Payment Terms Survey: Majority of Marketers Still Paying Agencies Within 30 Days

4A's Says Hoopla Over Extended Pay Terms Doesn't Consider Other Policies

By Published on .

Despite big marketers like Procter & Gamble and Mondelez announcing they would extend payment terms for agencies, the majority of shops are still being paid by clients within a month's time, according to a new survey of nearly 100 prominent ad agencies.

The study was conducted by the 4A's and polled member agencies. It also reported on TV network billing practices covered by 282 agency-client arrangements. Those that shared information tended to be big players; of the 93 agencies that participated in the study, over 70% are members of large holding companies.

According to the study, the vast majority of marketers still pay their agencies in 30 days or less and 83% of agency network TV invoices are paid by the client in 30 days or less; 70% of agency production invoices are paid by the client in 30 days or less; and 69% of agency commission and fee invoices are paid in 30 days or less.

The results surely come as a relief to agencies, which have been fretting over what extended payment terms mean for the health of their business. At the same time, it's early days yet.

The 4A's conducted the survey on Agency Billing Practices & Client Payment Terms in June, asking members to provide insight into their billing and payment arrangements for network TV, production, agency compensation and other paid media channels for their ten largest clients.

That was only a month after Procter & Gamble made the announcement it would stretch the time it takes to pay agencies to 75 days. Packaged-goods giant Mondelez followed P&G a week later with new 120-day payment terms.

Still, the 4A's research offers a positive outlook in an industry in which a few large marketers and procurement departments have become notorious for relentlessly driving efficiencies through various means, including payment term extensions.It's not yet clear whether marketers will stand by their decisions to extend payment terms, and who else might jump on the bandwagon; so far, AB-InBev, Johnson & Johnson, P&G, and Mondelez have voiced their desires to stretch payment terms to improve cash flow. Only Coca-Cola has publicly said it doesn't approve of extending how long it takes to pay its agency partners.

A big concern among agencies is that they will have to pay their vendors faster than they're being paid by clients, effectively making them a lender to their clients. However, one area that isn't the case is in transactions with U.S. media companies, due to protections known as sequential liability. Under sequential liability, a media outlet can only seek payment from an agency if the agency has been paid by the advertiser.

The survey results, according to the 4A's, are evidence that the hoopla over payment terms hasn't taken sequential liability into account or some of the other payment practices that agencies and marketers can employ to help circumvent longer payment timeframes.

"The headlines never catch up with the fact that in virtually every circumstance clients are carving out media, particularly network TV, because if you don't pay on time you won't get your spots to run," said Tom Finneran, exec-VP of agency management services at the 4A's.

Pre-Billing

Pre-billing, another compensation practice used by agency-client teams, lets agencies bill clients in advance so clients can pay on time but claim longer payment periods. "In circumstances where client payment terms exceed the industry's norm of 30 days, agencies now routinely advance their billing timeframes in order to effectively blunt the impact of slower payments," the study stated.

One anonymous agency executive who participated in the study commented: "Clients have agreed to have us send invoices 30 days earlier than we previously did. This allows the client to claim a 60 day payment term victory and keeps our cash flow neutral."

The survey found that clients pay approximately 17% of agency network TV invoices after 30 days. These payment arrangements "closely correlate with 23% of network TV activities that are pre-billed by the agency a month prior to the service month."

Agencies also pre-bill clients for fees and commissions, according to the study. While 69% of core survey responses indicate that agency fee and commission invoices are paid by the client in 30 days or less, 19% of such invoices are paid by the client in 45 days and 12% exceed 45 days. The core survey pertains to questions for agencies and their biggest clients. Of the 804 respondents in the section on agency compensation, five agencies said they get paid in 90 days; five in 75 days; and one in 120 days. At least a few of these delayed payment term claims are likely affiliated with agency pre-billing practices, the study stated.

Special Financing Agreements

Special client financing arrangements are also sometimes used to shorten compensation terms, the survey found. For example, one respondent offered a 2% discount to clients that paid in ten days.

The recent survey findings are consistent with a survey the 4A's conducted in 2010 in response to a few marketers that announced stretched payment terms at the time. This year, however, Mr. Finneran said, "We had never quantified it to this degree." He added that considering that the 4As conducted the survey on such a large scale, he was surprised by how consistent the results were with the 2010 survey.

For now, he said he expects that consistency in 30-day payment terms to continue and sequential liability to serve as a regulating force. "If you get to a media marketplace that's more like a stock market or commodity exchange, a lot of dynamics can change," he said. "But we're a long way from that and a lot of the discussion surrounding extended payment terms is a huge distraction."

In this article:
Most Popular