Bookkeeping for digital marketing and advertising agencies might seem relatively straightforward.
Spoiler Alert – It’s not that straightforward!
Invoicing. Withholding tax. Official Receipts. Accounts receivable. Freelancer and consultant payments. MRR Revenue v Project Revenue!
Due to the nature of the local compliance framework, combined with the various types of client engagements that an agency might have, numerous finance and compliance items must be considered when it comes to managing the bookkeeping of a marketing or advertising agency here in the Philippines.
Below, we identify some of these key considerations!
As always, if you are seeking expert bookkeeping services for your creative agency in the Philippines, don’t hesitate to Contact Us and let our team explain how we can add real value for your bookkeeping function!
The Service Provider Business Model
The provision of digital marketing and advertising services is a growing industry in the Philippines.
And why wouldn’t it be?
The level and depth of creative talent in the Philippines, combined with the rise in online businesses, together with an increase in companies pivoting towards online selling strategies due to the pandemic, are all key factors in why both domestic and international companies look to the Philippines for their advertising and marketing needs.
In order to understand the bookkeeping requirements of marketing and advertising agencies here in the Philippines, it is essential to first explore the business model and identify how the business actually makes money!
First off – a creative agency will generally be providing a service to its clients – as opposed to selling goods.
This means that the agency will not be manufacturing or selling physical products or goods in order to generate revenue. Instead, the agency will rely on its people and their expertise (and perhaps technology) to provide marketing, advertising and creative services for which clients are willing to pay.
The distinction between selling goods and selling services is very important in the Philippines and we explore this in further detail below.
Sales & Revenue for Agencies
Generally speaking, marketing and advertising agencies will generate the main bulk of their sales across two primary revenue streams:
- Monthly recurring fees from services to retained clients; and
- Project work based on a fixed-fee or hourly rates.
Of course – agencies might actually have a mix – MRR clients paying for their services monthly, while also performing time-based or fixed-fee projects for the same clients or different clients on an ad-hoc/once-off basis.
It’s important for a creative agency to understand the key differences between these two revenue streams and how it will impact their financials, their BIR compliance requirements and the bookkeeping of the business.
Monthly Recurring Revenue (MRR)
The “MRR” revenue model is usually the more straightforward type of engagement for a creative agency from a bookkeeping perspective.
Under this model, the agency will have clients that pay a pre-agreed fee to the agency on a monthly recurring basis. The fee will generally be the same each month assuming the scope and level of service remains the same.
The MRR business model can enable the agency to plan, budget and forecast with a greater degree of accuracy as they have a level of certainty on the MRR that they are receiving at a point in time which they can use as a base for their future projections.
Of course, there is always the possibility of client churn (i.e. losing clients). Provision for client churn, however, should be built into any financial projections and/or cash flow forecasts that an agency has generated.
The MRR model can also help advertising and marketing agencies to understand the level of resources required to service their retained clients and plan recruitment and operating costs accordingly.
Invoicing under the MRR business model can also be quite straightforward. In an ideal world with robust systems and controls in place, the agency will invoice the same clients at the same time each month. To make things even easier, invoicing could be automated through cloud accounting systems such as Xero or Quickbooks Online.
A key issue, however, that can arise for agencies that bill many clients on a regular basis is making sure that the clients actually pay their fees when the invoice falls due! See the “Accounts Receivable” section below for more on this topic.
Bookkeeping for Projects Work
Under a project work business model, the creative agency will be engaged by clients to perform specific projects on a fixed-fee, milestone or fixed-time basis.
Examples of this might include a seasonal marketing campaign, a product launch campaign or a new sales or promotion offering.
A business model based solely on once-off project work can be a little more unpredictable from a financial forecasting perspective. It is difficult to anticipate potential revenue if you have no idea when a client will knock on your door (or visit your website homepage!) to engage your business for a specific project.
It also makes it harder to plan for resource requirements. Project work can come in many forms and with various levels of work and input required. An agency will therefore have to move quickly to ensure that they have, or can get, the resources and skillsets required to perform a particular project – or risk losing the project to another agency!
Finally, the recording of sales requires a little more consideration under the project-based business model. Let’s consider a working example!
Let’s say a digital marketing agency is engaged by a client for a 6 month project, starting on 1 January and ending on 30 June. The total fee is PHP60,000. Under the terms of the engagement, the client will pay the digital marketing agency 50% up front and then 50% upon completion.
How does this impact the bookkeeping of the agency?
Many agencies might consider this as PHP30,000 of sales to be recorded in the books in January and then another PHP30,000 of sales to be recorded in the books in June once the projects finishes.
However, this will very much skew the sales or revenue data of the business. The books and the sales will show a lump sum received in January and a lump sum received in June – yet, nothing is recorded for the other four months despite the fact that the service is also being performed during these months!
As such, under the accrual basis of accounting, the initial PHP30,000 would not technically be treated as a sale upon receipt as no service has actually been performed at that point. In short, the agency should actually book equal amounts of PHP10,000 in sales/revenue over each of the six months (i.e. the length of the project).
