Nick Hand, the commercially savvy, hands-on Finance Director, returns to discuss this often controversial topic of payment terms. As a CPA, with more than two decades of experience managing the finances of media, creative, PR agencies and more, he shares his experience and explains the often hidden costs to agencies and their clients of long payment terms, but also some of the ways agencies can use this to their advantage.
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Transcription:
Darren:
Welcome to Managing Marketing, a weekly podcast where we discuss the issues and opportunities facing marketing, media, and advertising with industry thought leaders and practitioners.
Today, I’m catching up again with Nick Hand, our commercially savvy finance guru here at Trinity P3. Nick’s a CPA with more than two decades of experience managing the finances of media, creative, and PR agencies and more. Welcome back, Nick.
Nick:
Thank you, Darren. Good to see you again.
Darren:
Yeah, thank you. Look, the reason I want to catch up again is I’ve been thinking about how so much of the work we do with TrinityP3 has a financial focus. And I was reflecting also on the fact that when you talk to agencies, finance is not top of mind. And yet, you’ve spent two decades working in agencies where as a finance director, finance is every day. Where’s this juxtaposition or this disconnection happening.
Nick:
I think a lot of it stems from the creative industries are looked at as being something fun, perhaps a little bit frivolous. The best practitioners though, know regardless of what their background is — some account guys, some are strategy guys, some are creative guys; they know that they’re in business to make money.
And so, the agencies that I’ve worked in over the years, the very best run ones, the principles have money as their core focus, they’re in business to make money. That’s the only reason that you are in business is to make money. There might be some altruistic side effects, but ultimately, these people have mortgages and families to feed, they’re in business to make money.
Darren:
Well, ultimately, if you’re not making money, you’re not in business for very long. So, I mean, you have to make profit to stay in business.
Nick:
Yeah. And so, your first point, it just staggers me sometimes the lack of focus outside, perhaps one or two of the more senior people in the business about the money side of things. I would go into agencies and your senior account lead would have no idea about not only how the agency makes money, about how their client pays them. Which is just insane.
I think over time, that has changed and certainly the agencies I’ve worked in, that’s often my first job, is to make sure that all the staff within the agency are up to speed on how we make money and how our clients pay us and their role in all that. But it’s just staggering the lack of commercial and financial acumen at some of these businesses.
And I’m not quite sure why. I think it’s perhaps my first comment that they look at this business as fun and frivolous. In actual fact, it’s a hardcore business designed to make money.
Darren:
Well, I’ve always felt that while we call it a creative business, there’s more focus on the creative and that’s not just creative agencies, all agencies. It’s all about strategy-creative, strategy-creative, and then people. But less focus on business.
And one of the things that really annoys me is the amount of focus on revenue or income compared to profitability, because I remember talking to account leads and their only KPI was how much money they got out of the client, not how much profit that that actually turned into. So, they were purely chasing revenue at any cost, but not actually profit. There was no responsibility for being profitable.
Nick:
And I think that’s a lack of understanding at the senior leadership level about what the important drivers of the business need to be. As you say, it’s not just revenue; yes, we want to maximise the revenue that’s coming in, but we need to make sure that we’re doing that profitably. Because as you said, businesses that continue to lose money ultimately, are no longer in business.
And agency principles, I think many of them don’t necessarily fully invest in making sure that they understand and have the resources in place to manage that part of the agency.
Darren:
Nick, do you think some of it’s a cultural throwback to the old media commission? Because in a way, the more money your client spent with you, the more money you made. Profit almost looked after itself.
Nick:
Yeah. I think it possibly does, particularly when you’ve got strategy or creative guys that are starting the business that often they’re kept at arm’s length from the finances. We just need you to go and win us business and keep the clients happy. The Managing Director and the Finance Director will worry about the finances. You should do your thing and we’ll make sure that the engine’s turning over.
And of course, it was turning over because there was so much commission and service fee coming in. I think there is a carryover from that. And even once the industry did move more to time and cost and other methods of remuneration, again, I think a lot of the senior practitioners in the creative and the strategy space were again, kept at arm’s length, and didn’t always have any input or keep abreast of what was happening financially.
