Omnicom Sought to Delay TV Production Payments; a Sign of Cash Crisis?

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Omnicom has done a U-turn on its attempt to delay payments to TV commercial producers until after clients pay the agency. The move is a possible indicator of Omnicom’s cash crisis.

Under the current system, Omnicom agencies would front producers 50 percent of their fees before the shoot and then the other 50 percent afterward. Omnicom wanted to change that, to pay producers only after the client had paid the agency its bill for the shoot.

But an outcry from UK producers had scuttled the plan, Campaign reports.

BNET previously noted that the company was downgraded by a debt rating agency over worries about its ability to pay its creditors.

Also, Omnicom’s working capital slipped by $12 million in the last quarter — an indicator that it is either struggling to delay payments or struggling to collect payments from clients. UPDATE: For an extended discussion of OMC’s working capital see the comments section below.

The worries seem to stem from Omnicom’s exposure to automobile accounts.

Final point: Note that the first Campaign report says that Omnicom wants to extend the delayed payment plan to to U.S. producers as well. But the second Campaign item says Omnicom has only settled with the U.K. producers. More on this issue to come?

Tags: Payment, Agency, TV, Omnicom, Fitch Cuts WPP, Operational Accounting, Advertising & Promotion, Finance, Marketing, Jim Edwards

Jim Edwards, a former managing editor of Adweek, has covered drug marketing at Brandweek for four years, and is a former Knight-Bagehot fellow at Columbia University's business and journalism schools. Follow him on Twitter or send him an email.

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tclaugus2

03/09/09 | Report as spam

RE: Omnicom Sought to Delay TV Production Payments; a Sign of Cash Crisis?

I keep seeing these delayed payments posts on Omnicom. From the most recent quarter's balance sheet recievables and WIP were down a pretty large amount from Q3 to Q4. This would indicate that Omnicom is collecting from advertisers at a higher rate than normal. The numbers don't indicate a collection problem at all, although I won't deny there are probably some accounts giving them trouble. Payables were roughly flat sequentially, indicating they are paying out to producers normally. I find the comments interesting but can't see it in the numbers.
2

BNET's Jim Edwards

03/09/09 | Report as spam

RE: Omnicom Sought to Delay TV Production Payments; a Sign of Cash Crisis?

@Null: My original post on OMC's working capital was written on the day of the release. That release didn't include balance sheet information, just the cashflows.

The original statement shows a decline in operating capital of $12 million -- a tiny amount for such a large business, true.

The later balance sheet info shows that accounts receivable did indeed decline over the year. So you're right, in 2008 OMC had an easier time collecting money.

But its accounts payable also declined -- meaning that OMC's vendors were sucking money out of the company at a faster rate. (Which relates directly to the post above.) In fact, payables declined faster than receivables, which means that OMC needs to do a better job of delaying its payments or speed up collections from clients even more than it has.

Q1'09 will be the test. In the meantime, I draw your attention to this text in OMC's 10K:

"A reduction in client spending and a slowdown in client payments could materially adversely affect our working capital.

Working capital is a source of cash as we have historically run a negative working capital cycle during the year. This cycle occurs because our businesses incur costs on behalf of our clients, including when we place media and incur production costs. We generally require collection from our clients prior to our payment for the media and production cost obligations.

The global economic recession could cause a reduction in the volume of client spending or a delay in the time our clients take to pay us which would negatively affect our working capital. Consequently, we could need to obtain additional financing. There is no assurance that such additional financing would be available on favorable terms, if at all. Such circumstances could therefore materially adversely affect our results of operations and financial condition."