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
Few 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
Payroll 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
Many 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.
Year in Review: Our clients' big wins in 2015
People tend to think of bookkeeping as a necessary evil. Your business has to have it, so just find someone who will do a decent job and whom you don't have to pay too much.
We beg to disagree.
We like to use our service to do more than just keep our clients' books clean. We like to go beyond balancing books to growing businesses. In that regard, 2015 was a very good year for us.
Today we want to showcase three clients who had big "wins" in the last 12 months.
C
lient #1: A Money-Saving Solution
One of our client's businesses was facing some difficulties staying profitable. Looking at the books, we found some areas where expenses were duplicated and some cases of fairly extreme overspending. We met with the owner and devised a plan to cut expenses. Once the plan went into effect, we were able to increase the bottom line by over $30,000 a month.
Of course...big deal, right? Everyone knows accountants are penny-pinching killjoys. Let's look at our second story, and see how we can help a client without forcing them to spend less.
Client #2: A Long-Denied Loan
A different client desperately desired a consolidation loan. He had gone to three different lenders, and been denied each time. He was getting nowhere in a hurry.
So, we took over.
First, we received authority to act on his behalf. Then we got to work, combing through his financials and organizing the data for presentation. Finally, we were able to present the information to the bank in the way we knew they wanted it. This time it was approved, and we were able to get our client a consolidation loan at one of the same institutions who had previously rejected him.
Thanks to those efforts, our client was able to consolidate his debt under one payment, and greatly improve his cash flow.
Still, that story isn't as great as...
Client #3: 
Money from Thin Air
Sometimes, something as simple as developing better procedures can make all the difference to a business. This was the case with a client who didn't have a good system in place for managing A/R.
Specifically, there was over $102,000 in receivables of which the owner was not even aware. (Some of the unpaid invoices were over two years old.)
When we discovered this large balance of aged receivables, we immediately began developing collections procedures, including a series of formalized letters to the debtors. Using the practices we put into place, over $30,000 has been collected within the last four months, with payments continuing to roll in.
To re-cap, that's money that the client did not even know existed.
These are just a few of our highlights from 2015. We can't wait to see what we do in 2016.
The Financial Reasons Small Businesses Fail
Almost every entrepreneur has heard the statistic: 80% of small businesses fail. There are many reasons this happens, and can include everything from market slumps to lazy owners. To enumerate every way a business can go under would be an endless, impossible task.
However, there are a few financial characteristics frequently found in struggling businesses. Here are the most common financial reasons small businesses fail.
There's no plan. It's not uncommon to meet new small business owners who have a brilliant product idea, a well-developed marketing plan, a slick website, and not one thought given to their budget. We've already written on the tough financial questions to answer before starting your own business, but the importance of a solid financial bedrock cannot be overemphasized. A well-researched budget and fixed goals is the key to surviving that crucial first year in which most businesses go under. Great customer service and spot-on marketing are not enough to balance out shaky financials.
Speaking of customer service...
Poor credit management and pricing strategies are bad for everyone. No one craves popularity like an entrepreneur and, when your business's success is entwined with how well-liked you are, the urge to avoid offending anyone becomes even stronger. In the early days of a business, when there are only a few customers, there is a common impulse to let clients slide on late payments, or to offer frequent "friends and family" discounts. It's easy to justify this with the logic with the idea that you need to establish customer loyalty, and you can tighten the reins a bit when you have a solid customer base. There are a few reasons this doesn't work:
- Clients who don't pay on time aren't going to appreciate the slack you've given them in the past; they are going to resent the restrictions you enforce in the future.
- Likewise, your patrons who are just coming to you for the lowest price will quickly go elsewhere when your rates rise.
Lenient accounts receivable and cheap pricing might gain you a quick boost in early sales, but they are not a sustainable model. Delivering a product you can be proud of, at a price that is worth your hard work and can keep your business afloat (and actually requiring customers pay you that fair price) ensures that your customers the pleasure of patronizing your business for years to come. Because you have to remember...
Cash is king. Yes, it's a cliche, but that doesn't make it any less true. A great business model matters little if you run out of money before you can implement it. Managing cash flow is key to not just the health but the continued existence of your business. Here are a few of the most common cash pitfalls small businesses face:
1.) Insufficient capital. In all likelihood, your business will not be immediately profitable. So not only do you need enough cash to get your business started, but you need enough to allow yourself to operate at a loss for a while.
2.) Not having a large enough cash cushion. Think "Princess & the Pea" levels of padding. Regardless of how well you plan, the economy is unpredictable. Look to history for examples. No one expected the Boston Molasses flood which, in addition to the damage caused and lives lost, resulted in a nearly $11M settlement (in today's money) for the responsible company.
3.) Over-investing in fixed assets. It's great to plan for the long-term but, if you don't plan for the short-term as well, your business will not get a long-term. Sacrificing too much of your cash for something like manufacturing equipment (even if you're getting a great deal) can hurt you, as that is not a liquid asset and will be of no help to you in the event of an emergency (i.e. your factory flooding a major metropolis with 2.3M gallons of molasses). Think of it like a game of Monopoly; if you start building hotels too soon and suddenly need cash, you're stuck selling all your buildings back to the bank for half-price, and you know bankruptcy is right around the corner. Only, in real business, instead of losing yet another game to your annoying brother-in-law, you've lost your entire livelihood.
Expanding your business is the ultimate goal, but maintaining cash flow gives you the solid foundation you need to build upon.
80% of new businesses fail, but that means 20% succeed. To be that 1 out of 5, have a plan, know your value, and remain patient. Better to start small and grow something big than to start too big and dwindle away.