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November 10, 2009

News Briefs

  1. Supply Chain Payments Do an Abrupt About-face
  2. Amended Investor Bill Includes SOX Delay Language
  3. The Balanced Scorecard Meets the Credit Department
  4. Doing Business With Minority Enterprises
  5. Eye on the Hill: The Data Breach Notification Act
  6. Small Businesses Continue to Feel Credit Squeeze
  7. U.S. Industrial Vacancy Rate Hits Decade High in Q3 2009

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Supply Chain Payments Do an Abrupt About-face

Almost all indicators over the last few months have demonstrated that the economy is pushing toward recovery—albeit, sometimes, quite slowly. Dragging down the emotional outlook, unemployment this month topped 10% for the first time since 1983, though that shouldn't really have been all too surprising. Predictions have for some time pointed toward a double-digit unemployment rate before the year's end.

Now, the holidays are no longer on the horizon; they are already here. Seasonal employment is being eyed to save many families, while retailers are bracing themselves for the hopeful return of the U.S. consumer. Holiday advertising began months ago, just after the back-to-school sales ended, and the economy is hoping to see some significant improvements in consumer spending this shopping season.

The holiday season also means it's a bad time of year for receiving timely payments. Manufacturers, retailers and suppliers typically take on additional trade credit debt as they prepare for the holiday shopping season. This has been clearly evident in Cortera's Supply Chain Index (SCI), which has seen a spike in late account receivables (A/R) each holiday season every year of the index's existence. So, it was of little surprise that after four consecutive months of improvements, the SCI saw slow payments in the supply chain tick upward in October.

However, that's not the entire story.

At first glance, the sharp increase seems indicative of the seasonal days beyond terms (DBT) that Cortera sees every fall and winter as companies dramatically slow down payments to suppliers as they try to manage their capital for the holidays. Unfortunately, this slowdown is normally seen in November or December, and then quickly recedes after the New Year when companies are sitting on a cache of cash and begin paying off debts again. This year, the arrival of the winter spike is two months earlier and the analysts at Cortera are scratching their heads.

"An abrupt slowing of payments and cash flow throughout the supply chain typically indicates a waning confidence in sales," explained Jim Swift, CEO and president, Cortera. "But we've seen similar spikes occur in the past as supply chain stakeholders make significant upfront investments in preparation for the holiday shopping season."

Swift stated that the early arrival of the DBT spike in October may indicate that companies are stretching out payments on that seasonal debt, or that overall confidence in the economy's recovery has taken a severe blow.

Cortera points out that manufacturers have increased output. That was reported by the Institute for Supply Management. But the fact that large-scale bankruptcies, like the recent filing by CIT Group, continue to snag headlines and may have companies unsure about the current pace of rebound.

Right now, commercial A/R debt more than 30 days past due is 50% higher than what was seen in September 2007, prior to the official start of the recession. Overall, payments are arriving 40% later than what was seen in the September 2007 SCI.

The biggest issue in the near-term is watching supply chain payments as the holiday season comes to its end to see if they return to normal at the same pace as seen in years past.

Matthew Carr, NACM staff writer

Government Contractors Guide to Managing Federal Government Payments and Collections

In this slow economy, managing cash and liquidity are more important than ever. That same slow economy and the large Federal stimulus package are causing more companies to look at doing business with the federal government. However, doing business with and collecting from the federal government is far different than commercial business practice, with its own set of very detailed rules and procedures. Understanding those rules can improve cash flow. For any company with any federal contracts, this GBG teleconference, presented by Bill Blumberg, Principal, Federal Contract Solutions, will teach you what to do, how to do it and help you solve problems with the government at all levels. Blumberg will also be answering questions submitted by GBG members. To register for this November 12, 2009 teleconference, click here.

Amended Investor Bill Includes SOX Delay Language

A bill that would exempt many of the nation's small businesses from the reporting requirements of the Sarbanes-Oxley Act (SOX) was recently rolled into another bill, just after garnering two more Republican sponsors.

Rep. Scott Garrett (R-NJ), the original sponsor of H.R. 3775, the Small Business SOX Compliance Relief Act, recently added the bill's provision's to the Investor Protection Act of 2009, which was recently approved with the amendment intact by the House Financial Services Committee in a roll call vote of 37-32. The added provisions were sponsored both by Garrett and fellow New Jersey Congressman John Adler (D-NJ).

