I E E E T R A N S A C T I O N S O N P R O F E S S I O N A L C O M M U N I C A T I O N , V O L , P C - 1 8 , N O . 3 , S E P T E M B E R 1 9 7 5

IVfana&irfca Subscription. Income HOUSTON BAKER

Sdiption income, and accrual basis sccvufiung provides better Many small publishers depend o n ca*ia b.^Is accounting and get sys-•?n-Etiv rX£ggrr2.ik?fiS of ?«up»^ss« iirtii^reL-tlmfites of exssiises w h e n ­ever costs, prices, or numbers of subscriptions riss. Subscription money paid in advance should not be fallow, but invested temporarily to generate additional revenue. Alietaatlvesy, this snoiiey n i a y scive In

farther when cost-cutting Ideas aie sought regularly feom tlie printer. It h speculated that the next round of i&crsasss in subscription prtess may drastically cut the number of i n s t i i n t i o r E a l subscribes to less popular journals. Some may not survive the change intact

uernancis successful soluiiuns iu maiiy pi'obleiias. Several piub-lems in managing subscription income are discussed in this Darker: arprnsnting methods, temporary investmer.t. economic?-! production, and planning price increases.

ACCOUNTING METHODS

Most journal publishers underwrite costs witu prepayments called subscriptions. The prepayment money is an asset, but it also represents an obligation to the subscribers either to deliver journals or return the money. The obligation is a liability which remains until the journals are delivered. For practical reasons, the term liability is applied t o money received before the start of the subscription year. Once the year starts, the Hsbiufy is reciassiiieG as current r&v&nut;. Revenue is money earned during the current year and includes all money received for subscriptions to be delivered during the current year.

Journal production and mailing cost money, and the costs for all of the issues in a year are expenses. Earnings (or losses) are the difference between the revenue and expenses. They accumulate from year to year and represent assets to which the publisher has clear title. These accumulated earnings are the publishers equity.

The relation between assets, liabilities, and equity may be expressed as assets = liabilities + equity (A = L + E ) . This is known as the "basic accounting equation" and underlies the

. _ X : . _ A1 3 „ u J 1 i - _ t W U C U I I l i n u i ! <i<*isuuiiii£ig iim? i i i u u a , v a a u a i m a t u u a i u a a i s

accounting. It may be read as follows: Assets, the publisher's total financial resources, are equal to and come from two sources, one of which is liabilities, assets whose title and ownership belong to outsiders, and the other of which is equity, assets whose title and ownership are the publisher's.

Manuscript received April 28,1975. This paper was presented at the i ~» » l i j i - y i j •L/Gniv/rence on kjCicnXix.xC joi»i»£s, ^nsxry r* i i i , I N . J . , r\pxn 28-30.

The author is with the American Society of Plant Physiologists, 9650 Rockville Pike, Bethesda, Md. 20014.

• i ' V UCS.Si.Kf t i V W l H I H U g . ^xjl-dLJ *jr. brjJ-Vtf --i|-r- V/a WO. J W O I 1 1 1 v i the two financial statements made by most managers (or their auditors) to see how they performed. One is the statement of nnanciai pusiUon (balance sheet). It appears complicated, but is in fact based on the simple accounting equat ion, / ! = L + E . On one side, all assets are listed and totaled. On the other side, all liabilities and equity are listed and totaled. Both totals are equal and the equation (and sheet) is balanced. The other is the earnings statement (profit and loss sheet). It consists of a summary of revenue, expenses, and their difference—the profit (or loss).

To illustrate the differences between the twu ^count ing methods, let us return to the subscription money received by a publisher for this and next year's issues. On the cash basis, this money would be posted to the subscription receipts account. With accrual, the posting would be two accounts, one for current revenue, the other for accounts paid in advance (liabilities). Some cash basis bookkeepers might protest that they post receipts to two accounts, current and advance, but these are combined in the statement to give total receipts.

When a cash basis publisher pays printing bills, he pus is them to disbursements accounts. With accrual, he would post them to current expenses accounts and to the accounts payable liability account. The latter contains all of last year's unpaid expenses. For example, the bill paid in January for the December issue is an account payable.

At the end of the year, all receipts and disbursements are summarized and the net gain or loss determined to make a cash basis earnings statement. On the accrual basis, it includes instead summaries of revenue and expenses and a determina­tion of profit or loss.

