Tag Archives: treasury management

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’.”

Estimated Billing: Time for Reform?

3 Sep

estimated billing processAccording to ZenithOptimedia global ad spending will exceed $520.0 billion in 2013.  Based on common industry practices, the majority of this money will be prepaid by the advertiser based on its agency’s “estimated billing” invoicing process.  Simply put, estimated billing occurs when an advertising agency bills their client upfront, based upon planned expenditures, in advance of performance and in advance of the agency being billed by the advertisers 3rd party vendors. 

With such a material level of expenditure at stake, the question to be asked is quite simply; “Is estimated billing the best approach?”  In our advertising agency contract compliance practice, we are engaged by global advertisers to conduct financial management reviews and provide consulting support for effectively stewarding an advertisers marketing investment. In two decades, we have seen many repetitive inefficient practices tied to estimated billing. 

By in large, advertisers trust their agency partners to act in a proper fiduciary manner when managing the marketing funds entrusted to them.  As well intended as agencies may be, errors happen, delays occur and yes there can be  non-desirable manipulation of funds limiting an advertiser’s ability to optimize the return on their advertising investment.  Further, limited transparency into the unused portions of prepaid monies compounds the risk to an advertiser.  

It is understood that the premise of estimated billing was that advertisers did not want their agencies to function as their bankers, fronting money to 3rd party vendors to cover commitments made on the advertisers behalf by the agency.  By billing upfront, once funds have been approved, agencies assure themselves that they will have the advertisers’ funds in hand once 3rd party vendors begin to invoice the agency for the products, time and services purchased on an advertiser’s behalf.  Conceptually this makes perfect sense.  No one in the marketing services supply chain wants the agency community to be at risk or to front funds to compensate 3rd party vendors for their clients’ purchases. 

However, throughout this process, it is the client’s expectation and incumbent upon the agency community to treat client money as client money, not its own.  Aside from routine billing errors, certain observed financial practices would suggest this expectation is not always upheld: 

  • Estimated invoicing not being accurately reconciled to actual expenditures
  • Inordinately long delays for reconciling actual expenditures
  • Securing and retaining prompt pay discounts and volume rebates offered by vendors
  • Delays in processing payments to 3rd party vendors 

Some agency practitioners operate as though possession is nine-tenths of the law, deploying advertiser fronted funds to their, rather than their clients’ advantage.  When client controls are lax in this area, abuses of the fiduciary relationship frequently go unnoticed.   

One aspect of an agency’s fiduciary responsibilities is to transact client business in an open and timely manner, fully disclosing all commitments, incentives, balances and risks. Further, the agency must be willing to open their books at the client’s request, allowing the advertiser to review the accuracy of the agency’s financial management practices along with their compliance to the terms of the client/ agency letter of agreement. Instances where an agency provides push back on a client’s request for open-book accounting should be dealt with directly and immediately to mitigate any further financial risk to the advertiser. 

Given the amount of an advertiser’s budget directed toward media, this is one area which requires a keen level of oversight on the advertiser’s part. The combination of the consolidation of ownership among media companies and the growth through mergers and acquisitions in the size of agency holding groups creates a concentration of power which may not always be applied in the advertiser’s best interest.  Clearly, “Big Media” and the agency holding groups have forged their own relationships and specialized deals involving data sharing, content development, inventory and financial incentives which are designed to benefit those entities, yet are reliant on the investment of funds by advertisers.  

Even when an advertiser successfully structures an agreement with their agency in which the advertiser believes that their business goals and the agency’s remuneration are aligned and clearly articulated, there is often more wiggle room than an advertiser would deem acceptable.  That is “if” they had a complete understanding of the agency’s use of funds in an estimated billing framework.  Net, net… it can be argued that agencies often make a higher level of profit than what the letter of agreement describes.  One source of this “incremental” profit being directly tied to the use of advertiser funds.  A week here, a week there when it comes to paying 3rd party vendors, one or two percentage points when it comes to treasury management, AVBs, intra-company purchases of services… it all adds up.  As Aristotle once intoned; 

“The least initial deviation from the truth is multiplied later a thousandfold. 

