Charlotte ad agencies, capitalized billings, and confusion.

charlotte ad agencyOur Charlotte marketing agency regularly submits our annual billings to the Charlotte Business Journal for inclusion in their annual Book of Lists under the “Largest 25 Charlotte Advertising Agencies” category. Even though birdsong gregory is a smaller, more nimble shop than the local big boys, we’ve always punched well above our weight class in terms of creative thinking and seamless execution.

And while we are happy to get a little free PR from the CBJ, I’ve always been a bit skeptical about the methodology behind “capitalized billings,” which is the formula used to rank the size of an agency on paper.

Capitalized billings are the aggregate total of all the measured business that passes through the agency’s hands. For example, if an advertising agency had one client that spends $5 million each year with the agency (on print and broadcast media, etc.), that agency might declare itself with $5 million in capitalized billings. The calculation of capitalized billings becomes more complicated when an agency does less traditional media buying and more, say, branding strategy or marketing collateral development.  In that case, in order to calculate the “equivalent” capitalized billings for that account, the agency may adjust those expenditures as a function of that work’s gross income to the agency. It is for this reason that capitalized billings, as an indication of agency size, is often debated.

It’s important to remember that, capitalized billings are often a disputed value and are NOT an indication of gross or net income. In fact, the figure itself has nothing to do with the agency’s gross income (AGI), gross profit, or net income. So you can see how the situation becomes more complicated if an agency in question does not purchase media for its clients. When that is the case, 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. Proponents say it’s not deceptive; it’s just an attempt to allow an “apples & apples” comparison. If you work at a Charlotte ad agency, what are your thoughts?

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