September 1, 2009
Experianâ€™s latest study shows that while many businesses have struggled financially over the past two years, businesses that were healthy at the start of 2007 remained so throughout the financial crisis.
Attend the Sept. 15 Webinar Small-business Risk: Understanding the Recession's Impact on Credit, and learn how identifying the characteristics of these healthy businesses can help you choose the right customers.
Numbers have told the story of the global recession, with monthly, quarterly and annual indicators characterizing all of the economy's ebbs and flows. Analysts, regulators and academics rely on these figures to make predictions and policy, but for financial professionals in the trenches, the real-world worth of numbers and growth percentages is notably subdued. In NACM's most recent monthly survey, respondents noted that economic indicators do have an effect on their companies' policies, but that it's a subtle one at best.
When asked, "How much do economic indicators and statistics influence your company's policies and procedures?" the largest percentage of participants (47%) answered "somewhat." The next most popular answer, garnering 28% of responses, was "not very much," followed by "very much" with 16% of responses. Six percent of participants said "not at all" and only 3% didn't know how much these indicators affected their companies.
Certain policies were more susceptible to change based on economic figures than others, most notably salaries. "We were just told that our company has been put on a salary freeze for 2009 and possibly for 2010 due to the economic crisis," said one respondent. Others noted that economic indicators play a role but that it's only one part of their company's considerations. "Economic indicators are used as one of the factors we consider when determining acceptable risk levels," said one participant. "They are used as a gauge to indicate how we think risk levels will be impacted by our customers' financial condition and what direction their markets are expected to take."
Some respondents noted that the breadth of some popular economic indicators makes them less useful and that more specific figures have a greater sway in their company's behavior. "The indicators that we use are not the general newsworthy reports, but those tied to maritime shipping and cost statistics for international shipping. These indicators will impact where we need to watch expenses and gear up to take care of our shippers," said one participant. "We follow government economic indicators and stats but our focus is with our industry's indicators and stats," said another. However, opinions on larger, general economic indicators were varied, with some hailing them as an invaluable resource ("No business, no matter its size, scope, industry, can truly succeed without following economic trends, developments, and statistics.") and others deriding them as an oversimplified and often sensational account of what's really happening ("If you let yourself be guided by the media's opinion of the economy, you will be out of business in no time."). These respondents often noted that they relied on other sources for their company's strategies. "My marketplace and discussions with clients are a much better indicator," said one respondent.
Jacob Barron, NACM staff writer
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The broad brush oversight of the Federal Trade Commission's (FTC) "Red Flags" Rule has sparked plenty of complaints and confusion. As the deadline for mandatory compliance has repeatedly been delayed, the pushback from industries has gained momentum. There have been a growing number of protests that the agency has overstepped its authority by trying to enforce the "Red Flags" regulation on a wide spectrum of businesses. Now, a prominent association is taking the fight to court to win exemption from the FTC's Rule.
The American Bar Association (ABA) on Thursday asked the U.S. District Court for the District of Columbia bar the FTC from including lawyers in the scope of the "Red Flags" Rule. The Rule is designed to force companies to detect, mitigate and respond to instances of attempted fraud perpetrated by identity thieves. The affected businesses are required to have a written "Red Flags" program addressing these tenets which must be approved by the company's senior management before the November 1, 2009 compliance deadline. The Rule divides entities into two sections: "financial institutions" and "creditors." The ABA is concerned because lawyers have been filed under the heading of "creditors" in the "Red Flags" Rule, which, to the association, is a dramatic failure in judgment.
"Congress did not intend to cover lawyers under the Rule," said ABA President Carolyn Lamm. "The FTC's decision to apply the Rule to lawyers is contrary to an unbroken history of state regulation of lawyers and intrudes on traditional state responsibilities. The Rule requires extensive reporting and bureaucratic compliance that would unnecessarily increase the cost of legal services."