The Investor Protection Act of 2009, H.R. 3817, was originally introduced by Rep. Paul Kanjorski (D-PA) and would give the Securities and Exchange Commission (SEC) new authority to better protect investors from violations of securities law, among other provisions.

"There is a place for federal oversight," said Garrett, "but the weighty cost of compliance under Section 404 is slowly strangling small businesses. It is diverting valuable resources away from other legitimate business needs, creating massive and tedious documentation requirements and discouraging the public listing of both international and domestic companies on U.S. markets."

"Honest companies are being punished and the U.S. economy will suffer as a result. Especially now, as our country struggles to emerge from a recession, the last thing American small businesses need is another barrier to economic stabilization," he added.

Before the Act was rolled into an amendment, Rep. Jeb Hensarling (R-TX) and Rep. Tom Price (R-GA) both signed on as cosponsors of the Act. "Small businesses are the driving force of our economic engine, yet the burdensome requirements of Sarbanes-Oxley have become a huge barrier to job creation," said Price. "It's been reported that compliance costs an average of $1.7 million, a staggering burden for most small businesses. H.R. 3775 is worthy of support because it would help lift the heavy weight of these compliance costs off the backs of our primary job creators."

"To promote a real and sustainable economic recovery, we must unleash the power of America's entrepreneurial spirit once more," he added.

Jacob Barron, NACM staff writer

Look for the "A" Players

You need the "A" players. They're the most qualified-the most productive people-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 productivity-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.

Click here to get started!

C4F: Employment Connections for the Business Credit Community

The Balanced Scorecard Meets the Credit Department

Helen Keller once said, "The most pathetic person in the world is someone who has sight, but has no vision." Companies the world over craft corporate slogans and mission statements designed to motivate employees and energize customers and investors. And oftentimes, the success of that stated vision is quantified by financial measurements.

During the 1990s, two gentlemen from the Harvard Business School, Robert Kaplan and David Norton, found that the majority of companies were managed by financial measurements only.

"As credit people, we totally get this because we have our aged trial balance. We can tell you what our DSO number is, how much we collected this month and how much we billed—all of this financial-related detail," said Susan Delloiacono, CCE, director of credit, Brother International Corp. "We look at that and think, 'Hey, if we've got our competence rate based on our finances, then everything else must be going along just swimmingly.' Well, these guys found that, no, we're missing three other components that help successful organizations."

During the NACM-sponsored teleconference, "The Balanced Scorecard Meets the Credit Department," Delloiacono challenged credit managers to think in the same terms that Kaplan and Norton did: that corporate success is dependent upon more than just financial ratios. Kaplan wrote that "if senior managers place too much emphasis on managing by the financial numbers, the organization's long-term viability becomes threatened."

"It doesn't sound like we have a rudder on our boat to success here," said Delloiacono. "But actually, the balanced scorecard can give us that. We're going to know why we're successful, how to be successful and be able to measure those steps along the way."

Almost two decades ago, Kaplan and Norton recognized that changing times called for the end of one dimensional measurement. They devised a management system where managers are given a comprehensive picture of the business. The duo created the Balanced Scorecard, where strategies are deployed and then tracked using financial measures, customer measures, internal business process measures and knowledge education growth measures.

The balanced scorecard is based on the reality that investors and customers have expectations about an organization. Senior management is then charged with setting the strategic vision for the company, while department heads are given the responsibility to create goals for their team members and their department that follow that outlined vision. This process is all supported by employees that must execute to achieve those desired goals.

"We all know what's expected of us because we've been doing the job for years. We know our products; we know our customers," said Delloiacono. "We know who pays and who doesn't. Sales complains about us, but we must be doing something right because we haven't lost a lot of money and we get a raise every year."

The scorecard is designed to create an environment where an organization is ensuring that it is doing the right things and aligns cross-functional visions for a company's success. It also puts accountability for achieving goals on individuals and departments, and helps translate high-level strategies into words that are meaningful and relevant to the entire organization.