And when they go and move into their own business, it’s very hard to get out of that mindset unless you’ve got good mentors that you have around you to tell you what you need to do when you’re setting up your business. I mean, that’s key.
Darren:
Yeah, how to actually run the business.
Nick:
Yes.
Darren:
It’s interesting because Michael Farmer in his book, Madison Avenue Manslaughter, said that one of the reasons we got all these holding companies — and WPP is only a company around three decades old. And some of the others, they haven’t been here forever.
It was because they identified accountants like Sir Martin Sorrell, identified that even though the agencies were cash flush, they were still poorly run, so that their margins and profit were relatively small. And that there was an opportunity here of consolidating this, taking the back end, consolidating that, reducing operating costs and therefore, making big profits.
The only thing that they didn’t see was the move from commission to head hours and that head hours were going to be under pressure for the next two decades. But that was the sort of thinking, that perhaps advertising has never been a really well-run business.
Nick:
Yes. I think you’re right. I can remember having conversations with peers working in other industries, people I went to university with and met out and about; questioning the professionalism of the agency business. And it’s not a real business. You’re an accountant or you’re a lawyer or you’re in finance, you’re in property, they’re real businesses; manufacturing, they’re real businesses. Coming up with ideas and selling ideas, that’s not a real business.
You work in property and you need to be accredited. You work in finance, there’s regulations and you need to be accredited. You’re a lawyer or you work as an accountant, you need to have accreditation. There’s no such thing in advertising. And so, quite often, it is perceived as having a distinct lack of professionalism. And I think that is also embodied in the way that some of the businesses are run.
Darren:
Yeah. And look, the reason I raise it, is that a there’s a big elephant in the room that’s been sitting here financially for at least a decade, and that’s payment terms, which is why I asked you to come and have this conversation.
I mean, extended payment terms from my perspective really became a big issue after the global financial crash of 2007, 2008. Suddenly, clients, and especially the larger clients were finding themselves cash poor. And they needed to find a way to fund their cash flow or support their cash flow. So, they put it all down the downstream supply chain, didn’t they?
Nick:
They did. Look, and I think also we talked about this just before we started the recording that these businesses also have large and very sophisticated treasury functions, and that’s not looked on as a cost centre. It’s also a profit center.
So, out of all our financing activities, foreign exchange, investments, managing cash flow, how can we actually improve our overall margin by turning that function into a profit centre? So, a cash squeeze and global financial crisis, as you said, but also an opportunity to have serious skilled practitioners manage that function, a lot of these big businesses identified an area that could get more margin.
Darren:
Yeah. Because it is interesting when we talk about what payment terms should be. Everyone immediately usually defaults to 30 days as the sort of standard. But from a business point of view, that’s not a standard. I mean that seems to be common, but it depends on category of business. Doesn’t it? I know there’s some businesses at seven days, some businesses it’s 14 days, others it’s 30 days. Do you have a sense of what a standard terms of business would be?
Nick:
Yeah, look, I think 30 days is standard, but that also dates back to when financial processes were a lot more manual. You actually had to physically type out an invoice, put it in an envelope, send it to someone. Someone would need to open the envelope, look at the invoice, get it approved. Then it goes through the financial processes of the supplier. Someone has to write a check, stuff that in an envelope and post it off.
So, I can understand why it might take 30 days for that administrative process to happen. But today, we’ve got so many different payment options and ways of sending invoices and having things approved in financial systems in real time. In my mind, seven days should be standard. You should be able to manage all those processes within seven days or 14, I think.
Darren:
I think the hardest part, Nick, is getting the purchase order raised and the sign off of the invoice against it. Sometimes that can take 30 days just to get the person who commissioned the work or the cost to raise a purchase order.
Nick:
Perhaps that’s a topic for another day, but why is the purchase order being raised after the goods have been delivered, which if everything, if the process is working as it should, there should already be a purchase order that matches up to the invoice and there’s no further approval necessary. But as I said, perhaps that’s a topic for another day.
