October 13, 2009
According to a study by the National Automated Clearinghouse Association (NACHA) earlier this year, a total of 14.9 billion electronic payment transactions were conducted in 2008, representing more than $30 trillion in transactions. This was an increase of nearly 7% from 2007. In just the fourth quarter of 2008 alone, more than 3.8 billion ACH payments were processed, increasing more than 16% from the same quarter in 2007. Those numbers steadily increased into 2009, and ACH payments in the second quarter of this year topped 3.83 billion, representing $7.4 trillion in transactions. Ninety-one percent of these transactions were commercial, a sure sign that the foreseeable end of paper invoices, checks and other hardcopy transactions items is on the horizon.
ACM, Inc.—which made the change from the name "American Check Management" because it no longer applies—has seen steady growth in the move to electronic commerce. The payment processor, which solely serves business-to-business and commercial credit transactions, has continued to evolve with electronic payment processing trends. For businesses, there are major advantages to adopting electronic payment processing, which not only reduces paper use, postage and interchange fees, but can help facilitate better trade. Utilizing tools like ACH with a check guarantee can help companies in industries, like construction, save money where the final settlement total might not be known up front. "It allows a company to get approval today, ship the product and then process the payment when it's actually received," said Rudet Fountain, national sales manager, ACM. ACM's ACH check guarantee program allows companies to delay the processing of a payment up to seven days.
For concrete and aggregate suppliers, and any company that might not know the amount of shipping and has to get additional detail after the fact, switching to ACH with a check guarantee can be a valuable tool. "With concrete dealers, when those guys get up in the morning and they start mixing concrete in that tumbler, they don't know exactly how much they're going to pour," explained Dean Middleton, president, ACM. "When you go and meet with concrete suppliers, they forever want to get a credit card up front because they can get approval, put it in a queue and then settle it later. It serves the purpose just fine."
He added, "The truth is, it is probably the most expensive way to conduct business. And it's a necessary evil that's not going to go away."
By using an electronic payment platform with a check guarantee, a company can reduce costs by 30-40% by avoiding the processing fees associated the credit cards. Businesses can get pre-approval, delay processing for up to week and then adjust the final settlement at a later date, eliminating returned (NSF) electronic payments.
As more and more companies adopt enterprise resource planning (ERP) systems and other large-scale, comprehensive accounting systems, the use of corporate trade exchange (CTX) files is also on the rise. In the fourth quarter of 2008, CTX payments, which allow for multiple payments to trade creditors in a single transfer of funds, increased to 14.4 million, representing more than $691 billion in trade. The total number of CTX transactions for the first quarter of 2009 was nearly equal to that for 2008, but increased more than 9% to 15.4 million by the second quarter of 2009. This means utilizing an ACH system and being able to distribute CTX files is an increasing priority.
"One of the things banks typically don't offer with any of their ACH, pay-by-phone or online banking-type tools is the ability to attach remittance advice. If they do offer that capability, it's usually very, very limited," said Fountain. ACM has tackled this limited aspect of other CTX payments and files by building in the ability to "attach much more significant amounts of remittance advice."
The need for electronic payments and processing services is on the rise. According to Middleton, an average of 25% of a company's customers would rather receive documents and statements electronically than by mail. "If you can look at your customer base and get 25% of them to no longer require mail, you're talking substantial savings and return on investment from day one."
Matthew Carr, NACM staff writer
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While the title suggested that it was a novice-level course, it wasn't just new credit professionals who tuned in to Doug Darrington, CCE's recent NACM teleconference, "Financial Statements for Beginners." Attendees of varying experience levels were rewarded with a wealth of thorough, practical information on how to best nail down a potential customer's financial health, a skill that has become vital in today's economy. "Financial statements form a basis for understanding the position of a business," said Darrington, a credit manager for Altaview Concrete, Inc., with more than 25 years' experience. "Typically, you'll find the financial statements included in the annual report or, for any company that trades stock, it's required for them to submit an annual report to the SEC. For those who aren't large companies, we just have to take the financial statements that are provided."
