How to create an ABC in your country?

The ABC – as stated before – is a not-for-profit operation. Nevertheless, it must be managed as a business, and proper financial management is needed, both before and after establishing the organization.

All financial considerations must work toward the long-term, sustainable operations of the ABC.

There are three distinct stages of development for an ABC: the initiative stage, the pre-ABC stage, and the established – service-offering ABC stage. Each one has its own specific financial challenges.

The first two stages (initiative group and pre-ABC) will have no income side. There will be expenses only. Bad news, isn’t it?

Most probably, the established ABC needs time to build up its first audit service. During this period, it is necessary to fund (via membership fees, or other sources) the operations of the organization, without having a service in place.

Because money will be always a big issue, those embarking upon an ABC project must clearly understand the financial challenges of a such a project, prepare to cope with the financial problems, and solve them in a creative way.

The ABC initiative group, as well as the first members of the ABC, must know and accept the fact that they will have to be patient, and pay the bills, while working together on building the audit operations. There will be lots of needs for time and money.

Most significantly, the number of active participants will have a huge influence over the relative costs (membership and audit fees) for the members of the ABC. The greater the number of members, the less expensive the services.

There are two financing goals in this the early stage for the initiative group. One, finance the formulative meetings of the group, and two, the process for establishing the organization.

The initiative group will incur expenses for these meetings, ranging from catering to travel, legal advice, and translations. For instance, the group may want to organize a series of conferences and seminars featuring international experts who talk about ABC formulation and associated issues. Expect expenses for air or train fares, accommodation, local transportation, and some consulting fees.

Based on my experiences, the majority of these expenses can and should be financed by the members of the group on a sponsorship basis. Putting together a budget via input from the IFABC can help you outline and develop voluntary sponsorship for this phase.
The companies involved in the ABC initiative can provide meeting facilities, cover the catering costs, and make available their own legal experts. The sponsorship approach acts to solidify the commitment of members of the initiative group. Sponsorship motivates and becomes a source of pride for each member to put their commitment on the table. It induces teach member to participate at a higher level.

Another source of financing may come through a series of fundraising events. Look for organizations in your country that are elsewhere in the world that can benefit from the ABC and therefore might wish to finance part of its development at an early stage. Such early financing gives your new ABC enough distance to avoid any potential conflicts of interest, too.

Be sure to verify if such organizations exist in your country, and then contact them. You may have the pleasant surprise to be able to write a grant proposal and, eventually, obtain the funding you need. These organizations will probably be very happy to support an ABC initiative, and be even more willing to sponsor the project if a representative group of the media/advertising industry is involved and already involved in co-sponsoring the initiative. I worked on many occasions on such projects, and they were very successful.

It is also possible to have governmental bodies that would want, and be able to, sponsor your project. Juts keep an open mind; you never know where the help might come from.

An important task of the initiative group will be to outline the first operational budget of the ABC, and establish the structure and size of the membership fees. This is necessary planning for the next step.

To be able to develop the first budget of the ABC, go back to the tasks listed in the previous chapters, and note the different budget items which will be needed to ensure the resources to complete the tasks. Here is a preliminary list of expenses for this early stage of an ABC.

• Office rental and maintenance.
• Office equipment.
• Telecommunications, internet connection, mailings.
• Stationery and other consumables.
• Travel.
• Salary of the ABC manager.
• Legal and financial advice.
• Translations.

As stated before, many of the items above may be provided for free, or sponsored by the initiative group members (later members).

During my involvement with various ABC projects, the office was provided for free (in some instances for more than one year!) by one of the group members. In some cases, the communication expenses were also covered this way.

The financing at this stage must be approached in a creative way. Examine the members of the group (in the case of the advertisers: look at their respective industries, and then identify which items can be easily sponsored.

Here are two other examples. If you have in your initiative group a telecommunications company, it would be practical for this company to offer a free mobile telephone subscription for a year, including the telephone itself.

And perhaps a member of the initiative group members may be willing to offer for free office equipment such as a computer, desk and chairs, etc.

My overall experience in working with the development of ABCs is that either the initiative groups or the ABC members were always happy to offer a wide range of support to the organization – free of charge. This is another reason why there is a need for dedicated members of the initiative group, and why clear communications is needed.

The finances of the established ABC must ensure its operations, as well as the construction of the audit system.

Please remember that the operations items listed in the previous section may vary in the given market conditions.

There are some decisions to make, nonetheless, before building the membership fee system, including answers to these questions:

• Will members pay the same amount or not?
• Will the audited publishers pay more or less membership fees (the audit fees are separate from the membership fee)?
• Will advertisers and/or media agencies pay amounts different from publishers?

I strongly suggest establishing the same membership fee for all members, regardeless of their size, number of publications issued, or segment of industry they operate in (advertisers or media agencies). This standardized fee structure ensures the equal right to vote in the general assembly, as well as an equal voice in decision making for the ABC.

The size and position of the individual members will be taken in consideration later on, when establishing audit fees is discussed.

For the period immediately following establishment of the ABC (no audit system, therefore no audit fees in place), the calculation of the membership fee should be very simple: total operational budget divided by the number of members.

This stage should be reached after a long series of meetings where audit system issues are discussed and a large volume of paperwork – agendas, handouts, reports – is completed. I remember some of the audit system meetings where I was involved lasting more than 24 hours! When planning for the first budget of the ABC, one should plan for this amount of time and matching resources.

Another budget item that comes at this time is marketing and communications. Once an ABC is established, it should provide the market and members with timely, thorough communications that continuously update members on proceedings and progress. Such communications require funding too. Remember to add a cushion that provides for reaching the highest number of projected members.

