Accounting Considerations for Marketing Agencies

Over the last several months, I’ve had the honor of serving as the Treasurer of Triangle AdFed. It’s a volunteer position, and a lot of work at times, but it’s given me the joy of getting to hang out with some of my favorite people: marketers.

Despite the fact that I’m in a typically uncreative industry, I do love the enthusiasm and energy of professional creatives, and I greatly admire their work. A good number of The Bookkeeper’s clients are marketing agencies or professionals, and I consider many of them close friends outside of work.

I learn so much from my marketing friends, and the only advice I can offer in-turn is related to their financial management. So, to kick off our series, I thought it would be fun to write an article about the things marketers need to take into consideration when viewing their accounting systems.

Cash-Flow

wallet with hundred dollar billsFew industries can be as volatile and unpredictable as marketing. Trends change, Google adjusts algorithms, and marketing clients don’t always recognize the back-end work that goes into their return-on-investment. Add in high costs and challenging margins, and marketing agencies can face cash-flow problems from month-to-month.

However, there are a few strategies which can be put into place to mitigate these issues. Cash-flow is really comprised of two main components: Accounts Receivable and Accounts Payable.

On the Accounts Receivable side, there are steps marketing agencies can take to keep money coming in. The first is to have a plan in place to handle delinquent client accounts. A documented series of steps for contacting clients with overdue balances can help separate the emotions from collections practices, and can help overcome the fear of “not wanting to make a client mad”. And, particularly when clients are slow-to-pay, it is good to examine not just the on-paper profitability of the client, but the cash profitability of the client. That’s because, in marketing, a large part of Accounts Payable is tied to client activity.

On the Accounts Payable side, marketers will often have high bills (for ad spend, website design, etc.) tied directly to client projects. Ideally, you would have a client paying for these costs directly, or paying for them in advance, to improve A/P cash-flow. However, in situations where that might not be feasible, it can be wise to utilize credit for some of those large purchases, and pay the balance off in-full from cash each month. This way, in the event of a non-paying client or other emergency, there is a bit of a “cash cushion” to sustain the business for fixed expenses such as rent and payroll. There is also no shame in partnering with vendors to find a monthly payment schedule which works for the regular flow of your business; so long as they know when to expect their payment, most vendors will be happy to accommodate your preferred payment date each month.

Payroll

women at conference tablePayroll is so important because it is the one thing you can absolutely never be late on. If you have employees, they are the most valuable resource of your business. And marketing companies often walk a fine line in determining when to work with employees, and when to work with subcontractors.

Now, we know I can write an entire article on FLSA compliance, so I won’t bore you with reminders to pay employees as employees and vice-versa. However, for budgeting and expense-management purposes, choosing which type of worker to use can be a crucial part of a marketing agency’s growth.

Subcontractors typically come at a higher hourly rate, but can be used as often, or as sparingly, as is needed. Also, it’s easy to track client-specific costs when paying for work on a per-job basis.

Employees often come with a lower hourly rate, but they also come with employer tax liabilities, and might not be as motivated for high production efficiency if their hours are set. Also, if the market turns and sales drop, you can be put in the awkward position of having to cut hours and/or staff.

A good solution is to perform a break-even analysis of adding an additional employee vs. paying a subcontractor. You can use this to determine exactly how many hours of work necessitate additional part-time or full-time staff; you can also take into consideration such factors as production bonuses and/or commissions or profit-sharing for employees (to encourage strong work and efficiency).

Pricing

calculating invoiceMany industries struggle with pricing, but marketing has come unique concerns. Many clients contract marketing agencies for both project and ongoing retainer work, and tracking the associated costs for those clients (and billing accordingly) can be a major challenge.

The first step is to clearly define the parameters of retainer hours and service projects, and to monitor those closely to prevent “scope creep”. This will help you to keep costs down, and will also help prevent large, unexpected bills for clients. For clients who are paying a flat monthly fee, either have a provision in the agreement for going over hours, or regularly review client hours to see whether a retainer needs to be increased.

It is also important to have a clear definition of what clients you want to serve. There is a fine line to walk in pricing competitively and remaining profitable; recognizing that you can’t serve every client model and identifying your target market can help you walk that line.

Because marketing is such a large field, there are many other niche problems which can arise. (For example, 1099s for inf marketing, or currency conversion for international marketing.) So for marketers in particular, it’s important to work with finance professionals who understand your company and its unique needs fully. Don’t be shy about asking your bookkeeper, tax preparer, or CFO how they would address some of these issues.

Recommended Posts