But it should be able to be done within seven days. 14 days, I would say, is reasonable using today’s technology.
Darren:
It’s interesting because from your perspective, the longest payment terms I’ve heard of are 120 days.
Nick:
I’ve seen 180.
Darren:
180 days. So, we’re now at half a year. Basically six months before you get paid. It’s interesting though, because the one that was 120 days was after they’ve raised the purchase order. And here was the kicker; that to set you up as a new vendor could take up to 90 days, and then it would be once you are set up as a vendor, they could raise a purchase order, and then it would be 120 days from that.
And that’s actually one that we experienced. It took my finance manager 120 days. And the comment from the client was, “Oh, it’s much better than it used to be. It used to take twice as long to set you up as a vendor.” I mean, is this just an excuse or are finance systems actually cracking?
Because you said you should be able to do it in seven days, but it seems like a lot of these big businesses have outsourced all of their financial management. Is it not working? Is this the excuse or are they really just using that to cover the fact that they’re making money out of their suppliers?
Nick:
Look, I think it’s a little bit of both. If you’ve got the right systems in place, the right technology in place, it should not take 90 days to set up a new supplier. And it goes completely against the way that businesses are trying to operate today in a world where information is able to be moved around at such a rate, and business is happening so quickly.
You identify an opportunity that requires a supplier to deliver goods or services, and it’s going to take 90 days to set them up in your system? That opportunity is likely gone in a week or sooner. So, I find it difficult to accept that the systems are that archaic and maybe some businesses are; they’re legacy systems or they’ve had to knit together systems from disparate businesses that they’ve acquired over time, and nothing quite talks to each other.
I kind of understand that. So, I’m sure there is an element of that, but I also think it’s a way of stringing the process out to get the goods or services that you want into market and being able to delay the payment to the vendor at the same time.
Darren:
So, the first excuse, which is it takes that long to get through their financial system is indicative of a company that’s struggling with their workflow practices in finance. But let’s talk about the second part, which is why as a business, would you want to delay payment with extended payment terms? You know, what’s the advantage for a business if you can get all your suppliers, your creditors to accept 120, 180 days payment terms?
Nick:
It’s simply a lower cost of capital. I know that to borrow money or have credit facilities is pretty cheap these days, but if you can make it zero and put the onus of funding your business on all your suppliers when you’re talking about millions and possibly billions of dollars, it goes back to what I was saying earlier; that business is able to add margin to their bottom line simply through their treasury and funding processes.
Darren:
Right. So, what they’re actually doing is finding new ways of making profit off their supply chain?
Nick:
Yeah.
Darren:
And it seems to be from my experience, the larger the client, the more likely they’re to do this; why would that be? Why is there an advantage for very large clients to do this? Whereas small … and when I say large, I’m talking global or regional, multi-country compared to clients within one country.
Nick:
I think there’s two things; potentially, market power. If you’re a … we’ll use advertising agencies obviously as our example all the way through this. Agencies are continually looking for new business and if a large client says, “Yeah, we’ll give you our business on extended payment terms.” All of a sudden, you’ve added 3, 4 million to your revenue line. That’s pretty attractive from an agency perspective.
So, there’s the power that these advertisers wielded in being able to dictate those terms. But also, I think I said earlier that a lot of these organisations have very large and very sophisticated treasury functions. And through the use of those divisions, they are able to generate a lot of cash. So, most of those large advertisers today are swimming in cash. And so, they are able to use, as I said, their power and the combination with the sophisticated treasury functions to increase those margins even more.
Darren:
Yeah. So, I mean, it has an impact though, and you’ve worked with creative agencies, media agencies, PR — you’ve worked across the gamut. Does a client demanding excessive or extended payment terms, impact agencies differently? I imagine media would be quite different to creative.
Nick:
Media is different. As an agency though, you really only need to … because media is quite regular. Yes, occasionally, there’s peaks and troughs, but most big advertisers are spending pretty much the same amount every month. So, once you’ve negotiated the first three or four months, you’ve got regular cash coming in because once you’ve got the 120 days, well, every month it’s 120 days and it just rolls on.