The cash basis net gain is not the same as the accrual basis profit. The inclusion of next year's liabilities increases receipts, and the exclusion of the previous year's liabilities decreases it. These procedures would offset each other and make receipts nearly equal to revenue, if there were no changes in the number or subscribers o r price for na^t vear's issues. If either increases, next year's liabilities will increase and exceed last year's, causing receipts to exceed revenue.

Increases in unit costs, subscribers, or published pages have the opposite effect on the relation between disbursements and expenses. Although the inclusion of some of last year's ex­penses (accounts payable) in tins year's disbursements partially offsets the exclusion of some of this year's expenses (next year's accounts payable), increases in costs or numbers will cause expenses to exceed disbursements. To restate, increases in price, costs, subscribers, or pages raise receipts and decrease disbursements relative to revenue and expenses. Thus, to the extent that it is relied upon to estimate profit, cash basis misleads by exaggeration.

9 3

Statement uf Financial Position (Accrual Basis, Estimated)

IfcEn iRANSACiIONS ON PROFESSIONAL COMMUNICATION, SEPTEMBER 1975 n A

aiaiemei i i ui jl iiidricia: rosmion a c c r u a l i?asis, r s^matea i

Assets cash S 46 000 receivables 22 000 investments 000 property 4 000

total assets $197 U U U

Liabilities account 0 P a y a b l e $ 1 8 000 subscriptions in advance 94 GOO

total liabilities $112 000

Equity restricted I unci balance ^ ~ ~ K)KJ\J unrestricted fund balance 30 000

l u i o i c u u n ^ C> O J UUU

total liabilities and equity $197 000

Eitiiiiiigs Statement (Accrual Basis, Estimated)

Revenue S254 000 Expenses 223 GOO

profit $ 31 000

Fig, 2,

be calculated by subtracting liabilities from assets (a rearrange-rneni oi si — l, ~r aiiu me i e s u n a> ^ o j uuu. m e ungmai

is not shown separately in Fig. 1. Therefore, the unrestricted fund balance is $30 000. This completes the reconstruction o f the estimated statement of financial position on the accrual basis.

An accrual basis earnings statement can also be recon­structed. The net profit or loss is found by taking the difference between the 1974 and 1973 equity. (The 1973 equity is calcu­lated as above, using the 1973 statements.) The result is $31 000 profit. Of tliis, notes in the original statement show that $12 000 was assigned to the building fund (restricted f..,.A t - - 1 x ~~ ~ c m n n n u ~ i * „ x i _ _ 1 U l i U UcIic2iiv*oj», a w L i i w i c i i i a i i i i i i g , u v i u u s s m t n ^

accrual basis profit of $31 000 and the cash basis net gain of $47 000. If the $16 000 difference between earnings is assigned evenly to revenue and expenses, the accrual basis earnings statement would be as shown in Fig. 2.

To conclude, accrual basis accounting serves managers better because it generates summary figures for revenue and expenses rather than approximations that deteriorate with changes in business activity. Conversion to accrual is readily accomplished with assistance and instruction from a certified oublic accountant.

Figs. 1 and 2 are financial statements illustrating these points. They come from a mature scientific society with a sound financial structure, and stable membership and sub­scribers. The society has operated successfully on the cash basis for many years, Its statements are presented twice, once as condensed from their published statements (Fig. 1), and once as reconstructed on an accrual basis (Fig. 2). The latter contain several unverified Hsxiinipiiuus. but any errors would affect the magnitude of the results^ not the argument.

Statement of financial Position (Cash Basis)

Assets cash $ 46 000 investments 125 000

cash balance, i 2-31-74 £171 000

liabilities $ 0

^

receipts $262 000 disbursements 215 000

net gain $ 47 000

cash balance, 1-1-74 124 000 cash balance, 12-31-74 $171 000

Earnings Statement (Cash Basis)

Receipts $262 000 Disburse merits 215 000

net p i n $ 47 000

Fig.l. * ~

The reconstruction of the cash basis statements to accrual basis statements is done in several steps. Assets are divided into four categories: cash, investments, property, and re­ceivables (money earned, but not received, such as current subscription orders filled with payment to fo!!ow)= Cash and investments are taken directly from the cash basis statement. Since no information is available for receivables and property, two unverified assumptions are made: receivables equal one month's receipts, or S22 000; and property consists of the contents of rented office space, worm $4000. Thus toiai assets are estimated to be $197 000.

Liabilities are divided into two categories, accounts payable and subscriptions in advance. The laiier are about $94 000, as derived from supplementary figures in the published cash statement. There is no information on accounts payable, so an unverified assumption is made that they equal one month's average disbursements, or $18 000. Thus the subtotal for liabilities is estimated as $112 000.

