The Business: Advertising/public-relations agency
Founded: 1994
Closed: 1996
Primary Cause of Death: Underpriced services
Secondary Cause of Death: Aging accounts receivable

It should have been a brilliant success. By all accounts, the three founding partners were talented and had been highly successful in advertising and public relations. Joe Burnieika had run his own public-relations shop for 6 years after selling his partnership in one of New England's largest ad agencies. Robin Emerson and Larry Bearfield had run their own small advertising and marketing agency for 10 years. When the three launched Burnieika Bearfield Emerson, they projected billings of $5 million by 1997, half a million dollars more than their combined shops had taken in the year before they joined forces.

Clients loved their work. "They've got talent and skills and have always been responsive," says Jim Grasso, PR manager at Algonquin Gas Co., in Brighton, Mass. Yet billings peaked at $2 million in 1995 and dwindled to $500,000 the following year, with the company's debt to almost a dozen creditors reaching six figures. What went wrong?

The first sign of trouble came when PR work the agency had done for a Wal-Mart account in late 1995 resulted in a huge influx of cash. The partners bought expensive equipment and hired some pricey employees. By the end of 1995 the company had grown to 18 employees. The agency's half dozen PR clients represented a 15% profit margin; advertising clients, a margin of 5% to 8%. So when Wal-Mart dumped Burnieika Bearfield Emerson, a few months later, taking about 30% of the agency's $2 million in revenues with it, the blow to profits was huge.

Rather than slashing costs, the partners made payroll--which had increased from 40% to 55% of expenses--by dipping into reserves. "We should have let people go and hired freelancers as we needed them," says Burnieika in retrospect. "But I felt that if we had only one more good person or client on board, we would turn things around." Savings ran out in April 1996.

So the agency scrounged for work, any work, to try to cover expenses. It started underbidding to win advertising projects. The result was devastating. Whereas Burnieika Bearfield Emerson had previously been making 5% to 8% margins on ad clients, it now fell 2% to 4% short of covering costs on each project. The agency was keeping the high-priced talent busy but wasn't billing enough to make payroll.

To make matters worse, the accounts receivable from those unprofitable ad clients were late. Most of the 10 clients stretched payments to 90 days, in an industry in which 45 days is normal. With no retained earnings left, the agency simply didn't have the money to pay employees and vendors. "We were only six figures in debt, so one good client could have saved us," says Burnieika. But things got only worse. By that point, even profitable work would have had to do double duty: cover operating expenses and pay down the sizable and growing debt.

The agency shut down in October 1996. Bearfield and Emerson plan to marry and open a new ad agency. Burnieika is still trying to collect from former clients so he can pay off the agency's debt. He continues to do work for a few former public-relations clients. "We wanted to create something good, have fun, and be able to manage it," Burnieika says. "I wish it had worked."

Resources: The sad tale of the Burnieika Bearfield Emerson ad agency may have you examining your own collection practices more closely. If you don't like what you see, now's a good time to curl up with a good book such as Collect Those Debts! How to Get Your Money and Still Keep Your Customers (Self-Counsel Press, 800-663-3007, 1992, $8.95). The author, Timothy Paulsen, is a collection expert who offers a range of good ideas.

The Institute of Management and Administration publishes a 16-page monthly newsletter, Managing Credit Receivables and Collections, which includes advice from collection experts and describes effective strategies used by a variety of companies. The price, $199, may sound steep, but the newsletter is worthwhile. For information on ordering it, call 212-244-0360.

And, finally, to find out more about setting up accounts-receivable systems, check out finance editor Jill Andresky Fraser's column " Get Paid Promptly," in our November 1996 issue.

ALGONQUIN GAS CO., Jim Grasso, 1284 Soldiers Field Rd., Brighton, MA 02135; 617-254-4050

JOE BURNIEIKA, Pinpoint Marketing & Communication, 508-888-5733