The FTC uses definition for "creditor" that is outlined in the Fair and Accurate Credit Transaction Act of 2003 (FACTA), which is the definition adopted from the Equal Credit Opportunity Act (ECOA). In those pieces of legislation, a "creditor" is "any person who regularly extends, renews or continues credit; any person who regularly arranges for the extension, renewal or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew or continue credit." NACM members should be familiar with this definition as it is the reason business and commercial creditors fall under the governance of the "Red Flags" Rule.
Lawyers were never included in the original versions of the Rule and in subsequent releases until the April 30, 2009 deadline extension. During the previous delays in mandatory compliance, the FTC had pointed toward ongoing confusion and continuing interpretations of the scope of FACTA as the reasons for compliance delays. In April of this year, the FTC published a three-page document, "FTC Extended Enforcement Policy: Identity Theft Red Flags Rule, 16 CFR 681.1," on its website and, to the ABA's surprise, lawyers were listed as one of the businesses that must develop policies under the "Red Flags" Rule. The reason given was:
"In FACTA, Congress imported the definition of creditor from the [ECOA] for purposes of the [FCRA]. This definition covers all entities that regularly permit deferred payments for goods or services. The definition thus has a broad scope and may include entities that have not in the past considered themselves to be creditors. For example, creditors under the ECOA include professionals, such as lawyers or health care providers, who bill their clients after services are rendered. Similarly, a retailer or service provider that, on a regular basis, allows its customers to make purchases or obtain services and then bills them for payment at the end of each month would be a creditor under the ECOA."
The ABA charges that the agency is completely ignoring the aforementioned ECOA definition of "creditor" and further argues that simply because lawyers provide a service in advance of billing doesn't make them regular extenders of credit.
The ABA complains that applying the "Red Flags" Rule to lawyers is "arbitrary, capricious and contrary to the law." It also asserts that the FTC has failed "to articulate, among other things: a rational connection between the practice of law and identity theft; an explanation of how the manner in which lawyers bill their clients can be considered an extension of credit under FACTA; or any legally supportable basis for application of the 'Red Flags' Rule to lawyers engaged in the practice of law."
From the ABA's perspective, the FTC's "Red Flags" Rule threatens the independence of the profession by subjecting it to "unauthorized" and "unjustified" federal regulation. The association is asking that the Rule be deemed unlawful and void in its application to lawyers, claiming it will impose significant burdens upon them, particularly sole practitioners and those in small firms.
Nearly 30 state and local bar associations have officially joined the ABA's ranks in opposition and the association plans to appeal to Congress for reprieve from the regulation.
Since the Rule went into effect in January 2008, the deadline for mandatory compliance has been pushed back multiple times, with the current deadline of November 1, 2009 looming. The FTC has stepped up its business education efforts to ensure that all affected industries are aware of their responsibilities. The agency told NACM earlier this week that it is working on additional guidance materials that should be published before October.
Matthew Carr, NACM staff writer
Weathering the Storm
Join Deborah Thorne, Esq. of Barnes & Thornburg LLP on September 2, 2009 at 3:00pm EST for the NACM-sponsored teleconference, "Weathering the Storm: How to Deal With Trouble in the Supply Chain." When crisis hits, companies need to have an "action plan" to deal with troubled customers or vendors in the supply chain, and that's exactly what attendees of this teleconference will walk away with. Thorne will offer a practical to-do list of what needs to happen before a crisis occurs and pose several questions that companies need to ask before their customer gets into trouble. Do Article 2 UCC rights continue into bankruptcy? How should you structure credit relationships knowing that a possible bankruptcy is on the horizon? How can you protect your company but avoid violating the automatic stay? How should you best and most economically protect your rights under Section 503(b)(9) of the Bankruptcy Code? What should you do if your company is selling services and has no protection under Section 503(b)(9) of the Bankruptcy Code? You may not be able to avoid the storm completely, but after this presentation, you'll be better equipped to navigate your way through it.
To learn more, or to register, click here.
