Cutting through the business jargon

We’ve discussed budgets, expenses, and cash flow in previous articles. In this post, we’re going to talk about some of the more common business terms you’ll hear while running your business. Especially when talking to your accountant (or, if you’re fortunate, an investor or publisher), there are some terms with which you’ll want to be familiar.

The GameDev Business Handbook makes complex business topics accessible with in-line and footnote definitions. The following are taken directly from the book:

Cost of goods sold

You’ve got to spend money to make money. These are direct expenses related to the production of items sold by the company. This includes project-related staff costs, manufacturing, delivery, and platform holder royalty. Some of these, like staff costs, are the same no matter how many units are sold (fixed costs). Others scale with the number of copies sold (variable costs).

Fixed expenses

Whether you sell one copy or one million, these expenses aren’t changing. Any line item that does not shift in relation to how many units are created or sold is considered a fixed expense. Video game development relies heavily on people who are paid regardless of how many copies you sell. As you might imagine, fixed costs are a huge part of your business.

Variable expenses

Some of your costs are tethered to production runs or are directly attributable to sales. For example, you’ll incur a cost for every game sold on a console or PC storefront. This slides with the number of copies sold, pinning the expense to your revenue. Likewise, if you sell at retail, you’ll incur manufacturing, shipping, and inventory costs tied directly to the number of units you produce.

Overhead expenses

You need to keep the lights on, right? Some costs are not easily attributable to a specific project. They exist regardless of how many people you employ or how many different things you’re working on. Overhead is a fact in any business, significantly contributing to monthly operations (sometimes called “burn”). Overhead includes: rent, utilities, accounting and legal fees (not directly attributable to a project), interest expense, taxes, and more.

Project expenses

Many of your business’s costs can be assigned directly to the production of your games. Project expenses are those you can comfortably assign to development, including art, sound, and coding. This category also includes a reasonable portion of administrative time for activities that further the completion, marketing, distribution, and sales of your games.