Advertisers provide financial inputs which allow the marketing communications industry to exist, to grow, to innovate and to prosper.  Therefore, it is the advertiser who should benefit from the financial gains tied to the use of their funds.

Perhaps it is time for advertisers to consider rethinking the estimated billing process, particularly with regard to media purchases.  Linking payment to the timely and complete reconciliation of media purchases would greatly reduce the likelihood of others profiting from the advertisers investment.  Additional benefits would include the likely improvement in the time required to reconcile invoices, account for performance and to pay 3rd party vendors.  This is in addition to the improved controls, reduction in A/P processing costs and treasury management benefits afforded advertisers in a move away from estimated billing.

 

It’s Your Money and Your Reputation

26 Jun

advertiser's reputationDo you know what happens to your organization’s money, once it has paid the advertising agency?  If you’re like most advertisers you probably don’t know and may not even care.  Perhaps you should. 

Advertising agencies, regardless of the contractual definition of their role (agent vs. independent contractor), act on an advertiser’s behalf to procure and pay for services, space, time, etc… purchased from third-party vendor organizations that are related to producing and distributing the client’s advertising and communications messaging.  In turn, the advertiser is billed by the agency, typically upfront on an “estimated” basis for those goods and services with payment due to the agency in 15 to 30 days from receipt of invoice.  Terms between agency and client are usually set to insure that the agency has the client’s funds prior to the time third-party vendor invoices are presented for payment. 

For most advertisers, there is little transparency into the financial transactions between their advertising agencies and their third-party vendors, which number in the hundreds, if not thousands.  This lack of transparency results in diminished advertiser control and increased risks associated with third-party vendor reconciliation and accounts payable management.  Risks typically fall into four areas: 

  1. Clear and unambiguous title to any and all intellectual property/ work product
  2. The advertiser’s reputation among 3rd party vendors
  3. Treasury management “opportunity” costs
  4. Exposure in the case an agency became unable to pay its creditors 

AARM conducts agency contract compliance and financial audits of advertising and marketing agencies on behalf of advertisers.  In our experience it is rare to see a client-agency contract that identifies clear terms and conditions for the agency’s handling of third-party vendors or in establishing processes and controls to allow the advertiser to monitor performance in this area.   Don’t advertisers want to know if and when third-party vendors have been paid?  If vendors were paid at the agreed upon rate or something less?  If the reconciliation process resulted in credits, discounts or rebates that are due back to the advertiser?  Who are the vendors being utilized? 

Based on our financial audit experience, there has been a clear trend in recent years of agencies stretching out disbursements to third-party vendors well beyond their payment terms, as measured by “Days Payable Outstanding” or the time lag from vendor invoicing to agency payment to the vendor.  There can only be two reasons for this performance and neither is particularly sound.  Firstly, the agency may have flawed vendor reconciliation processes and or they are putting inadequate resources against this “non-revenue generating” area of their business.  Secondly, the agency is seeking to maximize interest income from float.  Simply defined, “float” is the amount of money that the agency has collected from the advertiser but has not yet disbursed to a vendor.  In almost all instances, agencies both earn and retain the interest income on this float. 

Within the agency community it is often joked that interest income (from float) is an agency’s best client; “It pays on time and never complains.”  However, when it comes to the advertiser’s reputation the risk of being labeled a “slow pay” is no laughing matter.  Whether deserved or not, such a reputation can carry both opportunity costs and economic costs in the form of vendors charging higher rates to compensate for their “carrying costs” or not offering preferential treatment.  Nor do many client-side CFO’s find much humor in lost interest income opportunities, aged vendor credits or delayed earned but unprocessed discounts and rebates.   

When the size of an advertiser’s budget is considered and the fact that this investment is being managed through a small group of agencies, who in turn handle purchases and payments on behalf of the advertiser with hundreds of diverse third-party vendors ranging from media property owners to production studios to third-party ad-servers, it may be time to perform an independent assessment of performance in this important area. 

After all, we’re all familiar with the adage: “What is inspected is respected.” 

Interested in learning more about the financial portion of an agency contract compliance audit?  Please contact Don Parsons, Principal at AARM at dparsons@aarmusa.com for a complimentary consultation.

 

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