Averting The (Advertising) Credit Crisis

Media companies are facing a credit crisis. No, I don’t mean the kind of crunch that makes it difficult for companies to borrow. In fact, the recent wave of television station consolidation argues that borrowing for acquisitions has become easier

What I’m talking about is the insidious move by major brands to delay payment for advertising services rendered. In the past few years we’ve seen DSO (days sales outstanding) numbers creep up, particularly on the national accounts side. Invoices may say “net 30,” but payments are coming in at 45 or even 60 days. Now come announcements from major advertisers including P&G and Mondelez (formerly part of Kraft Foods) that they will be delaying payment for up to six months.

Couple this delay with many agencies’ insistence that they pay sequentially, that is after they are paid by advertisers. This could add another 30 days (or more) before the media provider receives payment. I am speechless!

Fortunately Nancy Hill, president and CEO of the American Association of Advertising Agencies, is not. In an opinion editorial appearing in Advertising Age earlier this month, she likened the practice to the Wimpy character in the Popeye cartoons who always promised “I’ll gladly pay you Tuesday for a hamburger today.”

Hill goes on to say, “Deferred payment wasn’t right in Popeye’s world, and it isn’t right in our business. Payment delayed is lifeblood denied, unless of course, you’re a credit-card company that charges interest and profits from delayed payments.”

We at MFM and BCCA couldn’t agree more. Before BCCA, the media industry’s credit association which is an MFM subsidiary, launched EMCAPP, (the Electronic Media Credit Application) we polled industry members to determine standard credit terms. It is probably no surprise that we came up with 30 days.

These are the same terms for most business services and more generous than those for items such as health insurance, utilities, or outside services, not to mention employees’ salaries. This is why the payment language in that application reads, “Provided that credit is approved, payment is due 30 days from invoice date unless otherwise agreed to in writing ….”

Of course, it’s the last part of that policy that affects ad agencies and media providers alike. We can advocate for a 30-day payment policy but we’re being asked by holding companies whose brands spend tens of millions of dollars on a single television advertising campaign to accept those “otherwise” payment terms.

I suppose it could be argued that if a media company or an agency felt strongly enough about our payment policy we should hold our ground and be willing to risk losing the top 10% of accounts that can represent as much as 90% of our media advertising buys.

But is that really the argument we should be having? That we should jeopardize the financial health of the media businesses in order to prevent what might be considered bullying or, as some have described it, a perversion of the Golden Rule that believes “He who has the gold makes the rules”?

I don’t think so. Like 4A’s Nancy Hill, “We applaud the companies that are upholding the fair and balanced payment terms that have held us together as an industry for so long.”  

For the rest, whether we judge them as being greedy or exercising aggressive cash flow management skills, there are some best practices you can employ to manage your DSO. Following are some recommendations from media credit experts including C. Robin Szabo, president of Szabo Associates and a member of MFM’s board of:

• Offer a discount if the buyer agrees to a shorter payment terms; don’t honor the discount if the buyer doesn’t honor the payment terms.
• Take advantage of yield management metrics to negotiate better payment terms for the advertising times that are in highest demand (look for more on this topic in a future column).
• Train your new customers by contacting them before the invoice is due — the welcome call provides an opportunity to explain your practices, including when the invoice is due.
• If payment isn’t received on the due date, begin following up immediately. If you wait 15 days to contact a past due account, you have added at least 15 days to your DSO.
• Develop a good relationship with your agency contacts; they are people too. Despite everything to the contrary, business is still about relationships. It’s so much easier to delay payment to a nameless, faceless corporation.
• Figure out and follow up on discrepancies. In many cases agencies delay payment on an entire invoice because there is a discrepancy with one part of it. That’s only going to add to the trouble.
• Finally, I believe all media providers should look into accepting the universal electronic media credit application EMCAPP (www.emcapp.com) and begin asking their advertisers and advertising agencies to complete it before granting credit.

A lot of manpower is required to complete a unique credit application for each media provider involved in a national media buy. In the case of an agency buy that includes sequential liability, the media provider really needs a credit application from the advertiser too.

By completing the one universal and media-specific credit application, both the advertiser and the media provider have a clear understanding of the expectations surrounding the granting of credit for a media and can streamline the process.

The single EMCAPP credit application frees up resources on both sides of the transaction which is very important in a time when everyone is trying to do more with less.

EMCAPP was developed with an eye to the needs of agencies and advertisers in addition to those of media providers. In 1991 the 4A’s began asserting that advertisers and their agencies are sequentially liable for payments to media providers, that is media providers could only look to an agency for payment if that agency had been paid by its advertising client. At that same time the media industry responded by endorsing dual or joint and several liability which says that everyone who is a party to the media buy can be held accountable for the balance due until the media provider has been paid for the buy. EMCAPP’s terms and conditions say that the advertiser is responsible for the payment until such time as that advertiser has paid its agency, in short it’s sequential liability.

In addition, knowing that the boards of directors of both the Association of National Advertisers and the 4As have “unanimously endorsed Ad-ID as the industry standard for Web-based universal coding for digital assets,” we incorporated this schema into EMCAPP.

Having come this far, I know that we can work together to achieve payment terms that are both ethical and good business for all parties concerned. After all, Wimpy never wanted his favorite hamburger stand to go out of business; he was just looking to negotiate mutually favorable terms.

What do you think?  Please let me know by commenting below, commenting on MFM’s LinkedIn group or by emailing me at the address below.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. She can be reached at [email protected]. Her column appears in TVNewsCheck every other week. You can read her earlier columns here.