By Vincent G. Dong, CPA, CA
What’s the big deal about Write Offs? No one sees them on the income statement. Therefore, nothing to worry about, right?
I visited an agency last month and they were quite proud when they showed me their month-end reporting; Balance Sheet, Income Statement, Comparison to Forecast (and an unchanged plan I might add). They even showed me billability by employee!
The same agency reported a low six-figure profit last year. During this time, I asked them to review their write offs. The write offs were double the profit number. When I showed the owner, his face grew ashen.
They had never reported write offs. Anywhere.
They certainly tracked them. These nasty things didn’t show up anywhere on the monthly reporting package. The agency now monitors write offs. Monthly.
How important is it to track, review, analyze the nature of, and report write offs? If money is not important to you, then kindly move on to another article. If it is, let’s dig deeper.
What is the true meaning of a write off?
For starters, a write off is not when a client does not pay your invoice. Ever. That is more commonly called a bad debt expense as the billing has already been sent to the client. You did the work, billed the client, reported the revenue and the offsetting receivable, expected to be paid and now were just waiting for the check. The client either balks, refuses to or does not have the funds to pay your bill. You have a bad debt expense against the receivable. This transaction would even have been reported on your books. A write off does not even hit your accounting records!
So, what is a write off anyway?
A typical write off occurs when the total amount of time an agency works on a client project exceeds the budgeted or estimated amount of time (if an estimate is even prepared) and the agency cannot bill any of the overages. Who has worked 10 hours on a project and could only bill three hours to the client? Unless your name is Houdini, there is no way you could conjure up to bill the remaining seven hours. This is one example of a write off.
Why it is so important to track, report, and even budget for write offs? Alternatively, why not ask yourself what else could you have done with those seven hours you could not bill? Could you have billed another client? Gone fishing or golfing? Prepared for a new business opportunity? Imagine getting those seven hours back (I cherish time more than money... always).
I run into many agencies that pay a great deal of attention to growing their AGI top line, yet could do a better job at managing their bottom line by paying attention to the SECOND most expensive expense after salaries and benefits. One of the reasons owners don’t typically do so is that a separate management report from the financial statements for write offs is required as they don’t show up on the income statement. A write off report should be part of the month end reporting package. I'll cover more on this shortly.
A write off is symptomatic of numerous agency issues:
- Incorrect estimate of time.
- Inefficient use of time.
- Inexperienced use of time.
- Deliberate misuse of time.
- Experienced but improper use of time.
- Client misunderstanding of the use of your time.
Notice the common theme? TIME. How many agencies track their write off time in the six different ways noted above?
Agencies still earning media commissions are most fortunate. For other agencies that are required to bill based on time spent on clients, the way to running a profitable business is to manage time like attorneys, public accountants and consultants. Time management is a critical exercise in seeing an agency succeed.
Today, agencies have to earn their money based on time more than ever. Why aren’t agencies paying more attention to this issue? For numerous reasons; perhaps they simply don't know about it, or their accounting people do not have a handle on the issue. When agencies have to compete against consulting firms, the bane of their existence becomes billable time.
Agencies, unlike Consulting firms, were not taught about time metrics when they started out. It is time for agencies to take a more mathematical approach to their agency operations and pay more attention to the very precious issue of time. Otherwise, they are going to run out of … well, time.
For companies with agency management systems, write off review should be part of the month end routine each month. In addition, it should be budgeted for annually. Let’s analyze the six different time write offs:Incorrect Estimate of Time
In analyzing this type of write off, an agency could improve its estimating by understanding why not enough hours are quoted in an estimate and recover more income and time and not leave money on the table. The results? More profit for the company.Inefficient Use of Time
There are productive individuals and there are people who are simply not efficient. Clients want projects completed yesterday. Can your agency afford to employ people today who are not efficient with their time? An analysis of write offs not only by client, but also by employee, may detect one or more underlying issues.Inexperienced Use of Time
From time to time, staff who are not trained on a specific discipline are assigned tasks above and beyond their skill level. This is often referred to as “on the job” training. It is important to monitor this aspect of time reporting with staff to ensure that they are learning and not making the same mistakes over and over and incurring all kinds of unnecessary time.
Deliberate Misuse of Time
I like to refer to this one as stealing from the company. From time to time, agencies have employees who feel that they are the next reincarnation of Picasso. The design has to be just right no matter how many hours it takes. This matter can be and should be addressed as soon as it happens. The employee is certainly not being accountable for his or her time.Experienced but improper use of time
This often happens with new business opportunities. I see far too many new business pitches teeming with people. While I am a big supporter of new business efforts, let’s rethink this huge exercise that consumes so much unrecoverable time and reconsider which people really should be on the team. This time write off category may also have the usual suspects in the agency.Client misunderstanding of the use of your time
There are some classic client lines in this type of write off category. So much so, they should be enshrined in the Advertising Hall of Fame under the Misunderstood Client category. Who hasn’t heard…” Isn’t that new e-commerce website included in the retainer?” Or, "Can you do this little project but we don’t have the budget for…”
Clear lines of communication for all scopes of work need to be in place with each client. Conversely, simply be courageous and say, “that will be extra”.
What is the overall objective for write offs?
Your goal is to reduce write offs systematically by 50% in the next fiscal year vs. the prior year. If you don’t have the six categories set up to start, it would be helpful to review the last two years in totality as the starting point.
Your accounting people should be tracking these write offs as much as their focus is on labor hours against clients. The same accounting people should collaborate with the account management people to go over these write offs each and every month.
What should an agency budget for write offs in a given year? How about less than your annual profit? I would be in interested in hearing if any agency has minimal write offs.
Best of luck and start keeping an eye on those write offs!
A word on Vince. Vince is the founder of Ad-Vice Software and Consulting Inc. He advises independent marketing agencies in North America to help them make more money.
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