At press time, General Motors (GM)–which already received $13.4 billion in federal loans since late last year–was asking Washington, D.C., for another $16.6 billion to stave off bankruptcy.
The company has submitted a plan to the U.S. Treasury Department to justify the additional loan. GM reported a loss amounting to $30.9 billion in 2008.
So the question being posed to small entrepreneurial production companies–which have little margin for error in today’s tight economy–is: Do you want to bankroll GM as well?
GM has put forth a payment guideline to the production community whereby the first 50 percent of the amount owed on a job will be paid to the production house 60 days after the first shoot day. Then the remaining 50 percent would be paid 60 days after delivery.
There have been rumors floating about through second and third-hand sources of a production company or two that have accepted those terms in order to be on GM’s list of so-called preferred providers. But SHOOT has been unable to confirm if this scuttlebutt is true.
Furthermore, even if a production house were inclined to accommodate the GM request, that shop would be hard pressed to get the necessary short-term loan to do so in light of the credit freeze that has gripped the global marketplace.
Fronting money for work in this manner–particularly multiple jobs–would be tantamount to financial suicide, according to Matt Miller, president/CEO of the Association of Independent Commercial Producers (AICP), who outlined the economic basics for executives at production companies during last month’s AICP owners summit in Los Angeles. In a power point presentation, Miller showed how the cash flow under the General Motors payment plan would unfold, putting production houses in a major financial hole within a short period of time. Ironically, a production company that fronts significant sums of money without being paid in a timely fashion can find that the worst thing that can happen is being awarded another job.
That additional job could push a negative cash flow situation into a financial disaster, translating into the death knell for a production house already in a predicament.
“People are looking for answers,” Miller told SHOOT. “And while it might seem simplistic, we thought it was important to explain to everybody the basics of good business, that cash flow is essential and you have to make sure that you stay solvent. Otherwise you can jeopardize not only your company but the entire business. Labor costs have to be paid in a timely manner and other costs cannot be strung out. For production companies fronting large sums of money, what’s worse than getting one GM job is to get two.”
In the case of GM and other clients that are at an economic crossroads, said Miller, there are doubts that these advertisers can meet their financial obligations. In these cases, he affirmed, production companies are in no position to extend credit. Rather they need legal assurances that they will get paid. Such assurances can take the form of receiving 100 percent payment for the job up front or having 100 percent of the payment placed into an account that is specified for the production (with proper documentation outlining the terms of disbursement of the funds). It would also be prudent to get written assurances that put production houses in a strong legal position if a client were to go bankrupt.
Big squeeze GM isn’t the only client looking to string out payments. Miller noted for example that Anheuser-Busch InBev has floated a policy of 120 days before payment is made on invoices. Other clients and agencies too have made vendors wait for payment over extended periods, putting production houses and others in often difficult if not untenable cash flow situations.
According to the annual AICP membership survey, the most frequent explanation given by ad agencies to production companies for late payment is that the client has not yet paid the agency. This sequential liability explanation/justification for untimely payments has indeed gained prominence over the years. A growing number of agencies have included stricter terms into their contracts, including sequential liability, which translates into the agency meeting payment terms it has agreed to only if it has been paid by the client. Otherwise, the production company must look to the client for payment.
To deal with this situation, the AICP has advised production houses to make sure that the client: has an “agent relationship” with the agency; has committed to the terms of the contract that the production company has negotiated with the agency; and is fully aware of the payment terms and is committed to meet them if the agency doesn’t. To confirm these three suggested points, the AICP recommends that the advertiser countersign the final contract along with the agency.
Miller noted that sequential liability was created to provide protection for ad agencies in the area of large media purchases should a client declare bankruptcy. The concern was that within that transactional time frame, a client could go bankrupt, leaving the agency stuck with financial liability and media inventory.
“What’s happened, though,” said Miller, “is that sequential liability has become a substitution to evade and avoid the payment terms that are specified in the agency contract for production. Sequential liability is supposed to be for purchasing media and affording protection from bankruptcy. It wasn’t supposed to be about cash flow but it’s being applied to cash flow to our detriment.”
And at press time the vise was tightening with the news that agency holding company Omnicom is insisting on a sequential liability provision in production contracts, language that could prove onerous for production houses.
To mitigate against the slow payment problem, including sequential liability, the AICP has had in place since late 2006 a 75-25 national guideline whereby the first payment to the production company should be 75 percent of the contract price on a job. This way a production company isn’t behind the financial eight ball from the very beginning of a job.
Education The AICP’s role in all this, observed Miller, is to educate its members and the industry. As a trade association, the AICP cannot dictate how its member companies do business. Individual companies decide how they do business.
By providing education, the AICP hopes that those production companies make informed decisions, with an eye towards not only their own well-being but also that of the entire production community.
“We want companies to understand what their decisions mean,” said Miller. “If you go on that [GM] preferred vendor list, you’re done. No company can survive those terms. You’re done if you accept those terms.”
