Wednesday, October 22, 2008

If You Don't Pay Your Bills

From my Mediapost article today:

The credit crisis is having a very obvious impact on the global economy as anyone can see from a day-to-day observation of the stock market, but there are some less obvious points of impact that may affect our business, as well. Simply put – clients and agencies need to stop delaying payment on their bills – it is unprofessional and fast becoming an even greater problem than it used to be.

One of the biggest problems in the advertising business has always been late payment. Clients pay late, agencies pay late and publishers are left holding the bag in many cases. When publishers don’t get paid, their sales people don’t get paid. Agencies hold onto money and play the “float” game, accruing interest and using this interest as revenue and in these cases the agencies are to blame. Too many times the client is at fault as they will sit on invoices and hold payment for cash flow issues or for budgeting issues, trying not to spend money in one month and have it held until the following month. Regardless of who is at fault, it’s a problem which we will all be forced into dealing with in the coming months.

The credit crisis is basically eliminating situations where businesses can borrow money and in our business there is a constant flow of credit because publishers run media based on signed insertion orders and agencies buy media based on signed contracts, but rarely if ever do clients pay that money upfront, prior to the launch of their media. Publishers almost never request money be paid in advance of media placements. Guess what; that is going to change!

It is very possible that publishers and agencies are going to start requiring partial payments upfront. If I were a publisher, I probably would. I did an informal poll of agencies and publishers this past week by asking 20 or so representatives about these very issues and across the board everyone agreed that late payment is one of their top five problems. On the average agencies and publishers were seeing accounts receivable between 60 and 90 days and much in excess of 120 days. In many cases this portion of their accounts receivable (above 120 days) was as high as 25% of the total outstanding. This is simply unacceptable!

When clients default on paying for media, they are acting unprofessionally. I could name names of clients and brands that I know are not paying their bills to a number of agencies, but as a matter of principle and integrity I won’t. However in reading this article many of you know who you are and you need to know the ramifications of these decisions. By not paying your partners you are clearly saying that their business does not matter to you. By not paying you demonstrate the low value you place on your partnerships and your partners should see this and act accordingly. If you don’t value your partners, why should they value your brand? Why should they allow you to run media or pay for services when you obviously don’t care?
A few years back the IAB worked with agencies and publishers to create a standard form insertion order in our industry and in that document are terms referred to as Sequential Liability. Sequential Liability refers to the precedent that agencies is acting as an agent on behalf of their clients and in cases where agencies have not been paid the media costs for a placement, and therefore are unable to pay the publisher, the publishers are legally able to hold the client responsible for that money. Unfortunately not every publisher abides by those rules. I can understand why they wouldn’t, but the result of this fact is that some agencies are being forced to take the brunt of the irresponsible finances of their clients and that means some agencies will go out of business as a result. It would not be the first time.

Of course if the agency is at fault and is not paying their bills in a timely fashion because they have the money but are sitting on the cash flow in order to accrue interest, then those agencies should be held accountable and they should not muddy the waters around their clients’ brands. Publishers should hold media from those agencies until their accounts are up to date. This situation isn’t getting any better and is likely to get worse if not addressed.

It is a difficult issue to deal with because there are so many cases and situations where either party is being irresponsible, but the economic environment we are in is going to force some companies to deal with this issue in a timely fashion. If I were you, I would start paying your bills on time because the repercussions are strong and will have an impact on the potential growth of your business.

What do you think?

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