In his presentation, Darrington discussed the forms that go into a financial statement as well as what each of them is worth in the analysis process. "Basic financial statements include a balance sheet, an income sheet, a statement of stockholder equity and a statement of cash flows," he said. Diving head-first into the balance sheet, he added, "It's exactly what it says. It has to balance. It's made up of assets, things that the company owns, liabilities, things the company owes and stockholder's equity, also called net worth."
In terms of assets, Darrington first went through what comprises current assets and what else credit professionals can get from this and other figures. "Current assets include cash and those assets expected to be converted into cash within one year or one operating cycle, whatever's longer. Typically, the operating cycle will be shorter than one year. Therefore, most financial statements will be presented at the end of the year," he said. "The working capital is simply the difference between total current assets and total current liabilities. That doesn't mean much all by itself, but it will mean something in financial ratios."
One familiar portion of the financial statements that Darrington focused on was the potential customer's accounts receivable. "The accounts receivable is always the amount of money that is owed on credit sales, the amount that your customers owe," he said, adding that this figure will also be accompanied by another figure that indicates how much of the receivables are likely to be collected. "This number is going to be net of doubtful accounts. Each company will have an account set up in various ways to allow for those items which they may not collect."
How much of their receivables a potential customer is allowing for bad debt can be an important indicator of a company's fiscal health, and Darrington noted that comparing the current number with the prior year's figure is an important step in analysis. For example, if a potential customer has seen a sales increase over the last year and their allowance for debt that's not likely to be collected stays the same, this could be the sign of a good company that's made more cash sales. If there has been a decrease in sales and the allowance for debt that won't likely be collected stays the same, or goes up, this should be a red flag.
Darrington took attendees step by step through a sample financial statement and offered a number of important financial ratios that credit professionals can use to look deeper into a potential customer's health.
To learn more about NACM's teleconference series, or to register, click here.
Jacob Barron, NACM staff writer
Export Letters of Credit: The Importance of LC Instructions & How to Read an LC
The federal government has been pushing for years that more and more small- and medium-sized businesses in the United States should be involved in international trade. The vast majority of exporting companies are considered small businesses, but only represent a quarter of the nation's total export portfolio. Trade is still dominated by large enterprises. If companies are going to take the plunge into the global marketplace, they have to know the basics and the tools available to them. On October 14, Danielle Austin, letter of credit consultant, will share more than 15 years of experience in dealing with letters of credit (LCs) during the NACM teleconference, "Export Letters of Credit: The Importance of LC Instructions & How to Read an LC." Austin will explore the basics, like Incoterms and fundamentals of the LC process, as well as how to reduce discrepancies.
Credit managers interested in advancing their knowledge of LCs can register for the teleconference here.
When the economy is going strong, more often than not, suppliers are receiving what's owed to them in a timely fashion. Commerce chugs along and cash flows stream smoothly. As the economy sags and it takes longer and longer for retailers to get products off the shelves and out the door, they begin to drag their feet on invoices. Suppliers and manufacturers then find themselves in a pinch and the pangs of delinquency trickle their way through the entire supply chain.
"With the supply chain, you've got the flow of goods between manufacturers and wholesalers and retailers and the transportation companies that move everything. The flow of money in that particular segment of the economy is really important," said Jim Swift, CEO, Cortera, Inc. "If I'm a manufacturer, I need cash to buy more ingredients and more raw materials in order to increase my production, my inventory and my shipments."
Insurance companies and financial institutions like banks can survive more easily if customers begin to slow pay, but for manufacturers and suppliers, growth is culled and revenues curtailed until payments for past invoices are received. Over the past two years, there has been a sharp increase in delinquencies, which has been accompanied by a sharp uptick in accounts sent for collection. Days sales outstanding (DSO) has widened as more and more companies began hoarding cash, uncertain of the economic future of the nation, let alone their own industry. But, as other indexes—including NACM's Credit Managers' Index—have also begun to spy, Cortera's Supply Chain Index (SCI) has seen payment conditions throughout the supply chain become increasingly more favorable over the last several months.
