There are a number of challenges for marketing and advertising agencies when it comes to billing for the wide range of services they can offer. Challenges such as billing terms, contract setup, expectations, and invoice formats can all lead to billing discrepancies, delays in payment, and strain the customer relationship. These issues can also cause a rift internally as project managers are sometimes pitted against the finance team when issues arise.
To get past these issues there are a number of steps your agency can take to alleviate the stress, streamline the process, and improve the customer relationship. Adopting these best practices will help you improve your cash flow and ensure you are collecting on all the revenue you are due for the services you’ve provided.
Billing terms in the contract: You want to review your existing contracts and make sure they adequately reflect the billing terms you use as a standard practice as well as any conditional items for the customer or service that may be unique to a particular project. You won’t always need customizations in your contract, but if there are changes from your normal setup, you need to capture that up front.
Having the contract setup properly will help you to avoid liability issues if you have challenges with your client. It will also serve as great way to get the project started on the right track and instill trust with your customer that you both understand how the project will be billed.
Set the right expectation with your client: You need to avoid handshake contracts or email agreements that don’t involve all the right people. A great way to do this is to include your finance team in the early stages of finalizing an agreement so everyone understands the scope of work, the billing items and timelines and what they can expect to see in the invoice format.
If you don’t have the right format, or the customer hasn’t seen an example, it can quickly lead to a difficult discussion very early on in your relationship and possibly derail your project right at the first milestone.
Setting the right expectation up front can help you speed up the collections process and even set you up for repeat business if the customer sees the value in how professionally you approach their needs and expectations.
Fixed fee vs. time and expense: There are many ways a marketing and advertising agency may choose to bill. The most common are some hybrid of fixed fee and time and expense, although many use engagements and leads delivered as well. Regardless of the billing type you use, it is critical that you clearly identify what type of service will use what type of billing.
This comes into play much more when out of scope work is done or vendor markups and pass through billing takes place. If you have the ability to use fixed fee with milestone billing, that tends to be the best way to protect project profit and reward your agency if your able to deliver what the customer wants under your expected cost budget. Time and expense have a fixed profit typically but can be subject to write-offs if the customer’s expectations are not met. Again, this is critical to explain with your customer at the beginning.
Managing WIP and AR: Any agency should have clear visibility into their work in progress and AR balances and aging by project/campaign/customer and any other segmentation you use. Without this data, you are essentially flying blind in terms of your estimated cashflow and you can easily lose sight of any red flags with WIP that doesn’t get billed right away or AR that is becoming uncollectable.
WIP should never be more than 30 days old and AR should never get past 45 days. You can improve WIP aging by shortening the invoicing process with the right financial system in place. For AR you can put payment terms in the project or offer discounts for early payments.
In addition to WIP and AR, it’s important to keep a constant pulse on project margin, delivery margin, and billable utilization so you can optimize your work and strengthen revenue predictions.
Managing collections: Collections are no fun at all. Make it easier on yourself or your team by putting a process behind it. Create a dashboard or report with your financial system that will streamline the process and help reduce the headaches that come with collections calls. The above-mentioned discounts for early payments can help speed up the process.
Ensuring your invoices clearly state what is due, why, and when can also help. It is estimated that 26% of all invoices that are 90 days old will be uncollectable so make sure you stay on top of your aging reports and form a continuous collections process.
Deploying best practices can often time require the right tools in place. If you’re using a generic system like QuickBooks or some other out dated system, you will quickly find yourself limited in what you can do to facilitate improvements to your billing process.
If you’re struggling now more than usual with remote work to keep up with invoices and payment collection from clients out of the office, check out this list of tips from our partner BigTime Software’s CFO, on how to keep your finances as consistent as possible.
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