NACM's July Survey, which asked, "What percentage of your company's invoices need to be adjusted due to disputes, corrections or other issues?" showed that adjustments were manageable, but constant sources of frustration for credit professionals. A large majority of respondents (72%) noted that only 0-10% of their company's invoices needed to be adjusted due to disputes and other issues, but in a follow-up survey, it was revealed that the real percentage of invoices adjusted was even lower than 0-10% would suggest.
The second survey was sent to the 72% of respondents who answered "0-10%" in the initial July survey, or approximately 1,700 people. According to the results of the follow-up, 31% of these respondents noted that, in reality, less than 1% of their company's invoices required adjustment. Fifteen percent of participants said their company adjusts only 1-1.9% of their invoices, 11% said their company adjusts only 2-2.9% of invoices and 13% said their company adjusts only 3-3.9% of their invoices.
Participants in the follow-up survey were also asked how many invoices their company issues annually. The most popular answer was "10,001-25,000," which garnered 17% of all responses, followed by "5,001-10,000" and "25,001-50,000" which received 12% and 11%, respectively. There was little deviance among different classes of invoices; whether a respondent's company issued close to a thousand invoices per year or close to a million, the better part of them noted that less than 1% of their invoices required adjustment. Still, for larger companies that invoice more than 100,000, 500,000 or even 1 million invoices per year, having to adjust even less than 1% of them could still be a sizeable problem that impedes the payment process.
Of the different invoice classes, respondents who issued between 500,001 and 1 million per year had the highest percentage of "less than 1%," with nearly half (46%) answering this way.
Jacob Barron, NACM staff writer
Puts and Sales of Claims Against Financially Distressed Customers: The Dos and Don'ts
In the current economy, as corporate failures remain on the rise, the need to have a well-rounded distressed customer strategy is an imperative. Once a customer begins to demonstrate financial problems that may pave the way for bankruptcy, trying to secure protections like credit insurance is no longer an option. But, credit managers can utilize a third party by selling their unsecured claim or entering into a put arrangement to mitigate the risks of doing business with a financially distressed company. Bruce Nathan, Esq., partner in the Bankruptcy, Financial Reorganization and Creditors' Rights Group of Lowenstein Sandler PC, will walk NACM members around the pitfalls of implementing these third-party instruments during his NACM-sponsored teleconference on September 9.
Professionals wanting to maximize the rewards of these arrangements can register here.
"In today's economy, we all have to deal with higher risks, greater losses and greater delinquencies," said Vernon Gerety, Ph.D., VGAdvisors, LLC. "What I've been preaching is consistency in the way that you deal with every client, based on the factors that you face, such as the quality of the customer, the amount of information you have on them and how long your relationship has been."
During the NACM-sponsored teleconference "Credit Scoring and Improved Risk Management," Gerety stressed that credit managers must adopt credit scoring and the philosophies behind it, and apply them company-wide. The mantra being that those with the best risk management strategy win. If there is consistency in how customers are evaluated and the language that is used to describe them, a business is then set on a course for greater success. For example, using a risk-rated system to describe customer creditworthinessâ€”a simple A to F scaleâ€”is a launching pad for better portfolio management and cross-functional communication.
"What I'm suggesting is that no matter how you underwrite, your business would operate more effectively, from a strategic as well as operational perspective, if you designed a risk rating system to evaluate your customers," said Gerety. "A nice thing about a risk rating is that it's a tool, whether you are using credit scoring or not, that allows you to say, we consider this an 'A' credit and then it becomes part of the vernacular of how you talk about customers throughout your entire organization. It allows you to communicate more effectively with some non-credit type people, specifically sales and senior management."
That allows the credit department to easily explain to senior management and sales why they chose not to extend credit to a particular customer and it validates their efforts. They can report to management that they reduced the number of "F" credits from the company's customer portfolio and increased the number of "As," decreasing risk and the possibility of defaults, while easily quantifying improvement.
In terms of credit scoring, there are plenty of companies that provide solutions, including NACM Affiliates, but in reality, credit scoring programs are just an automated extension of a credit manager's decision-making process. It should be viewed as a partner to the credit function.
