Tag Archives: estimated billing

2021 Resolution for Advertisers: Drop Estimated Billing Approach

30 Dec marketing accountability resolution

It is time for marketers’ treasury management teams to turn their attention and scrutiny to the ad industry practice of “estimated” billing. 

Why now?  The long-standing practice of “estimated billing” is a relic of a bygone era and one that EDI technology has rendered as obsolete. 

Toward what end? Simply put, to improve the management of marketing funds, a material expense, to mitigate financial risks and improve controls in and around the disbursement of cash to marketing vendors.

The fact of the matter is that most client organizations do not have a clear line of sight into the disposition of their funds at each stage of the advertising investment cycle. With estimated billing, once marketing budgets are approved, purchase orders issued, agency billing generated and those invoices paid, advertiser controls are insufficient to monitor their funds once the agency has been paid.  This is largely because advertiser funds are now under the control of “other” parties (i.e. ad agencies, media sellers, production resources, etc.) who take the responsibility for closing jobs and trueing up estimated costs to “actual” in a timely manner. 

Unfortunately, the process for reconciling media campaigns, production jobs and agency fees can extend weeks and months after the attendant activities and or timelines have lapsed. Sadly, there is little incentive for agencies to expedite this process and issue the requisite credit adjustments, discounts and rebates. This is largely because they are in possession of client funds and as long as job/ campaign costs have not exceeded client-issued P.O.’s clients aren’t clamoring for a final accounting of advertising activity.

Billing based upon “final” costs provides an incentive to agencies and third-party vendors alike to quickly and accurately reconcile activities and process invoices for payment. The other to advertiser accounts payable teams is the reduction of paperwork in the form of multiple adjusting invoices associated with the estimated billing approach.

In our advertising assurance consulting and audit practice we have observed first-hand the efficiency of actual (in-arrears) versus estimated (in advance) billing methodologies. One of the key commitments required of advertisers to make this work is to establish accounts payable guidelines for its agency partners that ensure the timely disbursement of the funds necessary to settle third-party vendor obligations in a timely manner. Fundamentally, advertising agencies are not banks and should never be asked to settle vendor obligations made on behalf of clients, with their own funds. Conversely, they should not be earning profit from floating client funds either.

That said, many clients and agencies have cash neutrality clauses in their agreements, which prohibit this type of activity. For those agreements that don’t address this issue, we believe that it is simply not appropriate for an agency to make money on the use of client funds. Period. Disallowing estimate billings and requiring the agency to bill only after expenses have been incurred and actual costs known, is a proven way to minimize non-transparent agency profits. After all, allowing the agency to unfairly benefit was never the intent of the estimated billing process to begin with.

For marketers, transitioning to an “actual billing” process in 2021 makes good sense from both a risk mitigation and control perspective. Further, it is more efficient, can reduce payment processing costs and can potentially improve days payable outstanding performance for the agencies and third-party vendors. In the words of the 20th century American poet, Richard Armour: “That money talks, I’ll not deny, I heard it once: It said, ‘Goodbye’.”

Media Agency Estimated Billing Should Be Eliminated

24 Oct

accountspayableLet me start by saying that Advertising Agencies are not banks and should never be asked to settle vendor obligations, made on behalf of clients, with their own funds. That said, the long-standing practice of “estimated billing” is a relic of a bygone era and one which should be abandoned.

In a day and age where the electronic transfer of funds is commonplace and where most media owners invoice agencies based upon “actual” activity, following the month of service, the notion of an advertiser being billed upfront on an estimated basis is no longer necessary for the vast majority of media being purchased. From an advertiser’s perspective, this antiquated system results in burdensome levels of paperwork, drives up accounts payable processing costs, needlessly extends the invoice reconciliation process, restricts client use of funds, results in lost interest income opportunities for the advertiser and perhaps one of the less apparent benefits, eliminating the apprehension/reliance on an agency to accurately track and timely reconcile such estimated billing.

Can anyone cite a single benefit that accrues to an advertiser from this approach? If an advertiser were to purchase inventory directly from the media seller they would pay based upon actual costs, so why should it be any different when purchasing media via a client-agent relationship?

