The countless hours spent managing employees and clients, as well as dealing with administrative headaches, can quickly eat away at a marketing agency’s profit margin. One of the biggest accounting sins marketing agencies commit is not placing an importance on accounting.
How profitable is your marketing agency? That’s a question many agency owners have difficulty answering. Unfortunately, accounting often becomes a back-burner task until the bills are due.
Procrastinating accounting tasks could have dire consequences to your bottom line and plans for future growth. Here are the top seven mistakes marketing agencies make with their accounting:
1. Credit card expenses not tied to specific clients
Most agencies have a variety of credit card expenses spent by their entire staff. Expenses can range from travel and meals with clients to office supplies to digital ad spend.
Any credit card expenses that cannot efficiently be tied to a specific client account are cause for concern. Even more concerning is when the expenses can’t be tied to a client at all. All credit card transactions that are not administrative-related should be allocated based on a need for a specific client. Not enforcing this rule could allow for spending to get out of control. Additionally, if the expenses are not properly attributed, it’s difficult to get an accurate handle on each client’s profitability.
When it comes to data, the rule is “garbage in, garbage out.” The best practice is to implement technology to capture expenses as they occur. It’s also a good practice to monitor expenses not allocated to a customer in your accounting software. Then, reminding employees to allocate expenses to customers on a consistent cadence.
2. Commingling funds
This is one of the worst accounting mistakes you can make when running any type of business. Commingling funds occurs when the business owner mixes business funds with personal funds:
- Depositing payments from clients into your personal bank account
- Using your business credit card to pay for personal expenses without documentation
- Using a personal credit card for business expenses to get points. If you’re really that concerned about points, choose a business credit card that offers the type of rewards you want.
- Moving money back and forth between your business and personal accounts without documentation. This is common with ATM withdrawals and deposits.
Commingling is a serious problem with legal implications. Limited liability companies could lose their liability protection — due to “piercing the corporate veil” — because you’re exposing your personal assets.
In other professions, such as real estate and law, a professional caught commingling funds is likely to be banned for life from legally operating in their current roles. Commingling can also have tax implications. At the very least, commingling creates an accounting nightmare, as the transactions inevitably need to be untangled.
3. Suffering cash flow bottlenecks
Cash flow issues can rear their ugly heads when clients issue large payments in batches. Agency owners have a hard time managing cash flow and monthly finances when this occurs.
If a marketing agency sends an invoice late and you miss the client’s batch issuance deadline, or the client seems to only pay in large amounts once in awhile, focusing on cash flow forecasting becomes important, even if your forecast is a little off.
Other reasons to forecast cash flow include:
- Understanding the impact of social media spend which is later reimbursed by the client
- Determining when you’ll run out of capital before you do.
- Being able to budget on a monthly basis with no surprises.
- An increase in flexibility to accept irregular payments from clients.
- Estimating whether or not you’re actually turning your revenue into cold, hard cash. For example, if you expect to get paid on an invoice by a certain date and nothing’s come in, it’s a problem that must be remedied immediately.
Cash is a major component of working capital. Not having enough cash can wreak havoc on your business – often resulting in mental gymnastics just to get bills paid. To learn more about working capital for marketing agencies, check out this recent YouTube video I did:
4. Not consistently invoicing
Invoicing isn’t fun, but it’s necessary if you want to stay in business.
For each client from the beginning, create an invoicing schedule that both of you understand, whether that be monthly, weekly or as-needed when they require your services for one-time projects. Make sure you have engagement letters for each client, and the payment schedule and terms are clearly outlined.
Consistent invoicing sends a signal to clients that you know how to run your business and you need to be paid by a certain agreed-upon date. For clients who spend a large amount of money with your agency, sending invoices more frequently also encourages clients to pay faster because the requested payments are smaller.
5. Payment terms are too long
Running a marketing agency, or any business for that matter, requires acting tough more than you’d like. If you’ve been too lenient with your payment terms (for example, offering net 60 instead of net 30) change the required payment term to 30 days after the invoice is issued.
Thirty days should be plenty of time for a client to get their money together. If they complain, maybe they’re not the right client for you. Clients who complain about payment terms generally don’t value the service you provide. This might also be a sign that they’re having financial troubles.
- Charge a late fee for those who miss the due dates
- Offer an incentive for early payment, such as a 2% discount for invoices settled within 10 days; otherwise the full amount is due in 30 days.
- Accept alternative payment types, such as PayPal or credit cards
6. Not increasing fees
Marketing agencies struggle with raising their rates because their long-time clients are used to paying a certain price for their services. However, inflation means it’s gradually going to become more expensive to deliver your services. Employee wages, software costs and office rent all increase over time. Therefore, your rates need to increase too in order to maintain profitability. To address this, it may be a good idea to include automatic escalators in your engagement letters for ongoing clients.
It’s likely clients will become upset upon hearing the news they will be paying more. Make no mistake, some clients will leave. This will free up time for marketing agencies to allocate more time prospecting toward an ideal customer profile or work on their own marketing. Every client crowds out a prospective client – you only have so much capacity.
In the same vein of raising rates, do you know when it’s time to fire a client? The clients who take up too much time with bill collecting, unproductive meetings or constant complaints will likely make room for more ideal customers.
However, agency owners should be wary of constantly chasing the next big client. The costs of prospecting and on-boarding new clients sometimes outweigh the costs of up-selling current clients. Know your numbers so you can make informed decisions in this regard.
Another option is to adopt a subscription model or flat fee instead of hourly projects. Doing so can help stabilize your revenue on a monthly basis. More clients will also be willing to put their payments on auto-pay if the monthly subscription fee is the same every time.
7. Not taking advantage of tax deductions & credits
If your agency is profitable (and sometimes if it’s not), the tax man is going to confiscate a portion of your hard-earned cash. The goal: decrease that amount as much as possible. Here are some ideas:
- Optimizing your choice of entity. All of the agencies I work with are S Corps to save money on self-employment tax. What type of entity is your agency?
- The R&D Tax Credit. Jason Swenk did an entire podcast on this one.
- Maximizing your QBI Deduction. Check out this blog post and the below video for more information.