Accounting for Creative Agencies: How to Manage Complex Challenges

Creative agencies can have unique accounting challenges, primarily because the hours and expenses spent on a creative project don’t consistently add up to the same outcome. For example, clients may reject certain items on an invoice, such as meetings about the project, and often ideas will need to be reworked to a client’s satisfaction. In addition to putting in unexpected hours and expenses on a project, this can make it difficult to gauge how much a project will cost from the outset, and more difficult to determine which projects are profitable. Here is a step-by-step guide to managing the more complex accounting challenges of creative agencies:

How to Achieve Accuracy in Estimates

Estimates are a key element of a successful proposal, so it is essential to know where to start when trying to put one together. Usually it is best to take a look at comparable projects to see approximately how much they cost, and put together an estimate based on those numbers, with some leeway to make adjustments later if the project begins to exceed its scope. It is also a good idea to make sure the client knows exactly what they will be paying for, so there are no disagreements down the road when their invoice shows up.

What a Thorough Contract Early in the Process Looks Like

One of the best ways to mitigate complications down the road is to create a good, thorough contract early in the process, and have the client sign it. The contract can stipulate whether the project is a fixed fee project or whether you will charge hourly, and what expenses the client should reimburse you for. You will also need to decide what markup you will charge for hourly work and if there needs to be administrative fees added to creative consultants and expenses. Additionally, the language a contract uses is key to avoid complications down the road—although proposals can be included in a contract, it is sometimes hazardous to use marketing language in the contract itself. For example, if the client has signed a contract stating that your work will be “above market standards,” it becomes a deliverable that you may need to negotiate down the road.

Why Should you Define your Deliverables Clearly?

A well-written contract is also the place where creative agencies can avoid scope creep. Scope creep is a common phenomenon that happens when work on a project begins to exceed the original scope of the project, and it often happens because expectations were not clearly defined from the outset. If you have a solid contract that identifies exactly what your deliverables are, then it is a negotiating tool for extra funding later if the client requests work that exceeds them. On smaller projects that aren’t going to be complex, a standardized contract is usually fine—but larger, more complex projects require more complex contracts, and possibly a lawyer’s review if you have any doubts.

How to Make Sure Everyone Tracks Time Correctly

Once you have your contract, it’s essential to make sure that all employees are charging their time to the right projects. Even when the time cannot be billed to the client, it is still important to know how much you are spending in wages to know how profitable the project is. On a larger scale, effective time tracking makes for accurate utilization reports, which will tell you how much staff time is billable to the client and how much is overhead. This in turn can help you determine what your overhead markup needs to be when you set a price for hourly work, or generate a fixed fee. The best way to do this is to make sure your timesheet software is user-friendly. The more difficult timekeeping software is to navigate, the more likely staff will make mistakes on their time sheets. There are also add-ons like mite and clockodo that create your invoices from the recorded time.

Have a System in Place for Expenses

You will also need a way to keep track of project expenses, regardless of whether or not you can bill for them. This can either be done with separate expense software or in-house accounting software, but either way, preferably one that makes it easy for employees to log expenses to the correct projects. This is another case where a user-friendly interface can be key in helping the expenses get recorded properly for each project and, if applicable, reimbursed by the client. Additionally, you’ll want to make sure that you have an efficient system for saving receipts and consultant invoices for each project in case the client needs to see them.

Why is it Good to Know the Client’s Expectations for Invoicing and Payment?

When it comes time to do invoicing, make sure you know what the client wants to see on their invoice. Ideally, these details would be stipulated in the contract, so you know from the outset what records you need to keep. For example, if the project is billed hourly, does the client want to see a more detailed breakdown of what the hours were spent on, or just a total? Similarly, for expenses, does the client want copies of the expense receipts attached to the invoice, or just a categorical breakdown? Does the client need their invoice by a particular time each month in order to complete their own accounting? Who should the invoices be sent to and what will the expected turnaround time be for payment? It is also a good idea to have a specific plan in place in terms of when and how you will follow up on collecting payment, and if necessary, at what point you will stop work if you have not been paid. It’s essential to have a good invoicing habit to communicate the right message to your client.

Conclusion – Accounting for Creative Agencies

Finally, when it comes time to close out a project, having completed all these steps will mean an accurate report of the project’s financials. This ensures that Creative Agencies will have the knowledge to take with them to the next project, making each attempt at estimating, drawing up a contract, managing the project and invoicing smoother and more airtight. Financials are not something most people see as contributing to a creative project’s success, but it is because when they are done right, they do not cause unnecessary stress—as it should be!