What’s the big deal about write-offs? No one sees them on the income statement, therefore, nothing to worry about. Right?
Every year, ad agencies and marketing firms lose money they may not even know they are losing, largely through failing to monitor the dollars they are losing to write-offs.
I visited an advertising agency last month. They quite proudly showed me their month-end reporting package: balance sheet; income statement; comparison to forecast (and an unchanged plan, I might add). Why did they even show me billability by employee?
This agency reported a low six-figure profit last year. During my visit, I asked them to review their write-offs. The write-offs were double the profit number.
When I showed the owner, his face turned ashen.
They had never reported write-offs—anywhere. They certainly tracked them. It’s just that the nasty things didn’t show up anywhere on the monthly reporting package. The agency now monitors write-offs. Monthly.
How important is it to track, review, analyze the nature of, and report write-offs? If money is not important to you, then kindly move on to another article. If it is important, let’s dig deeper.
What is the true meaning of a write-off?
For starters, write-offs do not occur when a client does not pay your invoice. An uncollected accounts receivable is more commonly called a bad debt expense,as the billing has already been sent to the client.
You did the work, billed the client, reported the revenue and the offsetting receivable, expected to be paid and now are just waiting for the check. The client either balks at the invoice, refuses to pay or does not have the funds to pay your bill. You now have a bad debt expense against the receivable. This transaction will have been reported on your books.
A write-off does not even hit your accounting records!
So, what is a write-off?
A typical write-off occurs when the total amount of time an agency works on a client project exceeds the budgeted or estimated amount of time (if an estimate is even prepared), and the agency cannot bill any of the overages.
Show of hands, please: Who has worked ten hours on a project and could only bill three hours to the client? Unless your name is Houdini, there is no sleight of hand you could conjure up in order to bill the remaining seven unbilled hours.
Why is it so important to track, report and even budget for write-offs? Alternatively, why not ask yourself what else you could have done with those seven hours you could not bill? Billed another client? Prepared for a new business opportunity? Gone fishing or golfing? Imagine getting those seven hours back. I cherish time more than money, always.
Why Write-Offs Matter
I run into many agencies that pay a great deal of attention to growing their AGI top line, yet could do a much better job at managing their bottom line by paying attention to the second most expensive expense after salaries and benefits.
One of the reasons owners don’t typically pay attention to write-offs is that a write-offs management report must be generated separately from the financial statements—write-offs don’t show up on the income statement. A write-off report should be part of the agency’s month-end reporting package.
We’ll get to a second, more important reason shortly.
A write-off is symptomatic of numerous agency issues:
- Incorrect estimate of time
- Inefficient use of time
- Inexperienced use of time
- Deliberate misuse of time
- Experienced use of non-client time
- Client misunderstanding of the use of agency time
Notice the common theme? Time. Time. Time.
How many agencies track their write-off time in the six different ways noted above?
Agencies still earning media commissions are most fortunate today. For agencies required to bill based on time spent on their clients, the only way to run a profitable business is to manage time like attorneys, public accountants and consultants do. Time management is a critical exercise in seeing an ad agency succeed.
Today, agencies have to earn their money more than ever based on time. Most agencies do not have the right cultures or management practices to switch away from time-based billings. Why aren’t agencies paying more attention to this issue? There are numerous reasons, ranging from their being unaware they have an issue, to their accounting people not having a handle on the issue, to not focusing enough on estimating and billing efficiency. When agencies have to compete against consulting firms, the bane of their existence becomes billable time.
Most agency principals, unlike the heads of consulting firms, were not schooled in time metrics when they started their agencies. It is time that agency leaders take a more mathematical approach to agency operations and pay more attention to the very precious issue of time; otherwise… they are going to run out… of time.
For those companies with agency management systems, write-off review should be part of the month-end routine. In addition, agencies should budget for write-offs annually.
Types of Write-Offs
Let’s analyze the six different time write-offs.
