Why clients should take a keen interest in their agencies' finances - and vice versa

Financial performance is certainly 
one aspect to be considered, but it is only one among many. Clients should be interested in continuity of service which may be at risk if the financial viability of their agency is in question.

Clients will also want to feel that the agency staff are able to concentrate on servicing their account. When an agency’s finances come under pressure, internal distractions tend to arise. For instance an agency team might be pressurised to make a client account more profitable by selling in additional services or simply minimising the time spent on that business.

Do you think independent agencies place enough importance on sound financial management?

Most have learned how important it is to have a well-oiled financial machine in place. Thankfully gone are the days when finance was regarded as a back room activity to be ignored for as long as possible. It's not so long ago that “beancounters” were more ridiculed than respected. These days younger agencies are generally well advised on how to establish a sound financial regime.

But the very nature of many creative businesses means that often there's little common ground with bank managers or financial advisors. Young ambitious creative companies still tend to place more importance on things like naming, branding or recruiting the hottest creative director than sound financial management.

What are the things (positive and negative) in terms of agency financial performance, that clients should look for when choosing agencies?

The two most important indicators are in the balance sheet.

First, does the agency have sufficient readily realisable (current) assets to meet all its short-term liabilities? If not, it may under pressure from creditors and that could affect the buying in of goods and services for use on the client’s business. I would go further and argue that there should be a sufficiently large surplus of current assets over current liabilities to enable the normal operating costs to be paid for several months in the event that a client suddenly took its business away.

Secondly, how reliant is the agency on borrowed money? If it owes more to the bank than the shareholders have invested in the business (including

profits accumulated for those shareholders), then the bank is likely to get heavy. Both of these measures will be affected by the day-to-day profitability of the business so that is an important factor too.

Also important is the reliance or otherwise of the agency on one or two dominant clients. An agency that has a client accounting for more than a

healthy percentage of turnover will obviously be quite exposed to the behaviours of that client. An agency with a wider spread of clients will have a

more stable trading platform.

Are there any financial measures agencies could use when identifying or assessing new clients?

Perhaps unsurprisingly, the measures are broadly the same.

Most important is the ability of the client to pay its bills when due. If they rely on extended credit from their own suppliers they will not be overly eager to pay the agency.

Another warning sign is any evidence that the client’s bank is taking a tough line, for example by seeking faster repayment terms on loans.

Big clients sometime demand extremely tough terms of business and it is important for the agency to stand its ground as far as practicable – or in

extremis even contemplate whether it should accept the business.

I know of one agency that fired a big client because of the bullying way it conducted its financial business. This came as a real shock to the client. But good fortune shone on the agency as it won a new account soon afterwards. However, such scenarios need very careful preparation and handling.

Make sure you assess every new client opportunity carefully. A fantastic brand to work for and a great creative opportunity might not feel so great when they don't pay their bills!

Are there differences/benefits for a client between an independent agency and a network agency partner from a financial perspective?

I’ve never thought this to be the case, provided the agency has all the necessary skills and financial resources. However, there are a couple of

factors that might come into play.

First, if the client has a genuinely global brand that needs a lot of service in local markets, it will often be harder for an independent agency to finance and manage those local operations. There are several examples of independent agencies opening offices in the US and the Far East, only to find they cannot manage them from a distance operationally or financially.

Secondly, the global agency networks can be very demanding on local management to achieve profit targets. That can have an unexpected impact

on local client service levels. Sometimes it can also mean that successful agencies within networks are restricted in their development and growth. This often depends on the performance of the rest of the network.

Since you have been involved in the industry, what changes have you seen in the agency world from a financial perspective?

I'd say that there’s certainly far more respect for the financial implications today compared to when I started in this industry. Most agency managements I deal with have a good grasp of the key measures like profit margins and staff cost/revenue ratios and are better in areas like fee negotiation and debt collection.

Overall what forecast could you give agencies for 2013 and beyond?

I don’t have a crystal ball, but the immediate indications are that trading conditions will remain subdued.

I would advocate keeping balance sheets strong (i.e conserving cash) and keeping staff levels tight. But of course there is a balance to be struck as the continued delivery of impressive and effective creative work is the key.

The quality of output is at least as important during tough market conditions as in more buoyant ones. Indeed good work may help agencies win more market share as weaker competitors lose clients or even fail.

Bob Willott is a chartered accountant who launched Accountancy Age, and was the founder of specialist accountants Willott Kingston Smith (now Kingston Smith W1) where he developed the annual survey of financial performance of marketing services companies. He edits the online newsletter “Marketing Services Financial Intelligence” (www.fintellect.com).

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Read the first article in this series: Top agencies outside London seeing significant green shoots, but KPIs vary widely amongst regions