The equity section is divided into two categories, a restricted and an unrestricted fund balance. The subtotal for eauitv can

B A K E R : M A N A G I N G S U B S C R I P T I O N I N C O M E

accounts, certificates of deposit, treasury bills, government according to a priority determined by their publications committee, They will buy until they run out of funds. Journals at the top of the list may scarcely see a difference,

partially offset by their usually lower yield. Certificates of But what about the journals at the bottom? They would see /4«-s.-» oJ+ Uz~U— - . : - U - -• : — .^i,. 1 — — w v ^ w u u i i u v v i u ^ i i W i j i & i U o , U U l i l iCUi iVCi i iGxi l iy JLUiig i i i a i U l i i i v d

unless the face value is S i 0 0 0 0 0 or more. Then terms as snort as 50 days may be uumigec. Treasury bills and government agency paper come with convenient terms, face values, and excellent safety. Commercial paper carries higher risks and higher yields. However, one should prudently avoid the issue of companies with solvency problems.

There is an alternate use for subscription money paid in advance. If revenues are not enough to cover expenses, next year s subsciipuuii muiiey <^an uc- "borrowed" to pay seme of

95

against its utility. If it is v/orth it, they buy. If it isn't, they don't. It their demand is elastic, then a price rise will cost a large number of subscriptions.

Institutions have been tried and found less elastic than individual subscribers. They buy despite price rises. However, the inelasticity of institutions is not boundless. As their budgets have fallen, they have had to choose. Most chuse periodicals over books. This tactic must be nearly exhausted, and unable to cover the large increases in costs coming in 1976. So another kind of choice must be made.

Hnp mav or oi-Mjioi-a thnt institutions will choose iourna^s according to a priority determined by their publications committee > They will buy until they run out of funds. Journals at the top of the list may scarcely see a difference. But what about the journals at the bottom? They would see o n l i n o r;r>-« ? c t n m p r i ^ l a c t i ^ i H / ^ The loifS' S WOl'ld bC SCriOUS because institutional subscribers often provide 60 percent or

r • 15_ t J A.1 _ r- A

justnients sre on tne way.

DISCUSS ION

Bob Harte (American Society of Bioiugicai Chemists; Chair­person, Session I ) : The spectrum of scientific publication is so wide, so vzzt in its diversity, that these are general m*momle<> that have to be modulated in each individual instance. I think of the extremes from a small society journal with a press run of 2000 or 2500 to the operation of an organization like the American Institute of Physics or the American Chemical Society with vast nuniuers c i iournais in u s studies u i i u inui t i -millicn dollar operations which can afford all kinds of sophisti­cated financial management. As a consequence, I think there should be a wide-ranging discussion of this topic.

Ralph Good (Ecological Society of America): What if, in deciding on rates for subscribers, members, etc., the society iii&Kes a move and decides it has made a mistake? For example, suppose that instead of a iO-percent loss in members r>*-»/4 P i i K p i r t k o r e i I t s c ~ O — — — + 1 — T"V ; v t>».-» r t

CU1VA ^UUCVUOViJ lv fci ' U v i v V l U i U O O . 1 / U V 3 I t HV/pV HIV, situation will get better and maintain its rates or does it back off and try to change the rates for next year? Houston Bzk?,r\ I'm happy to say I've never had to face ihdA decision. We recently raised our rates by about 12 percent. The figures aren't in yet, but we beat last year's subscriptions from VS. sources; however, we're a bit behind on foreign sources, and for our society, foreign sources consistitute two-thirds of ou r income. I'm not sure if that's material yet ucCauSc it 's iOO caily m the SeaSOii, aS faf aS Wc'ic CGfiCciricd. I say, collect in advance. We usually do collect in advance from our U.S. sources, but foreign ones dribble in iinoughout the year, Fni hopeful that we haven't lost too many.

To address your question, what to do if vou do lose too many, I 'd say you have to back off or at least hold still and let inflation catch up with you until they decide that it's a reasonable bargain again, and try to look for different sources of income in the meantime. But I 'm not sure it would happen that way. Usually you don't lose that many: at least that's my experience.

