An often disputed value or misunderstood concept – not related to gross income
Capitalized billings is often a disputed value and is NOT an indication of gross or net income. Capitalized billings is generally used by a client to judge the suitability of a candidate firm – and the client makes that judgment based on their intended or actual budget. Since the client budget is all-encompassing (media, fees and production), the client is inclined to compare their budget to the sum-total of other client budgets handled by the firm. By example, a client budget of $5 Million is considered a “good fit” at a $30 Million capitalized-billings agency.
The expression and concept applies best to agencies that include the planning and purchasing of media in their list of services. By example, if Agency B had only one client and that client’s budget (all-inclusive) was $5 MM, it would be said that that agency was “capitalized” at $5 MM. If that agency added two more clients; one at $10 MM all-inclusive and another at $2 MM all-inclusive, then that agency would be said to have $17 MM in capitalized billings.
The figure itself has nothing to do with the agency’s gross income (AGI); gross profit; or net income. For that reason, arguments of confidentiality fall on deaf ears when an agency chooses to protest making that figure public.
You can see that the situation becomes more complicated if an agency in question does not purchase media for any of it’s clients. At that, the agency size (as it relates to financial figures) now might want to actually explore AGI, gross profit or net income. Most agencies (except those publicly traded) understandably choose not to reveal that information. Many of these non-media buying agencies however, want to be considered along with the others.
Now the magic begins … those agencies artificially convert their AGI to a “capitalized” value by using the typical, although seldom the case these days, media commission of 15%. They artificially up-size their AGI by that 15% factor and declare themselves accordingly. It’s not deceptive; it’s just an attempt to allow an “apples & apples” comparison!
Curious … what prompted your research on this topic?