Best of Breed Billing Practices

Why Your Agency’s Billing Process is More Important Than You May Think

Carefully executing the right financial processes will increase your profits.

 A solid billing process will help your agency better understand how effective client budgeting is done. It will make your agency more efficient. It will also help you ,as the agency owner, to better evaluate how well your client team leaders manage the financial aspects of their accounts.

 In our two previous mailings, we provided our thinking on these other important tools for protecting your agency and improving profitability:

1.     Beginning every client relationship with a strong, comprehensive and adaptable Client Engagement Letter. (To review this thought piece, click here.)

2.     How to develop a tighter approach to defining, documenting and controlling Scope of Work. (Click here.)

 By integrating these best practices with what we’re recommending today, your firm will benefit substantially for years to come.

 Now let’s deal specifically with billing.

An effective billing process will improve both operational efficiency and profitability.

Billing clients is fundamental to the agency business. It’s the one activity which every agency undertakes every month. Even so, it often doesn’t get the attention it deserves. Many agencies are in a great hurry to get invoices to the client in the hopes of relieving pressure on their cash flow.

 However, it takes more than just a steady flow of invoices to ensure you are paid 100% of what you’ve earned in a timely manner. Don’t rush your billing without a thorough review.

To quote Hall of Fame coach John Wooden, “Be quick but don’t hurry.” This sage advice definitely applies to the billing process for marketing communications agencies. Carefully designed billing practices will not only speed up cash flow but also identify:

-       Client mission creep that can be billed (and help to reduce such creep in the first place).

-       Where over-servicing is occurring.

-       Staff performance issues.

 According to a recent survey by the PR Council, many independent agencies have created a huge problem for themselves by over-servicing accounts by up to 25%. This is a symptom of weak budgeting and billing practices, mission creep and lack of management control.

 Don’t be one of those agencies.

 Use minimum monthly retainers with your clients.

 Cash flow is definitely important… but so is getting paid for every legitimate hour worked on behalf of every client. To strike a balance between these two priorities, we recommend that your agency consider the concept of the minimum monthly retainer.

 This approach allows the agency to a) maximize cash flow while b) also requiring the firm to conduct a thorough analysis of each client’s monthly activity to ensure that every possible hour gets billed.

 Here’s how. The minimum monthly retainer maximizes the agency’s cash flow by allowing the agency to bill roughly two-thirds of the monthly fee budget on the first of each month. Then, at the end of the month when all time and expense have been logged, it requires that all activity be reconciled against the retainer.

Two steps for implementing a better billing process at the start of each month.

First, always bill the minimum monthly retainer at the beginning of the month.

Second, also begin each month by sending each client a memo which includes:

-       Summary of the coming month’s activity.

-       The estimated fees and costs which will be incurred.

-       All of the information and approval timelines which the agency needs from the client in order to be successful.

This will eliminate surprises by setting clear expectations for the coming month including informing the client about the overall costs they’ll be incurring.

How to wrap up each month.

Your finance team should first develop a draft invoice for each client. Send it to the designated account leader along with all backup supporting the invoice (including time reports and vendor costs).

The account leader carefully reviews the invoice and backup while:

-       Comparing month-end results with the beginning-of-the-month scope of work memo.

-       Identifying differences in the work planned vs. the work actually executed. Were there any extra, unpredicted activities?

If there was extra work, discuss the reasons for it with the account team. If the client requested this work, bill for it. If not requested by the client, why was the work executed and how can the agency be paid for it (if at all possible)?

Three more things you should be doing to strengthen your billing process.

First, your agency hopefully already has and actively applies an effective weekly (or at least monthly) staff allocation reporting system. This allows the account team to identify and address any over-servicing or extra client requests before billing occurs. If you only become aware of such issues at the billing stage, that may be too late.

Second, send any extra billing to the client as a supplemental invoice in case your program work is subject to a purchase order. Client procurement departments will likely flag any overage to an approved P.O. Variances to the purchase order might take months to show up. The supplemental invoice will make it easier for everyone to remember what occurred and for you to be paid more quickly.

Third, where chronic over-servicing exists, there should be some consequence to the account team in order to break this profit-draining habit. The agency’s CEO and/or CFO should meet with the account leaders each month to discuss the exact reasons for over-servicing. This is how you’ll learn about weaknesses in the client budgeting process, staff member performance issues or fears that team leaders may have about requesting more money from their clients.

Visit our Insights page to find more in-depth thinking on a wide range of other topics of interest to agency owners.

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