Delloiacono believes that the first step in adopting a balanced scorecard is that credit managers must look at their own companies and try to define what the corporate vision is, as well as identify what sort of planning process is in place. From there, managers and department heads can begin to lay the foundation for their balanced scorecard. "I kind of challenge all of us to think that today is the first day of the rest of our careers," she said. "Change your attitude, because it's going to start with you thinking outside the box."

NACM members who missed Delloiacono's presentation can contact Tracey Flaesch at 410-740-5560 or traceyf@nacm.org to listen to a taped version of the teleconference.

Matthew Carr, NACM staff writer

Wanted: NACM Member News

Have you recently been honored with an industry award, gotten recognized for your community service or for improving company processes, or promoted within the credit department?

How have you been raising the bar and setting best practices? Forward your news to bcm@nacm.org by November 16 so we can share it in January's Business Credit magazine.

Doing Business With Minority Enterprises

One of President Barack Obama's stated goals on the campaign trail was to increase small business participation in the government contracting process, and his rhetoric since being elected has echoed this. Obama and his Small Business Administration (SBA) chief Karen Mills have proposed increases in loan sizes and other measures to more effectively get small businesses into the contracting game. "There's a public policy desire to increase DBE participation," said Jim Fullerton, using the government approved term for disadvantaged business enterprises (DBEs). "We want DBEs to get more experience in doing construction contracts, we want them to become stronger financially and get these folks to a position where they're not disadvantaged."

"The issue is that most of these groups tend to be financially disadvantaged," he added, as their name would imply.

The unique circumstances of government contracting, combined with the general desire of the nation's lawmakers to engage distressed businesses, have created a difficult situation for many general contractors, subcontractors and suppliers, all of whom received a wealth of good advice from Fullerton's latest NACM-sponsored teleconference, "Doing Business With Minority Enterprises."

"Any time there's federal money in any project, the federal procurement rules are going to apply and that includes the DBE participation rules," said Fullerton, using a specific case out of Virginia to illustrate his point. "The case was really about bidding. To be responsible and responsive, bids had to show that a quarter of the subcontractors were DBEs or that the contractor had made a good faith effort."

"The contract went to the second lowest bid," he said. "It's an example of where the government is willing to pay $322,000 more for a contract because of the policy to increase DBE participation."

Contractors, subcontractors and suppliers who can't meet the government's needs for DBE participation can wind up missing out on a great deal of business and so, despite the financial risks associated with working with distressed businesses, finding a way to make a deal that satisfies security requirements for all parties involved can give a business a competitive edge in the contracting arena. "Our objective is to figure out how to structure transactions that meet public policy concerns, meet the prime's concerns about financial risk and meet the supplier's concerns about financial risk," said Fullerton, who enumerated several tools that contracting parties can use in order to secure their investments while still adhering to government-stipulated contracting rules.

For more information on NACM's teleconference series, click here.

Jacob Barron, NACM staff writer

CIT Group's Prepackaged Chapter 11 Filing

The nation has been under siege by large-scale bankruptcies that have significant impacts on suppliers, but the latest Chapter 11 filing by CIT Group is vastly different from that of a GM or a Ford: CIT was one of the largest lenders to small businesses. The filing has put many in the credit field at unease and has sparked a number of questions. On November 13, NACM will host the teleconference, "CIT Group's Prepackaged Chapter 11 Filing," which will be presented by Bruce Nathan, Esq., partner, Bankruptcy, Financial Reorganization and Creditors' Rights Group at Lowenstein Sandler PC. Nathan will discuss how the prepackaged plan will work, how the reorganization process will specifically relate to CIT and will answer any questions attendees might have about the CIT bankruptcy.

Members interested in learning more about CIT's prepackaged plan and what the company's Chapter 11 filing impact will be, can register here.

Eye on the Hill: The Data Breach Notification Act

With the electronic age came a new form of predator: the hacker and identity thief. As millions upon millions of records are stored and transactions take place in the virtual space of the Internet, the number of possible victims from a single data breach has grown exponentially and the sheer volume of individual accounts that can be compromised by a single attack has become staggering.

Between July 2005 and December 2006, some 94 million records at TJX Companies were exposed to potential theft and abuse. Between April 2003 and April 2004, some 30 million customer records were made vulnerable at America Online. A single laptop stolen at a Maryland suburban home housed more than 26.5 million records from the U.S. Department of Veterans Affairs, and those records are now exposed to potential abuse. And the list goes on and on. Each year, some company steps forward and announces a new mind-numbing total of records exposed due to a security breach.