Incorrect Estimate of Time
In analyzing this type of write-off, an agency could improve its estimating by understanding why not enough hours were quoted in an estimate; recover more income, and obviously, time; and not leave money on the table. Result: More profit for the company.
Inefficient Use of Time
There are productive individuals, and then there are people who are simply not that efficient for whatever reason. Clients want projects completed yesterday. Can your agency afford to employ people today who are not efficient with their time? An analysis of write-offs not only by client but by employee may detect one or more underlying issues. Result: More clarity about employee productivity develops more efficient employees.
Inexperienced Use of Time
From time to time, employees not trained on a specific discipline are assigned tasks above and beyond their skill level. This is often referred to as “on the job training.” It is important to monitor this aspect of time reporting with staff to ensure that employees are learning, and not making the same mistakes over and over, incurring all kinds of unnecessary time. Result: better estimating based on an understanding of employee capabilities, and improved planning/budgeting for employee training).
Deliberate Misuse of Time
From time to time, agencies may have employees who believe they are the current reincarnation of Michelangelo; for example, the design has to be just right no matter how many hours it takes. Or, the content creation needs just three more rounds of edits… In this case, repeatedly exceeding the estimate is, in effect, ignoring all the time and energy spent in proper scheduling and estimating at the start of a project.
Employees need to be held more accountable for their time, and managers need to closely watch time spent. More tightly manage actual vs. estimate and address it as it happens. Also, aim to build a little “cushion” into estimates, so you can spend more time “perfecting” the work if necessary.
In the meantime, exceeding the estimate is as much a management issue as an employee issue.
Agencies that build their brands on great creative work must calculate the trade-offs of “good enough within the time estimated,” vs. “our best effort but exceeding estimate.” Agencies are not solely in the time-billing business—they’re in the “ideas-that help clients solve problems” business. It’s a delicate dance, not a cold calculation. Result: Managers train employees to respect time constraints, and more tightly manage actual vs. estimate.
Experienced Use of Non-Client Time.
This is code for New Business Time. This often happens with new business opportunities. I see far too many new business pitches teeming with people, when a smaller team would suffice. While I am a big supporter of new business efforts, let’s rethink this huge exercise that consumes so much unrecoverable time and reconsider which people really should be on the team.
This time write-off category may also include the same individuals over and over. Therefore, to determine the ideal people on a pitch, it is worthwhile to analyze the time value of this group relative to the ultimate success of their efforts. I know, I know… It is not always about the money. Result:Better prioritization of where employees spend time, increasing billable time.
Client Misunderstanding of the Use of Agency Time
There are some classic client lines in this write-off category…. so much so, they should be enshrined in the Advertising Hall of Fame under the Clueless Client category. Who hasn’t heard… “Isn’t that new e-commerce website included in the retainer?” or “Can you do this little project—we don’t have the budget for it…” Clearly communicate scope of work with each client on every project. Conversely, simply be courageous and say, “That will cost extra.” Result: Improved client communications and better scope management.
What Is the Overall Objective for Write-Offs?
Ad agencies can start reining in write-offs by setting a goal, e.g.:
In the next fiscal year,reduce write-offs systematically by 50% vs. the prior year.
If you don’t have the six categories above set up to start write-off reporting, it will help to review the two most recent years in totality as your starting point.
Your accounting people should track these write-offs as closely as they focus on labor hours against clients. The same accounting people should collaborate with account managers to review write-offs every month.
What should an agency budget for write-offs in a given year? How about less than your annual profit?
I would be in interested in hearing if any agency has minimal write-offs.
Happy Holidays, everyone… and start keeping an eye on those write-offs!
Vince Dong is the founder of Ad•Vice Software and Consulting Inc. He consults with independent marketing agencies in North America to help them make more money.
© 2018 Vincent G. Dong. All Rights Reserved.
See also: Monthly Reports Agency Owners Must Read