Tracking payments against agreed upon terms, the latest SCI release shows that overall the amount of late account receivables (A/R) has continued to trend downward from high-water marks set at the end of 2008. According to the August SCI, the amount of A/R more than 30 days past due has fallen to just above 10%—a level not reported since last October, when the SCI saw a spike in delinquencies in correlation to the financial meltdown. In December 2008, the amount of late A/R peaked at 23%, but has since steadily worked its way down for nine straight months. Though the current level is still above the majority seen in 2007 and 2008, the declines signal change has taken hold.
"It tells me that, at least in the minds of finance folk, there is some kind of return of stability to the system," said Swift. "If you're a finance guy and you slow down your payments to your suppliers, it's probably for two reasons: you either don't have confidence in your sales forecast, so you're trying to hoard your cash, or it's because you can't pay; you have your own cash issues."
Swift wasn't sure if the spike in the amount of late A/R in December 2008 was simply fear or if customers were really going bad and not paying their bills at such a rapid rate, but the similar spike in the SCI in December 2007 may suggest some kind of seasonality. Regardless, he said the declines the SCI has reported in the amount of late A/R over the last several months go beyond psychology to the actual physical cash flow in the system. It demonstrates that not only are companies getting healthier, but that finance departments are also growing more confident.
"The way we look at it is the faster the money flows through the system of the manufacturing and supply chain world, the more efficient production is," said Swift. "If the money isn't flowing that fast, that means inventories are piling up, production is way down or there is something else that is wrong in the actual flow of goods." He added, "When we see things like this—where we're back to levels that we haven't seen in a year—that tells me cash flows are moving a lot more smoothly than they were. What does that mean for the overall economy? Well, extrapolate it up."
Unfortunately, what Cortera is also finding throughout the supply chain is that though the total amount of late A/R is receding, items days beyond terms (DBT) continue to grow. The August SCI DBT measurement was 15% worse than last year.
"The amount of debt that is late is returning back roughly to the same point where it was last year, but it's later," said Swift. "So, we're looking at some of the deeper buckets—the 90+ day buckets—and trying to figure out if it's a temporary thing or what else is happening. The simple answer is that it's a similar amount that's late, but later than what it was before."
It's an unfortunate duality. The increases in aging, those accounts pushing their way past 60 and 90 days, become harder and harder to collect. The trend can also be representative of a coming change. "It can be a change in behavior, where we're just going to get later and later and later, and we're okay with that now," said Swift. "It could also be a temporary blip, or it could mean that things are moving toward write-offs. It could just be a buildup of debt that will never be recovered and we might see a bump in collections down the road. That's the part we don't know."
Sifting through the numbers, Swift said that small companies are more profoundly impacted by the economy, lagging in recovery and paying slower. Cortera expects to have a more detailed release of this data in the coming weeks.
Matthew Carr, NACM staff writer
It's Credit Words Time!
It's time to submit your credit stories for this year's Credit Words Contest. Earn cash and Roadmap points if you're a winner and Roadmap points if we publish your story. It's been a really tough year; we know you have stories to share about how you've made it through the worst business environment you may have ever seen. This is just one topic of many so be creative.
Submission deadline is November 2. Read contest rules and get more information about the contest in the September/October issue of Business Credit, or by clicking here.
The U.S. Securities and Exchange Commission (SEC) recently issued a firm reminder to the nation's small businesses that the compliance date for Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) is only nine months away. Come June 15, 2010, public companies with a public float below $75 million will have to comply with Section 404's auditing and reporting requirements.
Previously, only the nation's larger companies had been required to comply with the provision, as smaller companies had been granted an extension designed to give them more time to properly create, implement and document their internal controls. In a statement, however, SEC Chairman Mary Schapiro noted that there would be no further delays and that smaller firms will be required to report to the public on the effectiveness of their internal controls. "Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance," she said.
The original compliance date for small businesses was for fiscal years ending on or after December 15, 2009. The extension was granted to allow the SEC's Office of Economic Analysis to conduct a study to determine whether the agency's previously-issued guidance had successfully reduced the cost of compliance for smaller firms.