So, the big agencies again, the network agencies in particular, because they’ve got lots of cash within their organisations, many of them also have sophisticated treasury functions and set up cash pooling arrangements. So, an agency that’s potentially underperforming doesn’t have to worry about cash flow because they can call upon the agencies that are performing well, because that network has pooled those funds.
So, they are better able to weather those initial months until the regular monthly payments start to roll on.
Creative agencies, it’s perhaps a little different. Media agencies are designed to generate cash. And so, most of them have significant cash reserves anyway. Creative agencies are a little bit different because the work is potentially a lot more seasonal and there are more peaks and troughs. But again, the larger network agencies will be somewhat insulated from that because they’ve got cash pooling arrangements, parents that they can call on for additional funding, if needed.
It’s the smaller agencies in particular, smaller creative agencies that I worry about because in many cases, they’re living from hand to mouth from a cash flow perspective. They are paying retail rates for any funding which makes that almost prohibitively expensive. And because you do have these peaks and troughs in cash flow, depending on when campaigns land and ultimately, are paid for, you need to have very stringent cash flow week to week.
I’ve worked in agencies, where I was literally getting day-to-day working out — well, what’s coming in today? What are we expecting today? What are we expecting to pay out today? And that puts a lot of stress on the principals of the business. And potentially, also, impacts the quality of the work.
If you’ve got a strategy guy and a creative guy that own a particular agency, and they’re having to spend the first hour of their morning sitting with the finance manager talking about cashflow, which clients need to be called to ask a favour and pay us a little bit earlier to compensate for the bigger clients that are stringing us out to 120 days, that’s taking them away from what it is that they are there to do, managing clients, producing work that’s going to get clients results. And that’s not a nice thing or position to be in.
Darren:
So, Nick, you’ve enlightened me because I always used to think of it as media agencies, because around 90 to 95% of the money paid by the client to the agency is getting handed on to third parties, the media owners. And the agency really only holds on to let’s say, 5 to 10% being generous.
And I thought, well, creative agencies, it’s only when you’re doing a, say big production and you’ve got a production company demanding 50% of the production cost up front that it becomes an issue with long payment terms. But you are right, I hadn’t thought about the fact that for a media agency, once you get over that hurdle of the first 60, 90, 120 days and being able to fund that, it really is just a process of getting the money each month and carrying the cost of the upfront that you have to worry about. Creative agencies are much more disruptive because you don’t have that regular, large amount of money.
I always used to say to people, if they said, “I want to get into advertising,” I’d say always go into media, because there’s so much money. If you’ve got slightly sticky fingers, you’ll get to hold onto some of it. And I think the truth is just born out by that.
What that means though, I have heard from big network agencies and their holding companies, talking to finance people, they are absolutely happy with accepting long payment terms. And they say it’s because it’s not a big impact on the business and it gives them a way of differentiating themselves and locking in a client because they’re able to accommodate these long payment terms.
Is this because they’re able to make money on the back end, as you say, through treasury and foreign exchange and things like that?
Nick:
Yeah, look, it’s not even the agency necessarily making those additional margins out of the treasury function, but the simple fact that they are more likely to have excess cash and can weather those ups and downs. And it is a definite competitive advantage if you’ve got a network agency up against a couple of independents for any given pitch, and the network agency’s prepared to accept 180-day payment terms.
The work or the pitch response from the independents would have to be substantially better, I think, in many cases to win that business because 180-day payment terms is very attractive … advertisers, they love it. And you’d rather go with that potentially than work that’s slightly better from the independent agency that’s asking for 30 or even 60-day terms.
Darren:
Yeah. It’s interesting because I’ve never met a marketer that loves long payment terms. It’s totally irrelevant to them. They’re more complying because it’s a mandate from finance that that is the way we operate.
And I think, I wonder if marketers knew the difference between the way a network or holding company can accommodate those payment terms compared to independent agencies. Because we are seeing over the last 18 months during the pandemic, we’re seeing marketers want to look for alternatives to big network agencies.