The move to final billing has but one drawback, to one stakeholder… the loss of agency float income on pre-billed activity. While conceptually we don’t believe that it is appropriate for an agent to make money on the use of client funds, we do understand that eliminating this non-transparent source of revenue would have a negative impact on an agency’s bottom-line. This, however, should not be the concern of the advertiser community, as this was never the intent of the estimated billing process to begin with. After all, it is the advertiser’s money and as such, they should be the only stakeholder to benefit from access to and the use of those funds.

Transitioning to actual billing makes good sense from both a treasury management and a transparency accountability perspective. It is more efficient, can reduce payment processing costs and can potentially improve days payable outstanding performance for the media seller.

As it is, advertisers generally have little to no insight into the time gap between remittance of their funds to their agency and in turn the time it takes for the agency to reconcile media activity and remit payment to an advertiser’s third-party media vendors. If client-side CFO’s were aware, there would certainly be significant interest in reforming the estimated billing system and the stewardship of an advertiser’s media advertising investment.

When it comes to financial management within the advertising sector, we have always been cognizant of the words of Robert Sarnoff, past president of NBC and RCA in the mid-twentieth century:

“Finance is the art of passing currency from hand to hand until it finally disappears.” 

Interested in learning more about improved financial management practices across your marketing agency network? Contact Cliff Campeau, Principal at AARM | Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation on this topic.

Transparency is the Key to Agency Financial Accountability

17 Jul

agency financial management

A job estimate is generated. A purchase order is issued.  An invoice based upon the estimated job cost is generated by the agency and sent to the client.  This part of the advertiser/ advertising agency billing cycle is visible and clear. 

However, what happens with client funds once that invoice is paid is often anything but transparent.  For instance:

  1. How much does the agency actually pay third party vendors? 
  2. Which third party vendors are utilized?
  3. Do any third party vendors pass along prompt pay discounts or agency volume bonification (AVB) rebates to the agency (and is the agency passing these back to the advertiser)?
  4. Is the agency competitively bidding outside services purchased?
  5. What percentage of the advertiser investment is being directed to agency owned business units?
  6. Are jobs being closed and actual costs reconciled to estimate?
  7. What is the agency vouching process to insure that third party vendors have fully delivered on the products/ services owed for the investment made?
  8. How much time has the agency invested in the process?
  9. Did the agency adequately earn their compensation?
  10. Is the financial process and reporting efficient?

These are not trivial topics, yet strangely it is rare that an advertiser invests the time and or energy to pursue answers to these important financial stewardship questions.  Too often, payment of the initial estimate billing from the agency is the end of the client’s review process, rather than the beginning of an important accountability process, when it comes to billing management and contract compliance.  Ironically, even when advertisers establish processes, controls and reporting requirements within the client-agency letter-of-agreement these parameters often go unchecked.  Perhaps there is some redeeming value in the words of renowned educator, David Starr Jordan:

“Wisdom is knowing what to do next; virtue is doing it.” 

If an advertiser cannot readily answer the aforementioned questions, the associated lack of transparency and lax control environment increases an advertiser’s risk quotient… financial, legal and supply chain management related risks.  In our agency contract compliance practice, we uncover many recurring reasons as to “Why” advertisers fail to enforce the requisite level of financial accountability within their marketing supplier relationships.  These can range from staffing limitation issues (competence, knowledge, turnover, etc…) to organizational process gaps or cultural morays which simply don’t place the requisite value on accountability in this area.   

Experience tells us that once advertisers understand the monetary impact of “flying blind” on these key topics, attitudes toward marketing supplier accountability and contract compliance quickly change.  The financial impact of limited visibility and or lax controls in this area can put millions of dollars at risk, year in and year out.  This doesn’t have to be the case.   An in depth independent agency contract compliance review can yield valuable insight into the financial stewardship aspects of a client-agency relationship including industry “Best Practice” standards that can be implemented to enhance visibility, mitigate risks, boost marketing ROI and strengthen the client-agency relationship. 

“The time is always right to do what is right.” 

~Martin Luther King, Jr.

Interested in exploring the benefits of enhanced transparency when it comes to strategic supplier management in the marketing area?  Contact Cliff Campeau, Principal at Advertising Audit & Risk Management at ccampeau@aarmusa.com for a complimentary consultation.

 

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