T E M P O R A R Y SNVESTMENT

Subscription money collected in advance can be used to generate more income because, on the average, it will not be spent for half a year. For example, the temporary investment of £ 1 0 0 0 0 0 at 6-percent simple interest for 180 days earns $3000. That equals $1 or $2 per subscription for many small publishers. If the subscriptions are collected even earlier than the assumed December 31, say by November 1 , add 60 days to the calculation and collect yet another $1000 in interest.

m e uglier khqvvii ^nori-iei'iii in.s tr urr*cnts arc savings accounts, certificates of deposit, treasury bills, government agency paper, ana commercial paper. Almost any ^ m i m m

can be invested in savings accounts, but their convenience is partially offset by their usually lower yield. Certificates of / | a n A « : f Un*,~ U z ~ U — - . : - ? J . : . - - - x t , . i ± —

« V ^ u j h ii.ts.v-w i 4 L j . ^ £ i W i j x C i U o , U U l i i i v U i i v v i i i w i l i y i U I i g i i i t t l u i i U v u

unless the face value is $ 1 0 0 0 0 0 or more. Then terms as sriori as 5 0 days may be airaiigeu. ircasury Dins and government agency paper come with convenient terms, face values, and excellent safety. Commercial paper carries higher risks and higher yields. However, one should prudently avoid the issue of companies with solvency problems.

There is an alternate use for subscription money paid in advance. If revenues are not enough to cover expenses, next year s subsciipiiuii inuncy tan u& "borrowed" to pay some of this year's expenses. This spares paying interest expenses that would have been necessary had the money been borrowed from a bank instead. Be careful! It's so easy, you hardly know you're doing it. Be very aware of spending next year's money this year. (Think accrual.)

ECONOMICAL PRODUCTION

Another aspect of managing subscription income is making it go further. Since most of it is spent at the printer's, the best opportunity iur savings is tnere. rrixiiers usually cio noi question the expensive requests they get. Thai is because ilie customer is always righi, so ii pays a customer to know the printer's technology.

For instance, most large presses print 32- or 64-page forms. Pages printed O R full forms cost less than pages printed on short forms. The 4 extra pages in a 100-page journal (3 forms X 32 pages + 4 pages = 96 + 4) do not cost 4 percent more. They cost 8 percent. Eight percent of an annual printing bill of $ 1 0 0 0 0 0 means a lot of extra expense. In addition to press-work, economies may be found in composition, layout, half­tones, paper, redactory, and others. Face-to-face questions in pursuit of economical production can yield luiig-ieiin dividends.

P L A S M I ^ G PRICE I N C R E A S E S

When other means do not balance next year's budget, subscription prices must be raised. An understanding of the likely effect on subscribers probably would complicate the decision, but may beneficially provoke a more diligent search for alternatives. Subscribers must balance a journal's cost

96 IEEE TRANSACTIONS ON PROFESSIONAL COMMUNICATION, SEPTEMBER 1975

Bob Marie: You are touching of course on the very critical problem of market elasticity, and in a sense the decision you make in anv one year is substantially irreversible. What you can do to modulate that in the following year is a moot question. Yuu just hope it doesn't happen because you're in a never never land.

Vic furies (Journal of the Experimental Analysis of Behavior): We didn't ever have to back off on a rate increase, but we did almost the same thing in that we once had a student sub­scription rate of $8.00, and when we suddenly found ourselves flush, we reduced it to $4.00. We doubled the number of siudent subscribers in one year from 400 to 800, so I suspect the thing to do is to back off. If you can stand it.

Houston Baker: Well, 1 think the point is that you've reduced your income by increasing your rate in this ca$e=

Woody Gannett (IEEE): The American Institute of Aeronau­tics and Astronautics went through that, and in case you're interested you can look through their subscription history from 1970 to 1974. In 1970 they doubled their member prices 211^ < onmioh tlip mpmhpr Q!»hc_fHnt ion?, dronnfid off very seriously. They hung in ther^ for about 3 years and then backed uff and finally built back up their subscriptions to ihe level iriey were originally.

KoiisiOii Baker graduated from Haxvaid University, Cambridge, Mass. in 1963 with a B.A. degree In physical sciences, and from Ohio State University, Columbus, Ohio, in 1969 with a Ph.D. degree in physiology. He presently holds the position of Business Executive with the American Society of Plant Physiologists. Previously he did research in cryobiology with the American National Red Cross, and teaching and research in the electrophysiology of muscle at the University of Saarlandes, Germany. He is a member of the Council of Biology Editors, ihe Aniciicaii Society of riant Physiologists, the Society "for Cryo­biology, the American Association for the Advancement of Science, and the Washington Society of Association Executives.