The consequences of cash neutrality
Given the impact of the global COVID-19 lockdown on many companies’ ability to trade – either at all or under radically different circumstances – cash flow is now a significant issue for many brands. Not surprisingly, many advertisers are now looking to extend payment terms with their vendors, including their media and creative agencies. This can cause challenges for both advertisers’ marketing procurement teams and their agency partners. Marketing campaigns are often very resource-hungry and require part-payment in advance for line items as diverse as production and pre-billing for media. If agencies are required to pay out on their clients’ behalf, they understandably push back on clients looking for extended payment terms at the best of times. In the middle of a global pandemic, requests for extended payment terms meet much stronger resistance, as each party looks to protect its own business.
It may therefore be difficult for advertisers to get agreement on extended payment terms in general. That said, they can protect themselves by ensuring that commercial agreements with agency partners include clauses guaranteeing what is known as cash neutrality. Requiring agencies to work in a cash neutral manner means they are not allowed under the terms of the agreement to earn revenue from interest on their clients’ monies they manage before paying them out to third parties. In this way, advertisers can overcome the frequent agency response of “not being able to offer extended terms because of the nature of the industry”.
Given the millions of dollars that agencies manage on behalf of many advertisers – a significant proportion of which is paid out to third parties – it is reasonable for advertisers to allow agencies up to seven business days to process receipt of their funds and allocate them on to the right vendors. Any longer, and brands can justifiably ask what happens to the interest earned – and question that robustly by introducing cash neutrality clauses with consequences to their contracts.
With the global economy heading towards what even the World Trade Organization is predicting to be the biggest recession since the Great Depression of 1929-1933, interest rates are at historic lows. In that context, agencies can and do argue that they don’t stand to make much interest by holding onto any one client’s monies for a couple of weeks. And yet a big agency holding company retaining tens of millions of dollars on behalf of multiple clients for a couple of weeks before paying their vendors … well that can soon add up. Advertisers should therefore consider adding clauses to their contracts that require the agency to pay their funds on to vendors expeditiously and pay interest at an outlined rate for withholding monies beyond a weighted average of – say – five days.
Cash neutrality clauses aren’t about being draconian or complex. They require all parties to be fair, reasonable, and transparent. Looking for positives in the current global crisis can be like looking for the proverbial needle in a haystack. It could be, however, that for advertisers at least the widespread application of cash neutrality clauses into agency contracts might just be one of the enduring positive outcomes of COVID-19 as we enter the new normal of 2021 and beyond.