Vicki Hinze © 2000-2011
Q. Could you please explain “reserves against returns?”
A. Sure. I’m not an attorney, but writer-to-writer, I’ll be glad to discuss this. First let’s look at what reserves and returns are in relation to writing/publishing.
Reserves: Royalties earned on a book that are due to be paid to the author but are, (by mutual agreement in the contract between author/publisher), withheld from the author by the publisher for a specified length of time to cover the costs of books reported as sold stock being returned to the publisher for refund (account credit).
Reserves are usually held for four (4) royalty periods. Each royalty period typically runs six (6) months. That’s the industry standard. (You’ll have to check your specific contract to know the terms on your book. If your terms are not up to standard, next contract, you might want to negotiate for standard or better terms.)
Returns: Books shipped (sold) to wholesalers/booksellers but then later returned to the publisher for a refund.
Some publishers require the entire book be returned in salable condition, but many books are stripped (front covers ripped off and contents destroyed) and returned to publishers, sometimes in as little as two (2) weeks. Generally, a publisher accepts returns for a term of six (6) months from the publication date. However, for the sake of business relations, publishers often extend that time to avoid a loss of orders by that bookseller.
Now, I’m sure you’re looking at these six months’ terms and wondering why then does the publisher need to hold the authors’ reserve money for two years (4 royalty periods) when returns are due in within six months of publication. I certainly wondered that.
Among the reasons are that the reserve and return policies were adopted and enacted long before computers. Then, it could take six months to know how a book was selling. It wasn’t uncommon, particularly in the wholesale market, to not have a firm fix on how a book was selling for over six months. Then it took more time for the proverbial dust to settle and the publisher to get a firm grasp on actual sales and returns.
No one denies that it’s beneficial for the publisher to hold these monies and retain use and benefit of them for the maximum length of time. But it isn’t strictly for bottom-line benefits that they do so. While many facets of the wholesale/retail market are computerized now, stragglers remain that are not–or who do not have centralized computer accounting, and when combined, there are sufficient numbers of these outlets to impact reserves/returns.
Two other reasons publishers hold reserves so long is because of global marketing and staggered shipment dates.
Ten, even five, years ago, the bulk of sales by US publishers were US and Canadian. Foreign sales to foreign publishers were more common. Whereas today it’s becoming common for buyers in foreign markets to buy the English versions of the books rather than editions published in their own countries. (There are exceptions to this. Harlequin/Silhouette novels and many bestsellers, for example.) Through Internet sales, buyers are ordering direct. While all sales are good, this new buying pattern presents challenges for publishers as well as blessings.
Ideally, a publisher wants the lay-down (books on the bookshelf) to occur within a short span of time. A spotty or drawn out lay-down hurts the odds of a book making the lists and maximizing sales. Word of mouth is still the best selling tool for books, and would-be sales generated by word of mouth are negatively impacted. This, however, pertains more to the US and Canadian markets. The global market by its very nature has a longer span. For better or worse (and it’s definitely both) that’s the nature of the beast.
The point is, these staggered shipments and new buying patterns on the global front are significant to overall royalties earned. Much of the global market is not on computer, much less centralized computer. It takes long stretches of time for reports of sales to be accurate, or even within striking distance of accurate. Simply put, publishers still need time for the dust to settle.
So the practice of reserves against returns for four royalty periods is still practiced. While it seems like a long time to the author, it’s a relatively short time to the publisher, who is dealing with all of its layers of wholesalers and retailers in domestic and foreign markets. It’s irksome to some authors. And yet it’s reasonable for those authors to ask themselves if they would prefer to have the royalties released to them and then two years later be billed by the publisher for overpayments. That would be the alternative.
Personally, I prefer the reserves against returns. When I do receive royalty payments, they’re mine. I don’t feel compelled to hold them for two years to see if I’m going to get billed for anything.
Some would prefer the author hold the money (earning dividends/interest) during that time. I’ve considered this. But then we’d have to worry about lost revenue from those who failed to return the sums owed to the publisher, and that would undermine its fiscal integrity. As an author, I want my publisher to be on firm, not shaky, fiscal ground. To handle the matter in this regard would, in my humble opinion, be poor business practices and fiscally irresponsible. Not the practices of a company with whom I’d want to form business alliances.
There are other reasons reserves against returns are required, but these are the major reasons and the ones that most significantly impact the writer. If I’ve failed to answer your questions, or raised new ones on the matter, yell.*