Clearing the Picture

ADVERTISING REVENUE IS NOT VERY EASY TO MAP OUT, PARTICULARLY IN THE UNITED STATES. ROUTINELY ANALYZE THE PAYMENT TRENDS AND ADJUST YOUR FORECAST FREQUENTLY.

A series of best-practice steps that can help improve forecasts for accounts receivable and collections.

BY CANDICE HERBST

HERE’S A SITUATION

Tthat many of us in finance are only too familiar with. Near the end of the quarter, the CFO is hot on our heels. How are collections pacing against our target? Are you confident you will meet your numbers? Which customers have not paid yet?

A chill can run down your spine. You know that certain customers typically hold cash going into the end of quarter, and although you know you have done as much outreach as you can, the customers are just not responding with a definitive confirmation that you will have their payment before the quarter’s end.

In this day and age, everyone has cash on their minds. In order to remain relevant, media companies need cash to diversify their businesses by acquiring or investing in digital platforms or buying competitors. The recent mergers of CBS and Viacom as well as Walt Disney Co.’s acquisition of 21st Century Fox have also consolidated the market. That has left smaller media companies with an even greater cash need.

However, forecasting cash from customers is a bit like predicting who might win the World Series when you have a wildcard team in the final. It is often the team you thought you could depend on least that comes through in the end, and the solid performers can leave you unexpectedly in the lurch.

During my years working at Discovery Inc., my team developed and validated a consolidated accounts receivable (AR) and collections forecast – an effort that escalated after the company acquired Scripps Networks in 2018. We needed a new methodology that would meet the expectations of senior management but also be reasonable and reliable. The development and implementation of an enhanced model became an extensive initiative that lasted over six months.

Here are some of the best practices we put in place that allowed us to more accurately forecast cash collections and receivables:

UNDERSTAND THE REVENUE FORECAST —

This was the most critical improvement we made to our process. The financial planning and analysis (FP&A) group compiles a revenue forecast working closely with sales. Often the billing team is not part of that pregame planning. This can result in a lot of disconnect between where sales think they are driving the business and how the billing team is translating that into collections.

It’s about getting the right hand to talk to the left, and the earlier the better. To use another analogy, it can be like getting the pitcher to throw a ball the way a batter on the opposing team expects.

Translating sales into cash means getting to the heart of what sales is doing as they are planning new business, so that you can begin to anticipate the potential revenue and what impact it will have on your billings available to collect.

Salespeople don’t always consider the cash impact of the deals they enter into, largely because their compensation is not frequently or solely dependent on the collection terms. It’s mostly based on closing the deal and ensuring that revenue will increase.

After understanding the revenue forecast with the sales inputs, we mapped out the timing differences between the forecasted revenue and the billing and collection of the customers. Oftentimes a sales team gets creative with larger customers by bundling certain products together; extending payment terms in certain cases; and in some surprise circumstances even requiring a certain amount of cash upfront.

In another example, you could have customers billed with significant delay that have prompt collection terms once the invoices are issued. Planning for prompt invoicing of these deals can improve collections in unfavorable sales circumstances.

UNDERSTAND PRODUCTS & PAYMENT

TERMS — This involves knowing more than just your company’s product catalog. You want to understand how you bundle the products, how the deals are priced and what is important to the customer. Many media companies have three types of revenue: affiliate fees, advertising and the sale of other products.

Affiliate revenue is typically contractual, and as long as you are not renegotiating your contracts, timely invoicing usually results in timely collection within your contractual timeframe.

Advertising revenue, on the other hand, is a bit trickier, particularly in the U.S. Advertisers are affiliated with agencies who may also be affiliated with holding company agencies. Although you are ultimately selling to advertisers, the payment is coming from the holding company agency after they have been paid, if the agency requires sequential liability terms.

Payment terms are negotiated between the advertiser and the holding company agency, and they may not align with the previous terms that we may have with the holding company agency that is paying us. Oftentimes the holding company agency will allow longer payment terms to the advertisers.

Collecting digital revenue has its own peculiarities. Sometimes digital advertising deals are combined with transactions for other media within a large agency; sometimes they may be standalone arrangements.

The collection of standalone deals is more like a consumer-to-consumer (C2C) transaction from a collection perspective. If the advertising on a digital platform is connected to large advertising agency, it will likely follow the payment attributes of the agency or the holding company agency. C2C digital customers may pay in advance through the app they are using. Although you have revenue from the customers, you may never see an increase in receivables for this revenue.

DISAGGREGATE YOUR REGIONS — We found that it was imperative to disaggregate our forecast by region: U.S., Europe, Latin America and Asia. Within those regions, we also had many sub-regions, which often aligned with a particular country.