There has been a rise in the independents becoming a little bit flavour of the month or flavour of the pandemic, you could say. But the impact of long payment terms would make a client less attractive in some ways for those independent agencies, wouldn’t it?
Nick:
It would. I think the rise that we’re seeing of the independents might sway some of the balance of power a little bit. If you are a marketer and you desperately want to work with this new hot shop over here, and they just simply flat out say no to your 120-day payment terms, then all of a sudden, the agency potentially is holding the power rather than the advertiser.
Darren:
If they’re willing to stand up and go, “We will only work for 30 days, 45 at the most” or something like that. But a lot of agencies, they put their heart and soul into winning a piece of business and it’s almost never the marketer who says, “Oh, by the way, it’s 90-day payment terms.” It’s the procurement person who flies in and goes, “Oh, by the way, it’s 90 days.”
I actually think there should be a mandate that payment terms should be declared upfront before any tender process starts because it should be a substantial decision for agencies as to whether they participate or not.
Nick:
Oh, it needs to be … yes, it needs to ultimately be a part of the remuneration negotiation.
Darren:
Or even before that, even when you ask the agencies… would you like to pitch for our business, by the way?
Nick:
Oh, I agree. My point is that it needs to be known upfront so the agency can prepare its price proposal.
Darren:
Oh, yes.
Nick:
Having that information in mind because sure, you can have 120-day payment terms, but we’re going to have to put the price up 5% because all of a sudden, our cost of funding is gonna go up. So, are you prepared to pay a little bit more in order to take those terms?
I’ve always tried to include the payment terms with advertisers when I’ve worked in agencies as part of the remuneration negotiations. So, if you desperately want 120 days, fine. But we’re going to charge a little bit more. Now, sometimes you are able to do that, sometimes you’re not, but not many agencies try, I don’t think.
I was going to say also that the rise of independents are the flavour of the month, there are many that I have seen that have simply said, “No, we are not going to work with any client on 120-day payment terms.” And the reason is not just, well, it’s going to cost us more money to fund and make it more difficult for us to fund our business” — when advertisers talk about a partnership with their agencies, stringing them out to 120 days, even if it’s known upfront, that’s not the definition of a good partner in my book.
And a lot of agencies view it exactly the same way. And they will simply say, “No, let’s have an adult negotiation here; 120 days is not acceptable to us. We may accept 60, 30 preferable,” or whatever their terms are. And sorry, I’ve lost my point, but-
Darren:
Well, making a stand. They stand on where they’re willing to go.
Nick:
Yeah, you are not acting, you’re saying that you want this to be a partnership, but before we even put pen to paper, this does not sound like a fair partnership.
Darren:
And look, the other point you beautifully highlight there is I’ve been using 120 days in this conversation. You mentioned before 180 days as the worst you’ve seen. But really, it’s just degrees of buggery, isn’t it? Because it’s like 30 days is perfectly reasonable; 60 days, okay, you’re starting to push the friendship. 90 days, well, there’s not a lot of friendship left.
We talk in business about goodwill. Well, there’s not a lot of Goodwill once you’re out at 90 days and certainly, at 120, it’s gone out the window. And perhaps this is why I suddenly thought this is why in agencies, they don’t talk about finance to the staff. They don’t talk about payment terms to the employees working on the business.
Because when you start to realise your client is taking advantage of these payment terms, it would be a huge demotivator for some members of staff to go, well the client wants this turned around overnight, but we’re not going to get paid for this for 90 days, 120 days, I’m not sure I’m going to work all night to on this.
Nick:
Yeah. It’s a very good point. And possibly, that is a reason that agencies are reticent to enlighten their staff. But I think the benefits of doing so for all the other reasons outweigh that. But that’s a good point. I’d not thought of that before.
Darren:
I was suddenly seeing there because you hear so many stories about the client, saying on Friday night at 5:30, “Oh I need some new ads on Monday morning.” Well, who’s gonna work all weekend if you also know that the client won’t have to pay that bill, not in 90 days, but 90 days from when the invoice goes in and is approved. So, it’s going to be 120 anyway.
