How Agencies Can Gain Greater Financial Stability By Understanding Write Offs
What’s the big deal about write offs? No one sees them on the income statement. Therefore, nothing to worry about. Right?
What is the true meaning of a write off?
For starters, it 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!
What exactly is a write off?
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 and the agency cannot bill any of the overages. Who has worked ten hours on a project and could only ever bill three hours to the client? This is one example of a write off.
Why it is so important to track, report and even budget for write offs?
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. A write off is symptomatic of numerous agency issues, that all lead back to lost time.
How many agencies track their write off time?
Today, agencies have to earn their money more than ever based on time. When agencies have to compete against consulting firms, the bane of their existence becomes billable time.
For those 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.
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A deeper dive: 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 obviously time and not leave money on the table. Results? More profit for the company.
Inefficient Use of Time
Can your agency afford to employ people today that 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. 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 that feel that 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.
Client misunderstanding of the use of your time
There are some classic client lines in this type of write off category. Who hasn’t heard: “Can you do this little project but we don’t have the budget for it.” 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?
Bring greater financial stability to your agency by reducing them 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 prior 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? Is there project management software that can help you find greater visibility into your agency’s finances?
Start keeping an eye on those write offs!
About the Author
Vincent G. Dong, CPA, CA is the founder of Ad-Vice Software and Consulting Inc. He advises independent marketing agencies in North America to help them make more money.