2021 Resolution for Advertisers: Drop Estimated Billing Approach

New Year's ResolutionIt is time for marketers’ treasury management teams to turn their attention and scrutiny to the ad industry practice of “estimated” billing.

Why now?  The long-standing practice of “estimated billing” is a relic of a bygone era and one that EDI technology has rendered obsolete.

Toward what end? Simply put, to improve the management of marketing funds, a material expense, to mitigate financial risks and improve controls in and around the disbursement of cash to marketing vendors.

The fact of the matter is that most client organizations do not have a clear line of sight into the disposition of their funds at each stage of the advertising investment cycle. With estimated billing, once marketing budgets are approved, purchase orders issued, agency billing generated and those invoices paid, advertiser controls are incapable of accurately monitoring their funds once the agency has been paid.  This is largely because advertiser funds are now under the control of “other” parties (i.e. ad agencies, media sellers, production resources, etc.) who you have entrusted the closing of jobs and trueing up estimated costs to “actual” in a timely and responsible manner.

Unfortunately, the process for reconciling media campaigns, production jobs and agency fees can extend weeks and months after the attendant activities and or timelines have lapsed. Sadly, there is little incentive for agencies to expedite this process and issue the requisite credit adjustments, discounts and rebates. This is largely because they are in possession of client funds and as long as job/ campaign costs have not exceeded client-issued P.O.’s, clients are rarely clamoring for a final accounting of advertising activity.

A wonderful benefit of having agency billing based upon “final” costs is that it provides an incentive to agencies and third-party vendors alike to quickly and accurately reconcile activities and process invoices for payment. An additional benefit that accrues to advertiser accounts payable teams is the reduction of paperwork in the form of multiple adjusting invoices associated with the estimated billing approach.

In our advertising assurance consulting and audit practice we have observed first-hand the efficiency of actual (in-arrears) versus estimated (in advance) billing methodologies. One of the key commitments required of advertisers to make this work is to establish accounts payable guidelines for its agency partners that ensure the timely disbursement of the funds necessary to settle third-party vendor obligations in a timely manner. Fundamentally, advertising agencies should not be considered banks and should never be asked to settle vendor obligations made on behalf of clients, with their own funds. Conversely, they should not be profiting from floating client funds either.

To support this position, many clients and agencies have cash neutrality clauses in their agreements that prohibit this type of activity. For those agreements that don’t address this issue, we believe that it is simply not appropriate for an agency to retain client funds longer than absolutely necessary. Period. Disallowing estimate billings and requiring the agency to bill only after expenses have been incurred and actual costs known, is a proven way to maximize efficiencies and prevent potential cash flow abuse. 

For marketers, transitioning to an “actual billing” process in 2021 makes good sense from both a risk mitigation and control perspective. Further, it is more efficient, can reduce payment processing costs and can potentially improve days payable outstanding performance for the agencies and third-party vendors. In the words of the 20th century American poet, Richard Armour: “That money talks, I’ll not deny, I heard it once: It said, ‘Goodbye’.”

Author Cliff Campeau

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