New ANA White Paper on Payment Terms

By Bill Duggan

ANA

This week, ANA released the new white paper, Payment Terms: Current Practices for Marketing Services, based on a member survey and qualitative interviews. We learned a great deal.

Key Findings

• Payment Terms Are Either Being Extended or Kept the Same: In the past year (calendar year 2019), 37 percent of respondents report extending payment terms and 18 percent report shortening terms for a list of marketing services covering agency fees, research, media, production, and talent payments. Meanwhile, 91 percent report keeping payment terms the same. (Numbers add up to greater than 100 percent because a given marketer could extend payment terms for one service, shorten for another, and stay the same for yet others.) Those services noted most for extended payment terms are agency fees, research, and production.
• Payment Terms Extended for Cash Flow/Main Drivers are Finance and Procurement: The majority of respondents who have extended their payment terms have done so to derive better cash flow. The area of the company that drove change to overall payment terms are primarily finance/CFO and procurement. Qualitative conversations revealed that payment term reductions are almost always led/initiated by finance while procurement’s role is to implement/enforce the new terms.
• Negative Consequences of Extended Payment Terms: Extended payment terms can have negative consequences, notably strained relationships with vendors, reduction in flexibility, and higher prices.
• Longest Payment Terms: Payment terms for research and agency fees are the longest; both have increased since the previous ANA payment terms study in 2013.
• Payment Term Policies Must Be Monitored/Enforced: For 66 percent of respondents, their companies have a process in place to regularly monitor/enforce payment term policies. This is especially important since internal systems are often not connected, and payment term practices need to align with policies.
• Almost 30 Percent Likely to Change Payment Terms Within the Next Year: Twenty‑nine percent of respondents say they are “very/somewhat” likely to change their payment terms for advertising/marketing services within the next year, including 14 percent who are “very likely.”

Conclusions

• For some publicly held companies, pressure from Wall Street has resulted in a focus on working capital initiatives to drive cash flow; one such initiative is extending suppliers’ payment terms.
• Payment terms are one element of a broader relationship between a marketer and supplier. When considering payment term length or if changes are warranted to current terms, many factors must be considered. Those factors may include length of relationship, services provided, spend with supplier, the position in the marketplace of both the marketer and supplier, the percent of revenue the marketer represents to the supplier, past history of terms, competitiveness of current terms, the timeliness of invoicing by the marketer, the financial status of the supplier, and the marketer’s cash flow requirements.
• Client-side marketers who are considering changes in their payment terms for marketing services — particularly extended terms — should proceed with caution. Extended terms can create “ripples through the system,” and as one qualitative respondent noted, “Suppliers are not just absorbing this.” Another said, "Nothing is free; often a marketer needs to give a supplier something in return for extended terms." Extended terms often come with consequences, including strained relationships with vendors, reduction in flexibility, and higher prices.
• The business models and livelihoods of smaller players in the marketing supply chain can be threatened by extended terms. This includes some agencies, research companies, production companies, and editorial houses. Such companies are not banks. They require a predictable cash flow, often don’t have access to large lines of credit, and have pricing models that do not reflect the costs to their business resulting from extended terms. Both marketers and smaller suppliers, in particular, need to proceed with caution to ensure that the terms of their relationship — including payment terms — are sustainable.
• As multiple respondents stated in our qualitative interviews, “This is not going away.” It makes good business sense for marketers and their suppliers to have open, honest, and transparent strategic conversations to discuss payment terms, any changes under consideration, and the pros/cons of such changes. Client-side marketers need to consider what is fair and how they would want to be treated. If the payment terms they are suggesting to their suppliers would not be acceptable to them as suppliers, a reconsideration might be in order.

The report is available here.