In these exclusive excerpts from our IPA online Commercial Certificate, we look at the role of finance within all components of a media agency, from pitching for new business to booking media.
Just like media, the world of finance comes with a language of its own that is designed to confuse and intimidate the outsider. To really thrive in the advertising industry you need to have great relationship building skills, campaign planning and execution skills and more than a fair share of creativity. You also need sound commercial, financial sense.
At the very least you’ll need a good awareness of the financial aspects of the business you are working in because, ultimately, the financial success of your organisation will have an impact on the clients who choose you, no matter how good your agency is.
New business process
Both senior management and relevant colleagues from the finance department should be involved in all new business proposals prior to submission. This ensures that no promises to potential clients are made that the agency cannot fulfil or which are commercially unviable.
Finance should be involved at the earliest opportunity with regard to costing out a fee which should form the basis of the proposal and providing advice should the prospective client have proposed draft contractual terms.
Ensure that the payment terms demanded by the client/offered by the agency are acceptable to finance. Ideally, credit insurance will not be a problem, but to avoid any nasty surprises ask finance to apply for a limit and if any potential problems are anticipated discuss this with the prospect at an early stage highlighting the potential need for prepayment.
Effective financial management begins before any work has even started on an account and well before the first invoice is issued. Clearly, any new business taken on should be on terms that are acceptable to your agency.
In any new business process, both parties need to be transparent across the entire terms proposed. By clearly defining all terms upfront, you avoid uncertainty and disputes later on.
Unfortunately the initial euphoria of winning new business is quickly followed by the realisation of how much work is ahead.
Sadly, in many instances during the early weeks of a new appointment finance matters get neglected. A new client, who will be going through disruption of its own during the transfer of its business, has a right to expect this transition to be as smooth as possible. Efficiency in managing the administrative aspects of this transitional process will be critical to making a good first impression with a new client, and just as importantly, will allow a focus on delivering the great work they chose the agency for.
To eliminate the significant risk of client default to which media agencies are exposed, most agencies take out credit insurance. Credit insurance is a form of commercial insurance that provides a business with protection against the failure of a customer to pay their trade credit debts. Policies will vary by agency but in general no client, however creditworthy, should be allowed to trade without sufficient credit insurance cover in place.
Responsibility for ensuring that adequate credit insurance cover is in place rests with both finance and the Account Director, who between them should monitor changes in requirements based on both historic spend and future media plans. As a rule of thumb, the credit limit required should be based on a client’s highest three consecutive months’ spend.
Where credit insurance is unavailable on a particular client, alternative security such as prepayment may be required by the agency prior to committing to media activity.
Why does this matter?
In Australia, media agencies contract with media owners as legal principals. This means that media owners invoice the media agency and hold it responsible for payment, regardless of whether its client is able to pay it. With the media agency’s liability extending from forward bookings through to all media that has appeared but not yet been paid for by the client, at any time the agency will be exposed to amounts far in excess of its annual profits.
In general, most clients are financially secure and able to honour their debts. However, agency management and finance are not in a position to judge their clients’ financial wellbeing and therefore rely on credit insurance or alternative security as protection.
Bad debts are the single biggest risk to a media buying agency, with numerous examples of agencies that have lost significant sums or even gone out of business by not managing this risk appropriately.
The IPA Online Commercial Certificate is available at any time during the year. It has been created to give future industry leaders an education in agency finance, to help with those important client conversations and to build the understanding needed to create quality work that delivers a profit.