As of this writing, the prime rate or the interest rate charged by banks to their best customers for loans is 8.5%. (source: Wall Street Journal Prime Rate Survey, March 26, 2024). This is up significantly from 2015, when the prime rate was 3.5%.
There was a time when Client/ Agency agreement language contained provisions binding the Agency to always conduct itself as a fiduciary, acting in the best interest of the advertiser and prohibiting the agency from earning any income on the use of client funds. Today, many such agreements don’t specifically address these two issues.
Understandably, the times have changed to a degree, specifically as it relates to practices such as principal-based media buying where the agency may forgo its fiduciary obligations (theoretically with the client’s prior written approval). Further, advertisers have been less vigilant when it comes to securing the requisite protective language and implementing the appropriate financial stewardship practices when it comes to their agency agreements.
This is particularly concerning given that the “estimated billing” process remains the dominant mode of charging practice when it comes to agency billing for third-party expenses. In short, estimate billing entails the agency invoicing the advertiser often in advance of performance and ahead of third-party vendor billing so that it is in possession of client funds when it is time to process payment to those vendors. Then, once a campaign has run or a production job has been closed, the agency reconciles estimated costs to actual and where appropriate issues a credit to the advertiser.
Unfortunately, the timing for agency media invoice reconciliations and production job closings can run upwards of 180 days post agency billing to advertisers. This combined with agencies holding unbilled media funds, rebates, and incentives often until ninety days post year-end and advertisers may be forgoing significant interest income opportunities resulting from their funds being held at the agency, rather than by client finance teams.
The good news is that these risks can be mitigated by taking some straightforward steps relating to an advertiser’s investment. For example:
- Requiring agencies to reconcile and pay third-party vendor invoices within 30 to 45 days of the end of the month of service, rather than relying on indeterminant contract language such as “Agency will use commercially reasonable efforts to promptly remit client’s payments to third-party vendors.”
- Establishing “job closing” timing and reconciliation guidelines with each agency partner.
- Tightening up “unbilled media” reconciliation practices from 30 to 90 days end-of-year to 60 days end of quarter.
- Identifying monthly financial reporting formats to estimate and track any “rebates, incentives, and credits” earned by the agency or its holding company related to the use of advertiser funds.
- Establishing contract language prohibiting the agency from earning any income on the use of client advertising funds.
- Consider moving from an “estimated” to a “final” or “progressive” billing process that allows advertisers to maintain tighter control of their funds.
Interest income opportunities, cost of capital, and improved treasury management controls are all factors that advertiser financial management understands and values and should be a foundational element of Client/ Agency agreement and relationship management practices.
“Money is always eager and ready to work for anyone who is ready to employ it.” ~ Idowu Koyinikan