Since 1977, all U.S. public companies have been required to maintain internal accounting controls, but SOX requires the reporting of these controls and an auditor's attestation that they exist and are sufficient enough to prevent material misstatements on financial documents.
Schapiro was joined by SEC Commissioner Luis Aguilar in assuring investors, smaller companies and other non-accelerated filers that there will be no more delays. "Over the last seven years, in several separate instances, the Commission has deferred the compliance date for non-accelerated filers to provide the auditor attestation under Section 404(b). I know that, as a result, there is uncertainty among investors and among non-accelerated filers about whether and when compliance with Section 404(b) would actually be required," said Aguilar. "The Commission is for the first time resolving that uncertainty by making it clear that all public companies, regardless of size, will be required to comply with Section 404(b) of the Sarbanes-Oxley Act, and that non-accelerated filers will begin complying in their first annual report for fiscal years ending on or after June 15, 2010."
For more information, visit the SEC's website at www.sec.gov.
Jacob Barron, NACM staff writer
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China has done the unimaginable in the global marketplace in the past decade. In 1999, China's total exports were a paltry $195 billion. The total amount of China's world trade then was a mere $361 billion, less than the total trade China has conducted with the U.S. in each of the last two years.
In 2008, China was the epicenter of nearly $2.6 trillion in trade worldwide, and the country exported $1.4 trillion in goods. That's more than a sevenfold increase in trade in just ten years.
During those ten years, the United States' trade deficit with China increased just as rapidly. In 1999, the U.S.' trade deficit with China was $69 billion. Now, it's more than $266 billion and growing.
As China cements itself as an economic powerhouse, the United States hasn't remained static. The nation has ramped up its foreign trade initiatives and exports have nearly doubled this decade. However, the U.S. is still running a trade deficit with the rest of the world. With the globe made smaller by technological advances and available shipping methods, the U.S. is not letting up on the push to get more American businesses, particularly small- and medium-sized enterprises (SMEs), involved in exporting.
U.S. businesses have historically benefited from a large, local and happy-to-spend customer base. The need to export has basically been moot for decades. But now the American domestic market is only a thin slice of a much larger pie.
"Exporting is literally a world of opportunity," said Senator Amy Klobuchar (D-MN), chairman, Senate Subcommittee on Competitiveness, Innovation and Export Promotion. "Over 95% of the world's customers are located outside the United States. Increasing our exports will mean more business, more jobs and more growth for the American economy."
When the dollar is weak, foreign markets become a haven for U.S. goods, and the government is trying to entice small- and medium-sized U.S. businesses to test the waters overseas. Last week, United States Trade Representative (USTR) Ron Kirk announced new policymaking initiatives to motivate American businesses to explore the opportunities of exporting, including an investigation by the International Trade Commission (ITC) to determine obstacles and benefits to SMEs.
"American companies of all sizes must export their goods and services to get our economy growing again," said Ambassador Kirk. The USTR will also be partnering with the Department of Commerce and the Small Business Administration (SBA) to draft small business export programs, and announced it will seek new trade agreements and set priorities in existing trade agreements to better facilitate small business trade.
According to the National Association of Manufacturers (NAM), as it stands, 95% of all U.S. exporters to North American Free Trade Agreement (NAFTA) partner nations are small- and medium-sized businesses, representing some $630,000 in exports per year per company. Almost 45% of exporting companies to the U.S. Central American Free Trade Agreement (CAFTA) partners are small- and medium-sized business, and more than 80% of U.S. exporters to China are SMEs.
Nonetheless, while small businesses represent 97% of all exporters, currently only 1% of all U.S. small businesses are exporting. International trade is still dominated by large companies that make up about 75% of the U.S.' total export volume.
"America has always reached out around the globe through its exports," said Senate Committee on Commerce, Science and Transportation Chairman John D. Rockefeller (D-WV). "However, small- and medium-sized businesses in particular have not taken full advantage of potential markets abroad. But that can and should change."
The Senate Subcommittee on Competitiveness, Innovation and Export Promotion is currently holding hearings on promoting export success for small businesses. Rockefeller believes that as the U.S. economy struggles, overseas markets will continue to represent opportunities and spur growth. "Firms that engage in overseas trade tend to have higher rates of productivity growth and pay higher wages," said Rockefeller. "By leveraging U.S. competitiveness and tapping new markets, we can narrow our trade deficit and create quality jobs."