It is necessary to find funding for the ABC operations, but it is equally important to know – and prepare for an ABC organization that must be sustainable over the long run. One way to ensure funding for the long term is to finance the ABC from membership fees alone.

Just as you have to finance operations, so must its members fund the building of the audit system.

Here again, before developing the proper financing of the service, some more questions should be considered:

• Will the size and type of publications have an influence over the cost of audits?
• How often will the audits be carried out (e.g. how many audits per year?)
• Will the ABC hire its own auditors, or will it subcontract one or more audit firms to carry out the work? Or it will be the publishers’ auditing firms that will carry out the audits, and the publishers who will establish the fee with the auditor?
• Will the publishers pay the audit fees to the ABC, or directly to the auditors?
• Will the ABC provide the results of the audits for free, or for charge? Will the members be charged for the data, or only non-members?
• What portion of the audit fee should be allocated to maintain the ABC (audit) operations?

Whatever decision is taken, it is important to understand that it will have a direct influence over the size of the audit fee, as well as over the level of income and the cashflow of the ABC.

The size of an audited publication will have an effect on the audit cost for the given publisher. The larger the circulation for a publication, the larger and more vast the distribution channels (contracts), which means more audit time and effort.

The frequency of issue of a publication also has a direct influence on the cost. The higher frequency, the higher volume of documents and information to be audited.

The more often audits take place, the more the costs to the publishers. ABCs worldwide carry out their audits yearly or bi-annually.

If an ABC has its own auditors, this setup means more administrative work, plus more associated operational and overhead costs. Having external auditors makes life easier, but still requires an oversight program.

If the ABC invoices audit fees directly to the publishers, this accounting function requires supporting personnel and a fee collection operation. The positive side of this collection operation is that it provides a very healthy revenue stream for the ABC.

Selling the data (and other services) requires more administration, but it brings more income to the ABC as well.

In general, once a member has paid its membership fee, it is entitled to have access to all audited data. It is up to each ABC to set a price for the audited data, if the membership decides to release it to non-members.

A margin of the audit fee must also be allocated to the ABC’s operations as well as for the audit itself, auditors, and producing data). This applies even if an ABC decides that publishers are to pay the audit fees directly to the auditors, because even in this case there is a volume of audit administration that cannot be avoided. Do not forget that once the audits start, there will be a great need for marketing and communications (travel to the offices of members and potential members, selling materials, training seminars for the industry, and to create a website to disseminate the data, etc.). This, too, will require financial resources.

ABCs worldwide have an unbalanced income structure: the big chunk of income comes from the publishers (via membership fees and audit fees), while advertisers, media agencies and other members pay only the membership fees.

As part of my research efforts in running an ABC, I surveyed IFABC members about budgeting matters. The results showed that, at the majority of the ABCs, non-publishers contributed a maximum of five to 10 percent of the overall budget of the ABC (membership fees), with the rest coming from publishers (membership and audit fees).

This unbalance is a subject of continuous debate among publishers and non-publishers. It is always resolved with the reasoning that the advertising money comes from the advertisers (via media agencies); therefore, the audit is financed by the publishers.

I would suggest that any new ABC agree in principle that a proper income stream (proper rate-card) will have two income sources: membership fees equally divided among members, and audit fees divided unequally among publishers – here one must take into account the number of publications audited by a single publisher, the size (circulations) of the audited publications, frequency, etc.

Once the audit service is in place, the ABC may decide to sell the audited data to non-members, thereby ensuring itself extra revenue. It is absolutely certain that once the audited data is streaming in, there will be a need for analyzing it (making market trends, etc.) Selling the analysis can be another great source of income.

Any new service – be it a new media channel audit, research , or just new forms of data dissemination – should be priced properly. In general, the ABCs are giving all data to members for free while selling it to non-members.

The decision-making bodies of the ABC must ensure proper financial planning, control and administration of the operations of the organization.

As any legal entity, the ABC should have a yearly budget of operations and investment.

The operations budget must cover all the activity of the organization for the given year. I strongly advice any new ABC to be very careful in budgeting, and never plan for deficits! If at the end of the budget period you will have unexpected, surplus revenues (more members and publications joining the ABC and the audit), you can easily reinvest this money in the next year’s budget. (For example you can lower the membership fee, and every member will be happy). If you are careless and incur a loss, someone has to finance it – in the end, the members will have to do it. Plan for a slight surplus, but make sure it is a plus.

In accordance with the not-for-profit principle, the net gain of the execution of a given financial year cannot be paid back to the members (no divident payments). Given the financial laws of its country, the ABC may decide to create a reserve (for safety reasons, or for funding product development), or reinvest the gain in the next financial year’s budget, by eihter lowering the fees, or extending the scope or scale of the ABC activity.

The net gain or surplus may help the ABC to finance its product development. As stated in other chapters of this handbook, ABCs around the globe are providing a wide array of services, beyond the circulations audits. None of these ABCs started with the whole range of services – they built them step by step.

Such progressive development needs resources, which can come only from members’ contributions. My experiences tell me that it is much easier to finance product development from small acummulated surpluses of each year, rather than asking suddenly for larger fees from members. Last, but not least, an ABC can always seek out external project funding available in the given country, should it need to bridge a gap or loss for a given year.

Once the ABC starts its operations, one must ensure the proper administration of the contracts, incoming and outgoing invoices, debt collection from members, timely payment of the bills, accounting services, etc. The administration of the ABC must run as smooth as possible, since the focus is on providing the audit services at the highest standards.

The control over the operations of the ABC must be as strong as possible, regardeless of the given legislation. (In many countries, it is compulsory to have an independent financial control – financial audit and/or an elected control body over the ABC).

The manager of the ABC must present financial reports to the superior ABC bodies on a regular basis. Overall, all the activity of the ABC – including finance – must be totally transparent to all members.