Financial statements provide critical information to the owners, managers, lenders and investors who review and analyze them. The information contained helps these individuals determine the economic health and operational performance of a company and make relevant decisions regarding actions to take. This applies to all businesses, including advertising agencies, but an advertising agency's revenues and expenses have a somewhat different relationship to its assets and liabilities than companies in other industries.
Advertising agencies are companies that provide advertising and related services to help clients penetrate a market or niche, or grow or maintain a desired market position in a chosen market. Advertising services include idea creation, ad design and promotional campaign design. Services also include market research to make the advertising effective, and ad booking. Advertising covers ads produced for all media outlets -- radio, television, online, newspapers and magazines.
Advertising agencies sell creative, intellectual services. Unlike consulting firms or law firms, which also sell a type of intellectual service, advertising companies do not own the products they produce or the byproduct of the intellectual services they provide. For example, a client normally owns, by contractual agreement, the television commercial or the print ad that the ad agency creates. Agencies can use one client’s products as references to sell their talent and expertise to another client, but since agencies typically create custom work, they cannot take pieces of one customer’s work to use with another. This impacts the income statement.
Advertising agencies do not have products, such as software, books or videos, that appear on the balance sheet as inventory. Since agencies sell talent, they do not have patents, copyrights, trademarks or other intellectual property to record as long-term assets on the balance sheet. Nor do they have much machinery or equipment. Agencies do have furniture, copiers, computers and servers. As with other service companies, an agency concerned about the lack of assets could purchase property to provide collateral for future loans.
Because talent is so important to advertising agencies, firms often reward high-performance employees with bonuses. Firms pay these bonuses out of net profits. This reduces the amount of profits that flow through to the balance sheet as retained earnings. Advertising agency owners must therefore carefully balance their short-term goals with their long-term goals. Short-term goals may include employee morale and revenue growth; long-term goals may include increasing the agency’s value in order to sell it to fund the owner’s retirement.