The FBI's latest annual report on Internet crime found that online crime hit a record high in 2008—a 33.1% increase over the previous year—and that the total dollar loss linked to online fraud last year was $265 million.

Currently, 40 states require companies to notify individuals if there is a security data breach, but there is no national or federal law requiring businesses to do so. Earlier this year, Senator Dianne Feinstein (D-CA) re-introduced a bill called the "Data Breach Notification Act," which requires federal agencies and businesses involved in interstate commerce to notify the parties made vulnerable by the breach. This bill was presented at the Executive Business Meeting of the Senate Judiciary Committee last week and was ordered to be reported.

Under the bill, any company or government agency that experiences a data breach must notify consumers if their personal information has been exposed, and the entities must do so without "unreasonable delay." The notice must outline the information that was exposed, and can be done via mail, email or phone.

But if the breach exposes the personal information from more than 5,000 individuals in any state, the agency or business must provide notice to "major media outlets in that state." And law enforcement must be notified within 14 days if the breach involves the records of more than 10,000 people, the database contains more than one million individual records or is a federal government database and if the personal information includes those of federal government agents involved in national security.

Penalties under the bill would be enforced by the U.S. Attorney General or State Attorney General offices, and civil penalties would have a ceiling of $1,000 per day per individual affected up to a maximum of $1 million per violation.

This isn't the only piece of data breach and cyber-security proposed legislation in Congressional halls. The Senate Judiciary Committee approved the bipartisan "Personal Data Privacy and Security Act of 2009," which was introduced by Judiciary Chairman Senator Patrick Leahy (D-VT) and is co-sponsored by former Judiciary Chairman Orrin Hatch (R-UT). This bill is similar to the scope of the Federal Trade Commission's "Red Flags" Rules by having the intent to prevent and mitigate identity theft, but by doing so by preventing data breaches.

"The loss of data privacy is not just a grave concern for American consumers; it is also a serious and growing threat to the economic security of American businesses, and is a growing threat to our national security," said Leahy.

"It seems, on a daily basis, we hear reports of cyber thieves who compromise private information of U.S. citizens and cause irreparable damage to reputations," said Hatch. "That is why passing consensus federal data breach legislation is a step in the right direction, to not only protect the unprotected, but to simplify the confusion caused by differing state laws."

NACM's Government Affairs Committee is actively watching both bills, ensuring that they adhere to the interests of business creditors.

Matthew Carr, NACM staff writer

Distressed Business Services

Many NACM Affiliates are involved in a national network to provide assistance in the rehabilitation (if possible) or liquidation (if necessary) of businesses in severe financial difficulty.

While courts can take several months or more to start a reorganization plan, NACM Affiliates can assist in getting a plan approved in as little as 30 days. Most helpful is the knowledge that experienced professionals are ready to step in at the most difficult time. NACM Affiliate staff members can serve as secretary to creditors' committees, provide other needed advisory services and are fully aware of the prevailing laws and regulations relevant to each situation.

Click here to learn more about NACM's Distressed Business Services.

Small Businesses Continue to Feel Credit Squeeze

A new study recently released by Experian noted that despite upticks in many economic indicators, small businesses are still facing an especially tightened credit market and a major decline in overall lending.

The annual benchmark report, Experian Decision Analytics' Small Business Lending Edition, showed that financial institutions have maintained their hesitant attitude toward small business lending, with overall loan volume to the sector dropping 10% over the past year. However, small businesses have continued to rigorously seek out credit and have increasingly begun relying on credit cards, with credit card volume increasing by 22% over the same period.

This year's report, the sixth of its kind, also reflected how the difficulties in the housing market uniquely affected the nation's small businesses and small business owners. "There is a reliance on the credit cards for the small business owner, but what we're seeing historically was that there was a reliance on the small business owner's personal residence," said Joel Pruis, principal consultant of Experian's advisory services. "Whether they were refinancing their mortgage and throwing that into the business or using the collateral support, because of the increasing value of the home, that was a great source for them to obtain credit."

