The Two Biggest Mistakes Adtech, Media, and Publishing Companies are Making with Strategic Finance.
In the last 20 years advertising media has shifted to a real-time trade, yet the cashflow moves slower than most other sectors. The disconnect goes back over 100 years to the earliest days of the business, based on how the industry is fundamentally structured. Still, the problems related to this disconnect remain industry-wide — and many agree these problems are not possible to solve on a systemic level. 45-days to well over sixty 60-days are inherently normalized payment terms.
The holy grail then is matching the velocity of the money to the new, high-velocity of the commerce in an efficient way that optimizes: cost of capital, scalability, and risk management. Basically, how to deliver real-time payment for real-time media trade.
As strategic finance specialists in the sector, our team consistently see two common mistakes occurring from previous finance decisions that work against these optimal conditions:
Mistake #1: Deploying capital raised from equity to finance OpEx.
When a media company closes a venture round, goes public with a SPAC, or takes on an equity investment from private equity, the general mindset is that the company is now efficiently liquid. The mistake then is to allocate a portion of those funds to finance OpEx to float the outstanding accounts receivable. Given an average of 60-day payment terms, this means a sizable portion of the new liquidity will be locked-up to service the A/R and now will be performing at market interest rates for short-term borrowing. This money will not be working as hard as it is intended.
To ensure growth, money raised from equity performs best when strictly allocated to CapEx — to finance M&A and investment in strategic growth (infrastructure, technology, etc.) — not to finance day-to-day operations. CapEx investment generally delivers a higher ROI based on asset amortization and increased enterprise valuation.
The consequences of using equity to finance OpEx are slower growth, diminished ROI, and ultimately, disgruntled equity investors. This approach is the corporate equivalent of a consumer taking out a HELOC to take the family on vacation.
Mistake #2: Relying on an ABL facility from a bank.
While an ABL from a reputable bank may seem like an obvious solution — it is a proven tool to solve OpEx liquidiy — these facilities are inherently a bad fit for the advertising media industry.
For starters, the risk profile of media A/R does not typically align with a traditional bank ABL facility. 60-day accounts receivable terms make banks nervous; while 60-75 days is the normal performance in the media industry. Blue-chip clients who pay invoices in 150 days? Forget it. Also, most ABLs include a variety of restrictive covenants and hidden fees. Attractive interest rates quickly become unwieldly when the fees are unpacked and factored into the interest.
Most importantly, these facilities don't scale efficiently, if at all. Sign a big new client and need access to an incremental 15% of overall credit? This is highly unlikely given that facility was initially drafted at the largest possible size.
Other serious downsides to this approach are broken covenants, a diminished borrowing base, and impaired credit.
Working with an experienced partner who understands these challenges not only avoids and corrects these mistakes, it delivers a new level of benefits.
Trade finance is a critically important tool that underpins the flow of goods and materials around the world. It’s a proven practice for managing liquidity, routinely employed by some of the world’s largest companies.
The use of trade finance in the technology services and media industry is a relatively nascent practice, but quickly gaining favor as a preferred way to manage liquidity. Apple, Inc. is well known for using various forms of trade finance — including A/R invoice purchases. Yet Apple has a significant stockpile of cash. Why doesn't it use its cash reserves to finance these transactions? One can argue that Apple’s savvy use of trade finance, protects those cash reserves.
Correcting the issues that can arise from the two critical mistakes outlined above requires a strategic finance partner with the experience to work with closely with senior management, advisory board members, and the managers of existing partner banking relationships. When a media company aligns with the right trade finance resource, not only are liquidity problems resolved, but the company enjoys other important benefits, including better relationships with both suppliers and clients — with clients enjoying more favorable terms and higher credit limits, while suppliers get paid on time, or even early.