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Agency Financial Management Tips: A Refresher Course

Agency Financial Management Tips


Red Alert! Second Wind’s Annual Survey Raises Alarms

As ad agencies enter the fourth quarter and review business plans, remember that Second Wind’s Annual Agency Survey Report is available for your review. As we compiled recent smaller ad agency data, certain data points caused us to start twitching like Groucho Marx’s eyebrows. Allow us to enumerate our concerns:

  1. Properly managing media billings is one way for agencies to stay on a financially stable basis. It is a Second Wind Billing Best Practice to advance bill for media buys—in other words, ask clients to cut a check as soon as you place the buy. But, according to this year’s survey data, 23 percent of agencies don’t bill the client until the media bills the agency. This puts agencies at risk of becoming their clients’ “bank.” To maintain good relations with the media, agencies need to pay bills promptly. However, many clients are making this impossible by stretching out payment to agencies. (See our next point.) Failing to bill in advance may force agencies to pay bills out of their own pockets. Never, ever let clients put you in this position.
     
  2. Enforcing agency collection terms is a tough job; we see too many agencies fail in this area, and get into financial straits as a result. Per our survey, 51 percent of agencies now wait 45 days to be paid by clients, and 18% percent say they wait as long as 60 days for payment. You can't possibly expect to pay your own bills under these terms. If clients won’t pay you so you can pay media and vendors (and meet your own overhead obligations), surrender any commissions you may still be collecting and have media and vendors bill the client directly. This takes your agency out of the risky area of having to pay vendors from your own capital before clients finally pay you, Let the vendors wrestle with clients for payment. Read The Peak of the Frenzy for some other money management tips.
     
  3. Balancing your account ratios is essential for smaller agencies. By account ratios, we mean the proportions of large to mid-size to smaller accounts your agency serves. Ideally, no more than ¼ of your AGI should derive from a single large account. However, according to new survey data, 34 of agencies say they get 25-49 percent of their total AGI from a single large account—and another 12 percent say they get 50-74 percent from that gorilla client! Lose that client and you basically have to shut down the agency. Large accounts (“gorillas,” as our founder Tony Mikes liked to call them) are great while they last, but they tend to make a very big hole when they depart. You need a good mix of “orangutans” and even a few “monkeys” to reduce the risk of managing a gorilla. Revisit the standards for an ideal account balance in The Numbers at a Glance.
     
  4. Overtime and compensatory time have not been an issue for quite a few years among Second Wind members. But this year, 20 percent of survey respondents reported they offer comp time to employees for working extra hours. Compensatory time is actually illegal in many states, especially if you fall under the FLSA regulations. Even where it is allowed, it must be offered within the week earned, or you run afoul of FLSA requirements. While proposed changes to overtime laws potentially affecting some agency employees not previously eligible for overtime pay never came about, agency owners need to be careful about use of overtime and determing which employees are eligible. Talk to an employment law specialist to make sure comp time is not an issue under state laws.
     

Download a copy of the Second Wind's Annual Agency Survey Report today, and review your standards and practices to ensure your agency management practices are protecting your agency from unnecessary risk.

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