Unfortunately, some of the biggest obstacles to small business participation in international markets are tariffs, duties and taxes that are imposed by other nations. This has been the main driver behind free trade agreements, like those pending with Panama, Colombia and South Korea.
"There are roadblocks for U.S. companies, big and small, when they export products internationally," said Brad Pierce, president, Restaurant Equipment World. "For example, an American product that has a dealer cost of $35,000 when it leaves our shores can have a final cost reaching $60,000 to $70,000 when it reaches its destination. U.S. innovation and product quality can overcome many obstacles, but a doubling in price can be crippling."
Another difficulty is informing small businesses of their options. This year, the Export-Import Bank of the United States (Ex-Im) experienced a banner year, helping small businesses with more than $4 billion in transactions, 29% more than fiscal year 2008. Small business transactions accounted for 88% of those supported by the bank, though the bank knows there is still work to be done.
"We estimate that there are 259,000 actual small business exporters in the U.S.," said Alice Albright, executive vice president and COO, Ex-Im. "With a business development staff of less than 40, Ex-Im is working incredibly hard to reach these companies; however, speaking candidly, we have work to do in terms of raising our profile."
Ex-Im made other considerable contributions to international trade by filling in financing gaps. For example, it provided more than $1 billion in guarantees because U.S. lenders were reluctant to take on Korean bank risk related to export letters of credit. The bank says that as the risk appetite of U.S. lenders increases, Ex-Im will be able to gradually withdraw its support.
Matthew Carr, NACM staff writer
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The ranking Republican member on the Senate Committee on Small Business and Entrepreneurship recently said the small business provisions in the stimulus bill passed earlier this year are having a positive effect on the nation's smaller firms. "The small business provisions we included in the stimulus are yielding tangible results. We have witnessed an approximate 60% increase in SBA lending, which translates into more than $11.3 billion in new loans through the 7(a) and 504 programs and the creation or retention of over 300,000 jobs," said Senator Olympia Snowe (R-ME). "In procurement opportunities through the stimulus, the federal government is exceeding its small business statutory contracting goals in every category except for women-owned small businesses."
Snowe's comments came after an oversight hearing, "The Recovery Act for Small Businesses: What is Working and What Comes Next?," held by her and Committee Chair Mary Landrieu (D-LA). According to witness testimony, the $787 billion American Recovery and Reinvestment Act (ARRA) passed in February has, as Snowe noted, increased lending and made it easier for small businesses to create and retain jobs. Still, both senators agreed that more work remains in several areas. "We cannot rest on our laurels," said Snowe. "I urge the administration to implement a meaningful women's contracting program like Congress directed it to nearly a decade ago. This would help the federal government to meet—and exceed—its contracting requirements for women-owned small businesses. And we must also pass legislation I introduced to increase the maximum level on 7(a) and 504 loans to $5 million so that more small businesses are able to access capital."
The legislation to which Snowe referred is S. 1615, also called the Next Step for Main Street Credit Availability Act of 2009, which she introduced in August. In addition to increasing the maximum on 7(a) and most 504 loans, the bill would also raise the maximum threshold for microloans from $35,000 to $50,000.
Another area in which the senators are seeking improvement is federal contracting. While the biggest spending agency, the Department of Defense (DOD), has spent 58% of its ARRA funds on small businesses, the federal government as a whole is lagging behind, having spent just over 25% of total recovery act funds on small businesses, dragged down by agencies like the Department of Energy (DOE), which has spent less than 7% of its recovery act funds on smaller firms.
Another controversial ARRA provision criticized in the hearing exempted the National Institutes of Health (NIH) from participation in the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. In joint letters sent early this year, Landrieu, Snowe and Senators Ben Cardin (D-MD) and Russ Feingold (D-WI) urged NIH to allocate the money anyway, despite the exemption. "This provision cheated small businesses out of as much as $230 million in work, and it directly counters the goals of the Recovery Act to create high-paying jobs, spur innovation and boost America's competitiveness," said Landrieu. "The SBIR and STTR programs have a proven track record in these areas."
