents (i.e. $1.25). If you have a chosen a simple structure and you've selected a Counting and Calculation method, then you're all finished. You can move on to the next royalty holder--or generate a report for the royalty holder you have just entered. Variable Structure. In a Variable Structure the percentage or flat amount varies depending on the quantity of products sold. It may also vary depending on the discount offered to your customers, or it may vary based on a combination of quantity and discount. Variable structuring allows you to further refine a royalty payment system. As a product sells more and your costs drop, you may want reward the royalty holder with a higher royalty. Or you may wish to decrease the amount of royalty paid, the more the product is discounted to your customers. Variable structuring allows you to make either of these adjustments. Quantity. To vary the royalty amount depending on quantity sold, click on the "Quantity" check box. You'll need to enter the number of breakpoints. (Quantity also has an additional option which directs how you wish to deal with returns.) Discount. To vary the royalty amount depending on discount, check on the "Discount" check box. In addition to checking the box, you'll need to enter the number of discount ranges. Both Quantity and Discount. To combine the two, click on both check boxes. When you check both boxes, you'll need to enter the number of breakpoints and the number of discount ranges. Click on the links above for more information on either quantity breakpoints or discount ranges.
Other parts of the Set-up Screen include: Name, Address, and Phone Blanks Email, Product, and Catalog Number Blanks Summary Name, Social Security, Active, and Code Counting, Calculation and Structuring Methods Options (Net and Profit Calculation Methods) Vary Rate Based on Pricing Level
For more information on setting up a royalty with a Variable Structure: Indicating the Number of Quantity Breakpoints Indicating the Number of Discount Ranges Entering Breakpoints & Royalty Rates for Variable Structure (Quantity) Entering Discount Ranges & Royalty Rates for Variable Structure (Discount) Entering Breakpoints, Ranges & Rates for Variable Structure (Quantity & Discount)
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