Clients Are Delaying Payments to Agencies

Clients such as General Motors and Anheuser-Busch InBev are delaying payments to agencies by as much as 120 days, the WSJ reports:

Anheuser-Busch InBev is trying to overhaul all its vendor contracts, including advertising-related deals. The world's largest brewer by sales recently told media outlets that they will now be waiting 120 days after an ad runs to receive payment versus the typical 30-day standard.

GM, whose brands include Cadillac, Buick and Pontiac, has offered to pay ad-production firms 50% of a commercial's production costs 60 days after the first day of shooting and the remaining 50% when the ad is finished. That's a major departure from the standard practice of paying 50% or 75% of the cost before production starts.

We have reports that in the past few months several fortune 500 firms have not made their ad agency payment for Q4 2008 yet much less anything for 2009. ...

... "We spent $2.5 million of our money in payroll and media buys-- and they have yet to pay us a penny back even though the terms of the contract were 30 days-- it's been 3 months now. If we don't get paid within weeks we are going to have to lay off everyone."

The news is predictable: In a recession, every company will try to delay payments as long as possible in order to keep the interest earned on the money.

But in the advertising business, delayed payment is an ongoing issue that frustrates agencies, who end up becoming their clients' banks. Basically, if a client expects an agency to handle large upfront costs and then delays payments, the agency ends up acting as the client's financier.

The issue becomes thornier because, knowing that every day without payment is a day on which the agency loses its own interest on the missing cash, agencies seek ways to reduce their exposure that aren't always in the client's best interest.

The temptation is to manipulate the vendor bidding process in order to go with vendors that are more flexible about waiting for payments from agencies, rather than those that provide the best work.

Here's Donald Block, partner and executive producer at Gartner Films, a production company in Santa Monica, Calif., in the WSJ:

Mr. Block says GM still owes roughly $500,000 from a job he did in September. "It's a growing problem," he says.

Direct your attention to page 7 of Omnicom's Q4 earnings statement, to the chart titled "Cash Flow â€" GAAP Presentation (condensed)" It sounds really boring, but it could be the most interesting part of the whole statement.

There's a line that says "Other Changes in Working Capital." Generally, this describes the net change in the difference between Accounts Receivable (money clients owe Omnicom) and Accounts Payable (money Omnicom owes vendors).

You can see that this period it was negative $12 million, when the period before it was positive $243.8 million.

This means that currently, accounts receivable and accounts payable were almost the same, but the accounts receivable was $12 million more.

True, $12 million isn't much in the grand scheme of things. But in the period before, it seems Omnicom was having an easier time collecting from clients and/or delaying payments to its suppliers, because it showed a positive $243.8 million.

What does that mean? It could mean nothing. But given that Omnicom was $700 million cashflow negative, any further declines in working capital could be a sign that Omnicom might be having difficulty collecting from its clients -- such as car companies -- on billings they owe. It is not unforeseeable that clients will try to delay payments to agencies as long as possible in this market. You wouldn't want to see that negative $12 million be the start of a trend.

As for Publicis, it's accounts receivable declined and its accounts payable rose, plus the company is cashflow positive, so the network is actually performing quiet well in terms of collecting from its clients and delaying payments to vendors.

Interpublic's Q4 cashflow and balance sheets will be interesting for the same reasons. In Q3, the net change in IPG's accounts receivable and accounts payable was positive $140 million. We'll see when IPG reports Q4 on Feb. 27 if IPG can do better than Omnicom's negative $12 million this time around.

Image by Flickr user Tracy O, CC.