Why the Music Businesses Need a Subledger
There is a problem in the music business that I think we've gotten so used to working around that we don't always recognize it as a problem.
Music rights businesses have accounting systems. They have royalty systems. They have contracts, distributor statements, bank accounts, payment systems and spreadsheets.
What they often don't have is a layer that connects all of those things. That's where I think the concept of a subledger becomes important.
The general ledger can't tell the whole story
A company's general ledger tell you about the financial position of the company. It can tell you how much revenue was recorded, the balance of your royalty liabilities, and how much cash you have in the bank. What it isn't necessarily designed to do is tell you the operational story underneath those numbers.
And that operational story is always what the people running music companies actually want to know.
- How are we doing?
- What have we earned but not collected?
- What are we still waiting to receive?
- How much do we really owe in royalties?
- Who is actually payable?
- What have we spent on this project?
- Has this artist recouped?
- Why is revenue up but cash isn't?
- How much of the cash in the bank is actually ours?
I've spent much of my career helping answer questions like these. And the answer rarely lives entirely in the royalty system or the accounting system. It lives somewhere between them.
That's what a subledger does
A subledger sits beneath the general ledger and maintains the detailed transactions that support the financial accounts.
This isn't a new accounting concept. Businesses use accounts receivable subledgers to track who owes them money and accounts payable subledgers to track whom they owe. The detail lives in the subledger; the totals roll up to the general ledger.
When I look at a music rights business, I see a similar need.
Music has a lot of financial detail
A piece of revenue may be reported by a DSP or distributor before the cash is received. It may create a receivable. When the cash arrives, it needs to be matched against what was expected.
That same revenue may contribute to royalties owed to multiple participants under different agreements. Some may be payable. Others may remain unrecouped. Expenses may need to be allocated against particular projects or participant accounts.
Eventually, royalties are approved for payment, money leaves the bank, and those payments need to be reconciled against the obligations they were intended to settle.
The general ledger should reflect the financial result of all of that.
But it doesn't need to contain every piece of operational detail required to explain it.
Royalty software isn't quite the same thing
Royalty systems contain an enormous amount of financial information, but historically their primary job has been to calculate royalties and produce statements.
That's different from maintaining the broader financial record of the rights business.
A royalty system might tell me what an artist earned.
But I also want to know what liability that calculation created, whether it agrees with the books, whether the artist is payable, whether payment was approved, whether the artist was actually paid, and whether that payment cleared the liability.
On the other side, I want to know what revenue the company earned, what it expected to collect, what actually arrived and what remains outstanding.
Those questions require more granular information than I necessarily want sitting in the general ledger, but they are fundamental to understanding how the business is actually doing.
The Missing Layer
The more I've worked in this business, the more I've come to think of this as a missing layer in the financial infrastructure of independent music companies.
The general ledger should remain the company's books.
Royalty systems can continue doing the complicated work of calculating royalties.
Banks and payment systems can move the money.
But there should be a financial record connecting those systems and preserving the detail necessary to explain how money moved through the business — from revenue earned and cash collected, through expenses and royalty obligations, all the way to payments made and balances remaining.
And ultimately, it should all reconcile.
That's increasingly how I think about what we're building with Royalty Partners.
Not as a replacement for the general ledger, and not necessarily as a replacement for the systems that calculate royalties.
But as the financial subledger connecting the economic activity of a music rights business to its books and giving the people running that business a much clearer answer to the question they actually care about: How are our deals doing?