"Technology is not the solution; technology is the enabler," explained Gerety. "What technology has provided to us is a wealth of data. And our job as credit professionals is to turn data into information. What we do with that information is we make decisions; we use our knowledge and expertise and experience. Credit scoring fits right into that, but what credit scoring does is, instead of a manual perspective, it does it from an automated perspective. And there are some advantages and disadvantages to that."
What technology also provides the credit department is consistency. Scoring utilizes past experiences to statistically predict future events. Statistical models can provide a superior risk tool by picking the most significant predictors of risk from hundreds of possibilities and determining the relevant importance of each predictive variable minus the hours of manual labor it would take a credit manager to conduct the research.
No matter what method companies use to determine the creditworthiness of new clients, Gerety said the most important aspect is keeping an eye on how customers are paying that company. A customer may have a great D&B number and spotless financials, but once they are a client, credit departments need to continually inspect payment behavior. This can be a process of blending not only the internal data that has been collected, but also external data culled from outside sources to get a broader view of that client. If a customer is slow to pay a particular company but is paying everyone else on time, then that customer is either viewing that vendor as inferior or is using that vendor as a bank. It also means that the cash is out there, it just needs to be collected.
"You need to continually refresh your evaluation of your customers based on how you are being paid and going outside to see what changes may have occurred via other data sources," said Gerety.
In the current recessionary and emerging post-recessionary period, credit scoring has an important role as an application to trigger early-stage collections and to prioritize collections.
Professionals interested in hearing a replay of Gerety's presentation can contact Tracey Flaesch, NACM Meetings Department, at 410-740-5560 or firstname.lastname@example.org.
Matthew Carr, NACM staff writer
NACM understands that business credit reports are the keystones that help credit professionals make sound credit decisions. NACM Affiliates can provide credit professionals with the most complete, objective and accurate reports available.
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Fiscal Year 2008 was a banner year for small business procurement, as the federal government set a new record for prime contracts to smaller firms. According to the U.S. Small Business Administration's (SBA's) recently released third annual small business procurement scorecard, the sector won a total of $93.3 billion in contracts during the period, which ran from October 1, 2007 to September 30, 2008, marking an almost $10 billion jump from the prior year's figures.
Still, the record-breaking numbers have elicited little celebration.
Despite the broken record and the major increase in the contracting dollars reaching small businesses, the federal government as a whole still fell short of its statutory goal of 23% of all contracting dollars reserved for smaller firms. As much money as $93.3 billion is, it only amounts to 21.5% of all federal contracting dollars spent in FY08. "This record $93.3 billion in contracts to small businesses is significant; however, across the federal government we are committed to ensuring that the 23% goal is met and even exceeded going forward," said SBA Administrator Karen Mills. "Especially during these tough economic times, federal contracts for small businesses can be just the opportunity they need to continue to grow and create jobs. At the same time, the federal government gets access to some of the most innovative and best products and services."
Some agencies are more at fault than others. The SBA's scorecard grades on the completion of five different contracting goals for federal agencies, and for a five-out-of-five rating an agency needs to spend a certain percentage of its contracting dollars on certain specific sectors: 23% on small businesses as a whole, 5% on small disadvantaged businesses, 5% on women-owned businesses, 3% on service-disabled veteran-owned businesses and 3% on small businesses in HUBZones (historically underutilized business zones). Only one agency, the General Services Administration (GSA), met or surpassed all five goals, while large agencies like the Department of Defense (DOD), the Department of Justice (DOJ), the Social Security Administration (SSA) and the State Department met or surpassed only one of the five goals. Two agencies, the Office of Personnel Management (OPM) and the U.S. Agency for International Development (USAID), did not meet any of the five goals.
"President Obama has made a commitment to ensuring that small businesses have greater access to federal contracting opportunities and it is a commitment shared across this Administration," said Mills. "We have already begun taking aggressive steps to connect small businesses with contracting opportunities, as well as increase our outreach to federal agency procurement officers to make sure they get the information and tools they need to help them connect with these good, innovative small companies."