In the international arena, payment trends differ substantially. You might be dealing with public broadcasters that follow the payment trends similar to a government entity. Companies in the Nordic countries typically pay in 14 days to two weeks, but those in countries like Italy typically take at least 90-120 days to pay.

Latin American countries may have payment trends more like Italy. However, if you have collectors on the ground in those countries who speak the language and understand the cultural nuances, it can make a real difference in the time it takes to receive cash.

In my case, the Latin American region was one of our better performing regions for collections in spite of the challenges in Brazil and Argentina. Our billing and collections team lead had a great relationship with the sales team and the customers and could leverage that advantage.

In Asia, the recent challenges with repatriating money from China requires some creativity on the forecasting front. Payment is often delayed as regulatory hurdles are cleared.

Lastly, if you have international operations, withholding taxes may reduce the amount of cash available to you. These rates are not insignificant.

PULLING IT ALL TOGETHER

A “to do” list of actions will make your forecasting much easier:

■ Start early with your forecast for the next year – preferably during the fourth quarter of the previous year or sooner, if data is available. ■ Approach the forecast from a high-level analytical perspective first, understanding the overall company’s data and cash needs, including days sales outstanding and actual cash expected. ■ At the same time, compile a more detailed calculation using revenue as a starting point.

Start early with your collections forecast, working with financial planning and analysis (FP&A) and sales to understand exactly what revenue will look like. ■ Derive forecasted revenue by region and by product. Make adjustments for billing terms, delivery of products and other known issues to determine forecasted billings. ■ To determine the forecasted collections, apply to the disaggregated revenue the payment history using data from your sub-ledger at this disaggregated level. ■ Validate, validate, validate! Share your forecast with sales, FP&A as well as your billing and collections team. Let them give you feedback and bake that feedback into your forecast.

Along the way, remember that your forecast is a fluid calculation. It should be updated with a regular cadence to reflect most recent trends and new payment data. Also bear in mind that a great forecast is only successful if we carry it through to the end game with timely billing and collections activity.

UNDERSTAND HISTORICAL ACTUAL

RECEIVABLES — This is about more than just knowing your payment history. We found it beneficial to disaggregate the total receivables in the general ledger between the billed and unbilled balances and understand what is driving the balances. It is important to establish a cadence for reviewing the unbilled accounts so that items with delayed billing are promptly invoiced. Unbilled AR can be a stealth contributor to a higher days sales outstanding without this regular review of unbilled.

To further improve our understanding of the fluctuations in our AR balance, we referred back to the accounts receivable roll forward that is required for financial statements. Because we were a listed company, the preparation of a quarterly roll forward provides a unique opportunity to leverage data about what is contributing to the activity in AR each quarter by region and by product. Who knew a U.S. Securities and Exchange Commission

disclosure requirement could be so operationally useful!

VALIDATE THE FORECAST — This is the single biggest lesson that I learned in developing forecasts. The process, which must include customer-specific information, also was the most complex part of our new process, and the one that gets a lot of pushback. However, it provides some guaranty to your forecast, and it allows you to explain which customers are not providing timely payments.

There are various ways to implement this. For most of us, any affiliate customers should have contractual payment terms that they adhere to. Mapping out these payments over the months in the year provides a pretty decent customer-specific forecast. Advertising revenue, on the other hand, is not very easy to map out, particularly in the U.S. Routinely analyze the payment trends and adjust your forecast frequently.

One of my teams examined the cash collected for every single customer by month in the prior year. Then it applied an annual revenue increase to every customer and used that as the basis of their collections forecast for the following year.

That team met their forecast every time, and in the rare months they missed, they were able to track precisely which customer was the culprit, and management could be directed to help resolve

the issues with the customer in a timely manner. This was a smaller region with less diversity in their sales arrangements, which made this is a practical approach. For most of us though, the annual increases are not uniform between customers, making that approach invalid.

Another option we used was to focus on the top 20 or 30 customers by product; review their payment history and revenue forecast; and map out expected payments. The billing team can then focus on these customers, ensuring that there is prompt invoicing and consequently a good base of regular-paying customers.

One media company I talked to has determined that a significant portion of their cash from advertising revenue comes in during the same few days each month. The company plans out receipts from those customers on that assumption. So far, it is working out well for them.

Here are some final thoughts: I have not identified a miracle cure for forecasting advertising customers. My advice is to have a little cushion in your forecast to address the volatility in payments and continue to work on your relationships with customers. Resolving discrepancies as quickly as possible is essential.

Have a little cushion in your forecast to address the volatility in payments and continue to work on your relationships with customers.

Candice Herbst is an experienced leader in order-to-cash and forecasting for media and other companies. She can be contacted on LinkedIn or at Candice.v.herbst@gmail.com.

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