Nick:
120 or even more if the campaign has been going on for three or four months.
Darren:
And this is the point, isn’t it? Because I hear a lot from procurement people who are in the position of having to justify extended payment terms; it’s a policy made by the CFO, by finance as a way of protecting the business or providing a financial benefit to the business. But you are actually talking about an especially large business using their commercial size and clout to force smaller businesses to accept unfavourable terms of business, aren’t you?
Nick:
Yes. That’s what it boils down to, ultimately.
Darren:
Isn’t that a good definition of corporate bullying?
Nick:
That’s as good a definition as I’ve heard.
Darren:
So, I see this as I don’t mind if two large clients come to terms like 120 days because they’re both able to adjust their business models to accommodate. But in a world where we’re talking about diversified supply chains and the need to have diversity in size, in culture, there’s a big thing in the UN sustainability objectives that they’ve set for diversified supply chains.
We’ve seen companies having suffered supply chain issues throughout the COVID 19 pandemic. You know, it is the topic of the month for procurement to diversify your supply chain. And yet, it seems to me that payment terms and extended payment terms are one of the ways that large companies are effectively shutting out a huge amount of the business market from doing business with them.
Nick:
Yeah, as you were saying that, I was also thinking there are quite, and quite rightly agreements in place around modern slavery and sustainable work practices within businesses, but it never extends to the payment terms. Which whilst not in the same category can cause businesses, small businesses huge degrees of stress and anxiety simply through the fact of them having to wait for so long. Maybe the UN could step in there and decree.
Darren:
Include that. Well, the number one reason small to medium enterprises go into insolvency is cash flow issues. And yet, your point very early in this conversion was extended payment terms are exactly a cause for small businesses. This idea is that an agency, principals of an independent agency are sitting there for the first hour every morning, trying to work out how they’re going to meet their financial commitments.
Because we know as directors of companies, if you trade while knowingly insolvent, unable to meet your financial commitments, then the limited liabilities of a proprietary company are then compromised. You become personally responsible.
Very different by the way, to a limited company, which a lot of these large companies are. Because the limited company as opposed to the proprietary limited company and in the US, the LLC, there is no personal liability. That that liability, the corporation in its own right has the liability, but no individual.
Nick:
Yeah. It’s a big problem as we’ve said throughout this discussion. And it’s a big problem for the smaller predominantly creative agencies.
Darren:
So, what’s the solution, Nick? What would you do if you could actually bring about a change? What would you do or recommend to clients?
Nick:
Look, it’s tough because ultimately, these things come down to a negotiation. And as we’ve said throughout, if the agency agrees to this knowingly, what we haven’t discussed is where advertisers unilaterally are late in payment. The terms in the contract might be 30 days, but the practice is to drag it out to 60 or 90. Perhaps also that’s a conversation for another day.
But where the agency has knowingly entered into those terms, it’s difficult to see a solution because they’ve accepted to do business on that basis. And presumably, they’ve done their due diligence to determine how they are actually going to finance those payment terms within their own business.
Darren:
So, you are taking a small regulatory view, which is it’s your business, you decide if you’re going to put up with 120 days, 90 days. You go into it with your eyes open and you absolutely go on, embrace that and put up with the pain and suffering.
Nick:
Look, that is part of it. But I would also add that for a large advertiser if they wish to be considered a good corporate citizen and so many companies these days have to have the triple bottom line of reporting. And I think even these days, there’s three or four more pillars that are added around the community and those sorts of things — if you are truly going to live by that sort of ethos, then asking your suppliers to cop 120, 180-day payment terms is completely at odds with that.
Darren:
And basically, fund your cash flow and your profit.
Nick:
And the 120, 180 days, I am actually seeing it less. There are more advertisers that are being a little bit more reasonable and requesting 30 and 60-day payment terms. But again, I think it comes back if you wish to be seen as a good corporate citizen, then you cannot screw over your suppliers by asking for unconscionable payment terms.