In addition to being below the statutory limit, questions have been raised about whether or not the money included in the SBA's figures even went to small businesses at all, potentially flowing instead to much larger firms. "According to information from the Federal Procurement Data System-Next Generation (FPDS-NG), of the 10 largest recipients of federal small business contracts, 85.4% of the contracts went to large businesses," said the American Small Business League (ASBL) in a response to the figures. "Eight of the top 10 recipients of small business contracts were large businesses."
The ASBL has long criticized the White House administrations of both former President George Bush Jr. and current President Barack Obama for their inaction on the issue of large companies getting small business contracts. According to the association, the top recipient of federal small business contracts in FY2008 was Textron, a Fortune 500 firm with 83,000 employees and over $25 billion in annual revenue that allegedly received $775.7 million in small business money during the period.
Other large firms that the ASBL claims were included in the SBA's $93.3 billion figure were Lockheed Martin, Boeing, General Electric, Booz Allen Hamilton and Northrup Grumman.
Jacob Barron, NACM staff writer
Look for the "A" Players
You need the "A" players. They're the most qualifiedâ€”the most productive peopleâ€”in your organization. And, for any open positions you have, you need them fast because any interruptions in staffing can mean missed deadlines, a breakdown in operations and loss of productivityâ€”consequences you can't afford.
You'll find the "A" players at Careers in Commercial Credit, Collections & Finance (C4F), the online resource for the people who are educated and experienced in your related field, and who are looking for the opportunities you can provide.
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C4F: Employment Connections for the Business Credit Community
As the battle over health care continues to heat up, the economic picture for the future of the United States has again come into focus. The Congressional Budget Office (CBO) and the White House both reported last week that the U.S. deficit will balloon to a record $1.6 trillion this year, representing 11.2% of gross domestic product (GDP). For opponents to President Barack Obama's health care plan, the news was a red flag against increasing federal spending.
Though NACM's Credit Managers' Index (CMI) showed that the U.S. economy hit bottom in March and other analyses have agreed with a similar time frame, the CBO anticipates recovery will be "slow and tentative." The predictions are for 1.6% annual growth as 2009 matures, with GDP growth of 2.8% from the fourth quarter of 2009 to the first quarter of 2010. The CBO predicts a slow buildup to 3.8% GDP growth by 2011 and that the average annual growth seen in 2012 and 2013 will be around 4.5%.
As the economy recovers, and if all policies remain as they are today, the agency estimates the nation's deficit will shrink, but remain above $500 billion per year, more than 3% of GDP, for the duration of 2010 until 2019. Public debt over that time frame would increase from 54% of GDP to 68% of GDP by 2019. That would be double the low seen in 2001 of 33%. The looming problem is that health care costs are expected to increase rapidly if something isn't done. Last year, outlays for Social Security, Medicare and Medicaid combined for 9% of GDP. Over the next decade, that percentage is expected to hit 12% of GDP by 2019 and total 17% of GDP by 2035. If that is allowed to happen, the CBO warns that it would pose a threat to U.S. economic stability because federal debt and the deficit would grow substantially.
For the 10-year period from 2009 to 2019, CBO's baseline combined deficit projection is roughly $7.1 trillion, $2.7 trillion more than the estimate it released in March. In contrast, the White House's Office of Management and Budget (OMB) predicts a combined deficit of $9.1 trillion during that same 10-year period. CBO's Director Douglas Elmendorf calls a comparison of the two projections "apples-to-oranges." The OMB assumes Obama's proposed policies will be approved.
"President Obama inherited the major causes of the deficitâ€”including debt-financed tax cuts and an economic crisis from the last administrationâ€”but he has accepted the responsibility to leave our nation on sounder fiscal footing than he found it," said House Majority Leader Steny Hoyer (D-MD). "The Recovery Act, even while it added to the short-term deficit, staved off catastrophe and is bringing this recession to an end."
