Time to Reassess Your Credit Policies

Television ad sales are finishing the year on a high note. As TNS Media Intelligence and others have reported, 2013 holiday season ad spending is at one of its highest levels in recent years.

The momentum is already continuing into next year; Magna Global is anticipating the major sports events of 2014 like the Sochi Winter Olympics and Brazil Soccer World Cup, coupled with the U.S. mid-term elections, will contribute to the strongest ad growth since 2010.

As stations look to capitalize on this added revenue potential, it’s also a good time to re-examine your credit policies to ensure they are optimized to support your objectives. “The result should best maximize sales, minimize bad debt and minimize costs associated with credit investigation, billing and internal collection activities,” says C. Robin Szabo, president of media collections firm Szabo Associates.

Szabo, who discusses the key components of a well-structured credit policy in an article that appears in the November-December 2013 issue of MFM’s The Financial Manager (TFM) magazine, reminds us that a comprehensive, well-defined credit and collection policy provides the structure that allows an ad-supported media enterprise to “organize the flow of credit extension and manage cash flow effectively.”

FIVE ‘Cs’ OF CREDIT

While each company’s credit policy must address unique considerations, such as the dollar amounts of orders and type of customer, Szabo says the factors that will be common to any credit decision can be summarized by “the five C’s of credit”:

1. Character — The moral qualities that identify a potential creditor’s management as people with high ethical standards.
2. Capacity — The ability to pay when a debt is due, which can be determined by the company’s borrowing and payment records as well as financial ratios.
3. Capital — The financial strength of a potential client, is measured by the equity or net worth of the business.
4. Conditions — The external occurrences that can affect a company’s ability to pay, such as economic downturns and natural disasters.
5. Collateral — Company assets that can be pledged as security for payment.

In Szabo’s opinion, these five C’s must be used to evaluate every company involved in the media buy, including the advertiser, the advertising agency and the buying service. “If the total risk is to be accurately evaluated, all credit and sales personnel should understand the nature and relationship of all involved parties.”

CREDIT EVALUATION

While due diligence to evaluate how well an advertiser meets these five C’s remains essential to the credit approval process, Szabo says credit departments will need to structure their credit application requirements on a broad basis in order to address changes in the marketplace. In addition to evaluating large orders that warrant credit applications and thorough credit investigations, today’s market also includes Internet advertisers that contribute high volume with low dollar amounts. He believes that  “requiring credit applications and investigations on these low-ticket orders is cost-prohibitive and inefficient.” 

To assist stations and other media businesses in evaluating the credit worthiness of advertisers and their agencies, MFM’s BCCA subsidiary, the industry’s the media industry’s credit association, provides credit reports for media companies. BCCA’s database has more than 40,000 Custom Credit Reports on local and national advertisers, agencies and buying groups. These reports are developed by BCCA’s team of experienced credit investigators; they provide the latest information on a particular advertiser or agency, including payment history for recent media purchases.

BCCA also offers Commercial Credit Reports which include data from Experian; Dunn & Bradstreet enhanced analytics; public information from Edgar online; collection experiences from commercial credit agencies; public record data including liens, judgments and bankruptcy filings; credit score; quarterly and 6-month DBT trends; and trade payment experience.

Customer Relations

As Szabo points out: “There should be an enthusiastic consensus of opinion among departments” on the company or station’s credit policy. While the policy objectives usually involve minimizing bad debt and maximizing cash flow, “the credit manager should exhaust every effort to find a way of accepting every sale. An effective policy embraces the principles of fairness, firmness, courtesy and consistency in its relations with customers.”

To accomplish these outcomes sales and credit departments will collaborate and agree on a number of elements in the credit policy, including responsibility for administering the policy, establishing who must complete and sign the application, determining the length of time for approving credit, and establishing payment terms when credit is denied and cash in advance (CIA ) is required.

Agency/Advertiser Liability and EMCAPP

One of the greatest challenges for an effective credit policy is addressing the question of who is liable for making the payment in instances where agencies and media buyers are involved. As we discussed in a previous column, MFM and BCCA are working to bring the advertising and media communities together by adopting a policy that we describe as “sequential liability with teeth,” which says advertisers are responsible for paying for media until their payment for that media has been received by their agency. It requires advertisers authorizing an agency or buying service to place orders on their behalf to submit both a credit application and an AOR (agency of record) letter as part of their request for credit.

EMCAPP, the Electronic Media Credit Application, actually ties the AOR, the advertiser credit application and the agency/buying service application into a credit application package for media providers. Designed to dramatically streamline the credit application process for advertisers and their agencies, EMCAPP allows advertisers and agencies to complete one credit application that can be used by multiple media providers. Credit applications completed by ad agencies can be tied to multiple advertiser applications, and that same advertiser or agency can also update its credit application at any time by logging into the secure EMCAPP website.

EMCAPP offers consistent credit terms. Of course these terms can be changed – parties must simply agree in writing. This has become increasingly important as some advertisers and agencies seek to prolong their payment windows. In fact, a recent ANA study reported that many of its members are under pressure to extend their days to payment in the coming year.

The payment language in the online application reads, “Provided that credit is approved, payment is due 30 days from invoice date unless otherwise agreed to in writing ….” It also states: “If the media provider has not received payment from the advertising agency or buying service within 15 days from the due date of the invoice, the media provider may consider the invoice to be delinquent and may contact the advertiser directly for payment after notifying the agency of record of its intention.”

Account Collection

Szabo’s article also details considerations for account collection and, when necessary, treatment of bad debt. He includes recommendations on timing of statements, the process for following up on unpaid accounts, handling NSF (non-sufficient funds) checks and parameters for the amount of notice required to cancel an advertising schedule.

Szabo’s piece concludes with a reminder that credit policies and practices must comply with federal and state regulations governing both advertising and the issuance of credit. It is a very comprehensive and thoughtful treatment concerning best practices. I encourage you to give it a read; the November-December 2013 edition of TFM is currently available on MFM’s website.

As Szabo concludes, “like any tool, a credit policy is only effective if it is used. Do not let it sit on a shelf collecting dust. Review it regularly and make updates as needed.”  Given the rise in both the near-term opportunities for increasing our ad revenues as well as in the risks associated with receiving those monies in a timely manner, there is no time like the present to conduct one of those regular reviews.

Happy Holidays!

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.