With the collapse of the housing market however, this is no longer the case for many owners of small firms. "Since those values have gone the other way, that personal residence is no longer that type of resource," Pruis added.

As small businesses have migrated to credit cards for their cash flow needs, applications to financial institutions for financing have also dropped over the last year. "This is the first year we've seen a decline in the number of applications processed per financial institution and the average request size," said Pruis. "Combine that with the approval rate and there is a significant reduction in the total dollars that were approved."

For banks and other lending institutions, the result of this decline in applications has also been devastating. "The average financial institution lost about $750,000 in income because of the reduction in the application volume," Pruis added.

The overall drop in lending from financial institutions has also had a predictably negative effect on suppliers to small businesses as well. "If you're not able to get it from the institutions, then the small business owners are going to be relying on the trade credit and leaning more heavily on that," he said. "When you can't get it from the bank, then you slow-pay on your suppliers to take care of more immediate needs."

"You start to go into the priority of the payments with the small business owner," said Pruis. "The suppliers have the lowest bargaining position."

For these trade creditors, the lack of available financing combined with a still lending-hungry small business sector will require many of them to change their approach to credit extension. "We recommend taking a more strategic approach," said Pruis. "Do some analysis on your customer base. You can start to see some general trends in terms of the credit they have and how long they are stretching."

"The whole idea is that we're in probably some of the worst economic times we've seen in close to 20 years, and we will come out of this, so as you start to see some businesses that are not performing as well as you would like, if this is the worst they've performed, are they still acceptable?" he asked. "The trick is how you decipher that this client isn't going to rebound, and cut them off."

Jacob Barron, NACM staff writer

U.S. Industrial Vacancy Rate Hits Decade High in Q3 2009

The national industrial vacancy rate edged up yet again during the third quarter of 2009, hitting 10.5%. This represents a new high for the decade and marks the eighth consecutive quarter of increasing vacancy, according to the third quarter industrial report from Colliers International, the global real estate services firm. The cyclical low for industrial vacancies had previously stood at 7.9%; and from one year ago, the U.S. industrial vacancy rate has increased by 1.9 percentage points. Industrial net absorption for the quarter measured negative 47.3 million square feet (msf). Although this is clearly not an encouraging sign, Q3 occupied space contracted by less than it did in Q1 and Q2, respectively. Year-to-date industrial absorption in the U.S. stands at negative 132.4 msf. Three markets in particular contributed to the YTD negative absorption, including Chicago (negative 18.4 msf), Los Angeles Basin (negative 20.4 msf) and San Jose/Silicon Valley (negative 9.6 msf).

The amount of warehouse construction completions declined again in Q3, in tandem with ongoing weak industrial market conditions, with just 11.9 msf delivered in the July through September period. This is the lowest number for new construction delivery Colliers has on record. Indeed, quarterly new construction has fallen steadily as 2009 has progressed.

In terms of U.S. warehouses under construction, during the third quarter, this metric was down as well. Approximately 22.4 msf of new development was underway at the end of Q3, scheduled to be delivered to the market during Q4'09 and into 2010. Like new completions, this construction underway number is the lowest Colliers has on record, and well beneath the 154 msf of construction underway just two years ago.

Warehouse rent patterns mirrored those of absorption mentioned above. Although the average rental rate for industrial space did fall from $5.09 per square foot (psf) during Q2'09 to $5.04 psf in the third quarter, this fractional decrease of 0.9 percent was the least rents had dropped (psf) in the past year. Bulk warehouse space and tech/R&D space showed larger decreases in rental rates, while flex/service space fared better than traditional warehouse rents.

"The U.S. warehouse market showed ongoing weakness in Q3, with vacancies up, absorptions negative and construction completions/construction underway at the lowest levels our researchers have ever witnessed—which is no surprise given the ongoing recession and stagnating economic landscape," reported Ross Moore, executive vice president and director of market & economic research for Colliers International. "Although a few bright spots are evident, including a pickup in leasing activity and an easing of absorption losses quarter-over-quarter, we predict 'more of the same' for the industrial space market until well into 2010. From our vantage point, warehouse tenants will sit tight and make do with their current space—avoiding expansion and new lease signings—until more signs of a sustainable recovery are evident."

Source: Colliers International

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