Jacob Barron, NACM staff writer
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Judges across the country are facing a deluge of cases. According to the Judicial Conference of the United States, which conducts a survey every two years of the needs of the U.S. appellate and district courts, case filings for both the appeals and district courts have increased more than 30% since 1991.
Last month, Subcommittee Chairman Senator Patrick Leahy (D-VT) introduced bill S. 1653, the Federal Judgeship Act of 2009, which looks to expand the number of judgeships in the U.S. The Judicial Conference recommends that Congress establish 63 new judgeships in the courts of appeals and district courts and have five current temporary judgeships be converted to permanent positions, with one temporary district court judgeship extended another five years. From the Conference's and Leahy's perspective, the reasons are quite simple. Weighted filings per judgeship (the Judicial Conference measurement to determine the workload of judges) in the district courts where the Conference is recommending additional judges have increased from 427 in 1991 to 575 in June 2009. This year, four circuit courts exceeded 800 adjusted filings per panel, though two of these courts—the Fifth and Eleventh Circuits—did not request an additional judgeship.
"The numbers underscore the need for action," said Senator Sheldon Whitehouse (D-RI). "On average, there are 573 so-called 'weighted filings' in the district courts for which new judgeships are recommended, well above the 430 'weighted filings' needed to trigger a judgeship recommendation by the Judicial Conference."
During the time period from 1991 to 2009, filings in district courts have risen 31%—civil cases have increased 22% and criminal felony filings have shot up dramatically by 91%. Immigration filings have also undergone a tremendous increase, ramping up from 1,992 in 1991 to more than 24,500 in 2009.
Likewise, since 1991, filings in the courts of appeals have been on an upswing, increasing 38% by June 2009. For the six circuit courts where new judgeships have been recommended, there is an average of 802 adjusted filings per panel, which, as Whitehouse pointed out, is well above the 500 adjusted filings per panel measure the Judicial Conference uses to determine the need for additional judges.
On the surface it may seem rudimentary that an increased workload for courts should be a no-brainer to increase the number of judges, but it's apparently not that simple, particularly for appellate judges. "The chief argument for increasing the number of appellate judges is to reduce the workload per judge," testified Eleventh Circuit Court of Appeals Judge Gerald Tjoflat. "This seems simple enough, but, from my experience, increasing the number of judges actually creates more work. Adding judges decreases a court's efficiency by diminishing the trust and collegiality that are essential to collective decision-making."
Tjoflat explained that when he was a member of the Fifth Circuit in 1979, when Congress increased the number of judges from 15 to 26, it negatively impacted the court's efficiency and the stability of the rule of law in the circuit. As the consistency in the rule of law diminishes, Tjoflat noted, it in turn creates an increased need for more district court judges because unstable law leads to increased litigation. Though he is currently a judge in one of the busiest circuits in the country that has repeatedly refused an additional judgeship, Tjoflat argues that more important for appellate courts is a smaller, tight-knit group of judgeships because those relationships translate into speedier, more consistent justice. Based on the Judicial Conference's threshold for additional judges, the Eleventh Circuit should have 27 judges, more than double its current 12.
He added that increasing the number of appellate judges also torpedoes a critical circuit function: the en banc hearing, where all the judges of a circuit come together to speak definitively about a point of law for that circuit. An en banc occurs after multiple panels have issued conflicting opinions or a longstanding precedent needs to be revisited because of changing circumstances. When a circuit gets too large, it has to resort to a "mini" or "limited" en banc, where a minority of judges definitively determines the law for a circuit.
"The courts of appeals must be limited in size if the law is to possess the clarity and stability the nation requires," said Tjoflat. "As the law becomes unclear and unstable, our citizens—whether individuals or entities like corporations—lose the freedom that inheres in a predictable and stable rule of law. The demand for more judges, if satisfied, will inexorably lead—little by little—to the erosion of the freedoms we cherish."
Matthew Carr, NACM staff writer
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