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Dear Commercial Acuman...

Dear Commercial Acuman...
Why does my FD grumble when I submit claims for “networking” lunches? - Creative Director

Haha, that's a good one - they also say in advertising we wait until a problem is too big to ignore... then go out for lunch.

From a cost perspective, there are three categories of this type of expense:

- subsistence is any food or drink claimed when you are travelling on business.

- staff entertaining is any food or drink you have with colleagues; this includes popping out for a coffee to discuss something, team lunches, even the sandwiches at lunch-and-learn training events.

- business entertaining is anything you have with non-staff; from a quick coffee to VIP tickets for Wimbledon.

By far the most expensive of these is staff entertaining - both in terms of actual cost and the behaviour it engenders.

In relationship-based people businesses, getting to know colleagues and clients is a good thing generally. In IPA terms, we call this the psychological aspect of the contract (along with the procedural and professional).

Personally, I make a point of holding meetings offsite over a coffee or an inexpensive lunch:

- to get to know new team members better; and periodically to check in on things.

- if I have anything confidential or personal that I need to discuss.

- when I need to kick-start some creative thinking on a project or thrash-out a complex, open-ended problem.

- to get to know key stakeholders on appropriately neutral territory.

But, this sort of activity comes at a cost, so needs to be seen as an investment upon which some sort of return is expected, rather than just part of the ongoing operating cost base.

My preference - and the trend these days - is to meet up early for breakfast. This has the following advantages:

- there is a natural limit on how much a breakfast can cost, especially as it does not (should not!) involve anything stronger than a shot of espresso.

- the unspoken message is that as we hauled ourselves out of bed whilst it was still dark to have this meeting, a latte and a pastry is not an unreasonable compensation.

- meet for breakfast between 8am and 9am near the office and you can be at your desk by reasonable 9:30am with the first meeting of the day under your belt.

As a rule-of-thumb, the direct cost of staff entertaining to the company is approximately double the amount you see on the chip-and-pin machine at the restaurant - staff entertaining is treated as a benefit and is taxed accordingly. However, agencies generally don't make people pay the tax on the benefit, but treat it as a PSA item and pick up the tax charge themselves by grossing it up.

So even a relatively modest lunch of £50 ends up costing the company £100 - take a whole department of 12 people out at £35 per head and the cost to the company will be over £800.

Moreover, behavioural economics tells us that the more staff see other people getting perks like long lunches, they more demotivated they will feel if they don't get the same treatment. Add in people's naturally inflationary/competitive tendencies and that team lunch could end up costing an agency of 100 people almost £10k if not properly controlled.

And that’s without even considering the effect on staff motivation of the whole agency seeing you stagger back into the office in the middle of the afternoon.

So, whilst not everything that matters can be measured and not everything that can me measured matters, you shouldn't be too surprised when your FD rolls their eyes at your expansive and over budget lunch.

Top tips for FDs!

- set an annual budget for staff entertaining and make sure everyone is aware of it; ideally divvy it up between departments, otherwise it will get used on a first-come, first-served basis.

- don't forget to budget the PSA on the benefit; generally, allow the same amount for PSA as for the cost itself.

- you get £150 per head per year tax free for staff parties.

- as with all P&L lines, make sure you track them monthly and let budget-holders know if they are trending ahead or behind. Always let people know if they are trending ahead and get them to rein back in.

- it helps always to have guidelines and budgets set up in advance; it's too late to do anything about overspends once the event has taken place.

If you have any agency questions or queries about enhancing your commercial performance that you need advice on, email the IPA’s Commercial Acuman, aka the IPA’s Finance Director Tom Lewis at toml@ipa.co.uk. All questions will appear anonymously.

Commercial Acuman No 1: What does 2015 hold and where does the money lie?

Last updated 11/02/2015

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