It’s in the hands of the advertisers, is I guess effectively what I’m saying. I don’t know how you can regulate it.
Darren:
Well, there have been efforts in various countries, governments of past regulations, which define the size of a business. Some say it’s a 50 million turnover, some say it’s a 20 million turnover, whatever. And then they regulate that payments will be made within 30 days so that they prohibit companies within their country from stretching out payment terms for small to medium size businesses.
Having said that, they can’t enforce it on global companies that are incorporated outside of that country. So, there is no way of regulating it.
Nick:
And it’s difficult to police too, I would think.
Darren:
Yeah, well, it’s difficult to police. And also, as you say, you go into this; I think what we need to do is clients and agencies … because you’re right, I’m seeing less of long payment terms for local advertisers. I’m still seeing a lot of multinational clients pushing this globally.
The big multinational clients, the ones that you would see as members of the World Federation of Advertisers, for instance, the very large American-based clients, almost everyone that’s incorporated in Ireland and other tax-friendly locations are pushing long payment terms because basically, they are looking for every opportunity to maximise their profits for shareholder value and they don’t care at whose expense.
So, that’s really what it’s driven by. In a world where we’re all liking to talk about environmental sustainability and net-zero, where we all say we want to make sure that we are not supporting modern slavery; all of these terrific UN sustainability goals are great, except that there is still a large group of companies out there that no matter what they say in their press releases are putting profit ahead of people in that mix. And I think that it becomes part of people need to be aware of it.
Nick:
People need to be aware of it. And I also think a lot of these problems stem back to the concept that shareholder value is the most important consideration for any corporation. Which is once people start questioning whether that is in fact, the case, and that’s starting to happen now, peopl … are looking at environmental issues.
They are looking at community issues and holding companies to account for those issues. Once that starts to gain more traction and yes, shareholder wealth is important, but it’s perhaps not the most important thing. Now, there are other things that are of equal importance or-
Darren:
The measure of success.
Nick:
Once companies are held to account for those things and potentially, extended payment terms is part of that, then you will start to see a change because people won’t want to invest in or deal with businesses that treat their suppliers poorly. Like we have stopped buying from companies that still employ slave labour.
Once we know about it, we will stop … most people will stop buying goods and services from those companies. So, I think it’s something that perhaps it’s going to take a little bit of time to evolve before we get to a position where companies are not using their market power to drive those sorts of payment terms.
Darren:
You know, you’ve just given me a great idea. What we should demand is every company publishes their trading terms, that their payment terms are openly and honestly available on their website or if they’re listed as public, as part of their public listing.
Because then, we can start to see, well, who has a business model that is actually self-sustaining. And who relies on the fundings of their smaller suppliers to actually stay in business.
Nick:
Contracted payment terms and effective payment terms as well. I think a combination of those two, a comparison of those two would be useful.
Darren:
You briefly mentioned earlier about people not even paying to their contracted payment terms. And I always laugh and there’s a couple of industry finance advisors going around the advertising industry and they say things like, “Oh, well, every contract you should penalise a client for late payment with whatever the cash rate is at the time.”
And I go, well, look, that’s all very nice, but I don’t know any agency that’s ever managed to get paid the extra interest on their payments, have you?
Nick:
I’ve seen it happen once. And they didn’t even have to ask for it. The client was late and paid the invoice for the additional amount: “Sorry about that.”
Darren:
We screwed up.
Nick:
We made a mistake. Won’t happen again. But it’s becoming increasingly difficult to get those clauses in the contracts to start with. Much less, being able to enforce them.
Darren:
Nick, look, it’s been terrific catching up and having a conversation. There are so many issues that are to do with the finance of marketing and advertising. We should do this again.
Nick:
I’ve got a long list of topics we can talk about.
Darren:
Hey, so just before you go; is that client that paid the interest still in business?
Ideal for marketers, advertisers, media, and commercial communications professionals, Managing Marketing is a podcast hosted by Darren Woolley and special guests. Find all the episodes here