Hoyer said that the mid-session reviews of the budget are clear signals to Congress and the White House that efforts must be made to bring the deficit under control. He added that, "because the cost of health care is the single biggest contributor to our deficit, it is imperative that we pass a health care reform bill that brings peace of mind to middle-class Americans, while reducing costs."
Not unexpectedly, the other side of the aisle saw a different picture. Republicans have rallied around the White House's $9 trillion figure and see the deficit projection as a clear sign that the nation's fiscal health is on a slippery slope.
"The Obama administration's announcement that the 10-year federal deficit has risen to $9 trillion is staggering," said Senator Lamar Alexander (R-TN). "We're on track to double the national debt in five years and triple it in 10 years. This is a flashing red light for any health care proposal that doesn't reduce the cost of health care for Americans and their government."
Senator Sam Brownback (R-KS) called the amounts of money being discussed simply "shocking." "If the administration stays this course, the gross federal debt will more than double to $24.5 trillion, more than 107% of the projected size of the economy," claimed Brownback. "Particularly troubling is that these deficits will come with income taxes rising to one of the highest levels on record as a percentage of GDP."
With the deficit debate developing, adding fuel and fodder to the health care discussion, the Department of Commerce's Bureau of Economic Analysis (BEA) released its complete analysis of economic growth. The agency says that real GDP edged down 1% in the second quarter of 2009, a better performance than the expected 1.5% drop and a much smaller decline than the 6.4% seen in the first quarter.
Despite grumblings about the breadth of the Recovery Act, the CBO, OMB and others have all agreed that the Act has averted even worse disaster. "The economy's better-than-expected performance in the second quarter suggests that it is beginning to stabilize," said Commerce Under Secretary for Economic Affairs Rebecca Blank. "The Recovery Act and other economic initiatives have put the brakes on the worst economic downturn in generations, but we are not out of the woods yet."
Matthew Carr, NACM staff writer
Despite today's uncertain economy, the best accounting and finance professionals remain in demand. In an environment where many companies have reduced staff levels, managers need to be extra attentive to the needs of their teams, or they risk losing their most valuable employees.
Before you're surprised with an unwelcome resignation letter, you need to be able to recognize signs that some of your team members may be looking elsewhere for their next career move. Here are some red flags to watch out forâ€”before it's too late:
- Change in attitudeâ€”Someone who is normally very enthusiastic and a team player may become withdrawn or stop volunteering to help others. On the opposite end of the spectrum is a normally quiet employee who begins complaining and voicing displeasure with the department.
- Missed deadlines and increased errorsâ€”Everyone misses a deadline from time to time, but apathetic workers make it a habit. A related red flag is sub-par performance. Numerous errors from a previously conscientious employee are a sign of disengagement and may indicate an impending departure.
- Limited interactionâ€”Workers thinking of leaving often become less visible and fail to engage with others as actively as they once did. Take note if an accountant who normally has lunch in the break room with colleagues starts to spend that time at his or her desk or away from the office more often.
- Increased absenteeismâ€”Unhappy employees, including those who are actively job interviewing, usually miss more days than their contented coworkers. Watch for patterns of increased absences.
- More professional attireâ€”An employee who shows up for work wearing suits even though your company has a business casual dress policy may be going on job interviews with other firms.
- Greater Internet useâ€”Not only does increased time on the Web indicate a decrease in attention to work, but it also may be a sign that the individual is researching potential employers or looking at online job postings.
If you note any of these red flags and worry a resignation letter may at some point come across your desk, you may first want to consider a little self-reflection. There are many reasons top performers leave their jobs, but quite often, it's the work environment. In fact, more than one-third of executives interviewed in a recent Robert Half survey said good employees are most likely to quit their jobs because of unhappiness with management. This is up from 23% when the question was asked five years ago. "Limited opportunities for advancement" was the second most common answer, cited by 33% of respondents. Remember that professionals seek strong leadership, particularly during times of uncertainty, and they also want managers they can learn from and who take an interest in their careers.
Source: Robert Half International
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