Small Business Strategies:When you receive a large client payment, how do you separate out COGS you’ll soon owe others?

guy dollar in faceDo you receive large client payments that include media or production dollars? Do you buy equipment or furnishings or other large items for your clients that you’ll need to pay for later? If so, you need to be especially careful about how you handle that revenue, so you can see clearly what’s yours and what’s not.

The owner of a small marketing group in San Francisco called me once to ask how our agency handles media money. (Typically, clients will pay huge chunks of  money for media, and the agency will then pay various publications or stations one at a time in drips and drabs over an extended time period, keeping a small percentage of the total as commission.)  She was having a very difficult time trying to figure out how much of the money in her business account was really hers. She knew a lot of it would be owed to media vendors down the road, but couldn’t untangle the numbers, even after hours and hours of accounting. It was driving her crazy.

I suggested she try keeping her money in two different shoeboxes, metaphorically speaking. This is what I call Redneck Accounting, because there’s nothing fancy about it. First, she needs to open a separate bank account for media money, at the same bank where she keeps her operating account. When a big media check comes in, she deposits it in her media checking account, transferring her earned commission into her operating account. Then, when media vendor bills come in, she pays them out of the media account. The operating account is where her profits will reside, along with the money to run the company.

Not only is this easier, it also can keep you out of trouble. I have another friend who had to close her ad agency, primarily because her CFO had spent media funds on operating costs when their business was slow. She was in the embarrassing position of having to tell a large client that the hundreds of thousands of dollars they’d paid the agency for media was gone. The client didn’t get the media they thought they had bought, and they didn’t get their money back either. 

A photographer we work with solves the problem by paying everybody early. As soon as he gets a check from a client, he immediately writes checks for all his production costs. Sometimes before anyone even invoices him, he pays the location fee, the talent, the stylists, the caterer — anybody involved with that job. He says that years ago he learned the hard way that not all the money in the client payment was his. 

You don’t have to sweat every single cost that will pass through your company. But do develop a system for separating your portion from the rest of any particularly large client payment for which you’ll pay COGS.

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