This would result in a more accurate reflection of how payment has been received for the actual services performed!
Accounts Receivable for Marketing and Advertising Businesses
When considering bookkeeping for a creative agency, it will be crucial for the owners/founders to constantly monitor the value of their accounts receivable.
“Accounts receivable” is effectively the fees outstanding for payment by clients for services that have been performed by the agency or for invoices that have already been issued.
For service providers such as agencies, usually the service will be performed and the payment will then be payable by the client on the basis of terms triggered by the issue of an invoice (e.g. 30 days later, 60 days later, etc).
This means that the agency will have a period of time where it is performing, or has performed, services for a client but must wait a number of days or weeks (or months…!) until it is actually paid for that service. This can make it difficult for agencies to manage cash flow, pay their staff and keep the office lights on unless they have already built up a steady portfolio of clients.
Compare this, for example, to an e-commerce or online business in the Philippines. Usually, when you purchase goods or products from an online website or marketplace, payment will be required and processed immediately! The online business does not have to wait weeks or months to get paid!
So, for advertising and marketing agencies, it is not only important to ensure that top quality services are provided to your clients – it is also crucial that the agency continuously monitors the fees outstanding for payment by clients and seeks to collect these fees as a regularly as possible!
Expert Tip for Marketing and Advertising Agencies: Constantly monitor your accounts receivable. Contact your clients. Request payment. Don’t let your accounts receivable continue to rise!
Sales and Official Receipts in The Philippines
Whether it is a MRR contract or project work that the agency is performing for its client, to ensure BIR compliance, the agency will need to ensure that the correct supporting documentation is generated and issued for every sales transaction.
As marketing and advertising agencies are providing services for their clients, under the Philippine BIR compliance framework, the agency is required to issue a BIR approved Official Receipt to every client upon receipt of payment from that client.
How does this work in practice?
- The agency will issue its invoice to the client for services performed.
- The agency will recording the value of the invoice in the company books as an accounts receivable (i.e. money that is due to be paid to the agency).
- The client will receive the invoice from the agency.
- The client will (hopefully!) pay the value of the invoice to the agency.
- Upon receipt of payment from the client, the agency is required to issue an Official Receipt to the client identifying the details of the payment for that sales transaction.
- There is an obligation on the agency to issue the Official Receipt to the client to ensure BIR compliance. The client will also need to request and receive the Official Receipt to ensure that they can validate their relevant company expenses when computing income tax payable.
Withholding Tax and VAT
As with other types of businesses and service providers in the Philippines, the concept of withholding tax and VAT will also be applicable to marketing and advertising agencies.
Just like any other business, creative agencies will have to consider their withholding tax and VAT obligations across all financial transactions – whether they are charging clients for their services or paying suppliers for supplier services!
For further information on these general types of taxes that apply to businesses across the Philippines, please feel free to check out our previous articles on Withholding Tax and VAT in the Philippines.
Paying Freelancers and Independent Contractors
Due to the nature of the services that a marketing, advertising, creative or branding agency might offer, the type of expenses that might arise can differ quite significantly from month to month.
While some of the larger agencies might retain all of their talent and expertise in-house as full-time or part-time employees, smaller marketing and advertising agencies in the Philippines will usually engage freelancers, independent contractors or consultants to avail of a specific niche skill or expertise that they might need for a once-off/ad-hoc task or project. This might include graphic designers, video editors, photographers, SEO and SEM specialists, influencers and other types of talent.
As a result, the expenses of a marketing or advertising agency related to paying contractors or freelancers might increase or decrease quite significantly depending on the level of work or ongoing projects.
So, how does this impact the bookkeeping and expense side of the agency’s finance function?
In the Philippines, there are quite specific requirements for companies when paying freelancers and independent consultants for services performed.
To ensure compliance, BIR requires that withholding tax is applied and retained by the payor (i.e. the agency) on payments to suppliers such as freelancers or independent consultants.
The agency is then required to remit the withholding tax that has been withheld to the BIR each month.
Usually, the rate of withholding tax on payments to individual consultants or contractors would be between 5% -10% of the total value of the payment. The actual rate may also depend on the personal position of the consultant – including how much sales revenue the consultant is generating in the same financial year.
Agencies should always ensure to request and receive an Official Receipt from each freelancer or consultant paid so that the agency has the required supporting documentation to evidence the payment, withholding tax applied and ensure validation of company expenses.
Separately, the freelancer or consultant also has an obligation, under Philippine tax law, to issue an Official Receipt to the agency!
CloudCfo – Bookkeeping Services for Marketing and Advertising Agencies in Manila and across the Philippines
The CloudCfo Team has significant experience managing the books and accounts of digital agencies, marketing agencies, branding agencies, advertising agencies and talent agencies across the Philippines!
Whatever the services offered, we adapt our bookkeeping services to align with your agency’s business model and bookkeeping requirements!
Contact the CloudCfo Team Today and speak with us about your bookkeeping needs!