In the News
October 1, 2015
Breaking away from the roller coaster ride seen over the last few months, NACM's Credit Managers' Index (CMI) continued on its downward spiral in September, dropping from 54.2 to 52.9 and resulting in the lowest combined index of the last year.
The index of unfavorable factors was mostly to blame, with the combined score reading 49.7 and four of the six categories also falling below the 50 point contraction zone. "When the unfavorable factors are showing stress, it is an indication that companies are feeling the pinch and may be starting a long downward trend," said NACM Economist Chris Kuehl, Ph.D. "These are the readings that indicate whether creditors are in trouble."
The categories of accounts placed for collection, disputes, dollar amount beyond terms and dollar amount of customer deductions are all below 50. Of those, only accounts placed for collection was above 50 in August. Filings for bankruptcies and rejections of credit applications, however, both stayed in the green, posting at 53.3 and 51.3, respectively.
The index of favorable factors did not fare too well either with three of the four categories dropping from the previous monthâ€”all did, however, remain above contraction territory. Overall, the favorable factors index posted at 57.7, a drop from 59.2 in August. The category of new credit applications showed the only increase, from 57.7 to 58.1, which Kuehl described as an "interesting sign," while also acknowledging it is the third lowest reading within that category in the last 12 months.
The categories of sales (56.4), dollar collections (56.4) and amount of credit extended (60.1) all fell to the lowest levels seen in the last year. Throughout 2015, many of the favorable factors have shown positive developments. As recently as July, all four favorable factors posted in the 60s. Yet, current data reflects a negative shift. "This is signaling an abundance of caution going into what is supposed to be a strong selling season and this is worrying," Kuehl explained. "It would seem that many of the triggers that usually promote growth are not working outâ€”unemployment is relatively low, there is no inflation in the energy sector and there has been improvement in the housing data. Nothing seems to be able to shake the lethargy and concern."
The CMI data for September shows worsening at a point of the year when many anticipated seeing modest improvements. "Nearly all the readings are down from where they were a month ago and significantly down from a year ago," Kuehl said. "There will have to be a big rebound just to get back to where the readings were in October and November of 2014."
- Jennifer Lehman, NACM marketing and communications associate
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One in three businesses surveyed in Brazil, Canada, Mexico and the United States reported that about one-fifth of the value of their business-to-business (B2B) receivables is more than 90 days overdue, and most of these invoices relate to foreign B2B customers, according to a new report on payment practices.
Domestically, the highest proportion of late payments are from customers in the machines sector followed by those in agriculture, food, metals, construction materials and construction sectors. These last two categories as well as textiles, consumer durables and electronics sectors account for the largest proportion of foreign past due invoices.
"As long-outstanding receivables are highly likely to become bad debts and be written off, this may cause severe disruptions to cash flow," noted Atradius, which released the September 2015 edition of the Atradius Payment Practices Barometer, a survey of B2B suppliers in the abovementioned countries.
About 95% of the respondents reported having experienced late invoice payments from domestic and foreign B2B customers over the past year. This translates into an average of about "50% of the total value of B2B receivables, most often on foreign trade, being defaulted on," Atradius said. "Respondents in Mexico [54.2%] experienced late invoice payments from domestic customers the most often, while respondents in the U.S. [56.5%] experienced late payments most often from foreign customers."
Survey respondents wrote off 2.2% of the value of B2B receivables as uncollectable. "Mexico and Brazil were the hardest hit by uncollectable receivables" the survey notes. Write offs were most often due to the customer being bankrupt or out of business for 54.6% of respondents in the region. Other reasons include failed collection attempts (37%) or the company could not locate the customer (35%).
- Diana Mota, NACM associate editor
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Collecting unpaid debt from any customer can be a challenge, especially when an oceanâ€”or even a borderâ€”separates the buyer and the seller. Different laws, political risks and accepted ways of doing business can factor into the credit and collections process.
"Don't assume that the law of your own jurisdiction is similar to the law of the place where you debtor is locatedâ€”think the opposite," said attorney David Franklin, Ad.E., of Franklin & Franklin in Montreal, during FCIB's "Legal Obstacles to International Collections" webinar on Tuesday. "I think with international debt collection you have to have a mindset that 'I'm dealing with a foreign area. They do things differently there.'"
Franklin, who concentrates on international commercial debt recovery in more than 100 countries, said that when selling to other regions of the world, it is important to know your customersâ€”especially if they reside in an emerging market. "Before you extend credit in a country that is emerging, it would be wise to conduct an onsite visit. If you visit the home and see very plush carpets, you see where the money is going. Do your homework," he said. Talking to a lawyer beforehand within the customer's country is another strategy that Franklin highly recommends. "The best advice is getting local advice," he added.
While Franklin listed and gave advice on several problematic areas faced by international credit managers, such as contractual interest, collection of legal fees, arbitration clauses and personal guarantees, one obstacle came up more than once: statute of limitations. Franklin provided an example of a four-year-old claim involving parties based in New York and Quebec. He realized that while the statute of limitations in Quebec was three years, in New York it was six years. Looking back at the contract, he noticed that both parties agreed that New York law would apply and, as such, was able to follow through on the claim.
"You have to verify where the debtor resides and [know] the time barred period to launch a claim," Franklin said, adding that just because New York has a six-year statute of limitations, that does not mean other places follow the same arrangement.
- Jennifer Lehman, NACM marketing and communications associate
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A case in the California Court of Appeals could provide subcontractorsâ€”and thus, the suppliers they are working withâ€”some protection against lawsuits stemming from the installation of products found in the future to be harmful to people or the environment.
The court will decide in Joe Hernandezcueva v. E.F. Brady Company, Inc. whether a subcontractor can be found liable for installing material that is subsequently found to be dangerous even if it did such work to existing specifications at the time. The case revolves around a man whose attorney alleges that he developed mesothelioma because of asbestos drywall at his longtime place of business. "To bring it around full circle to suppliers, if subcontractors are involved in an issue like this, they likely will have payment issues," said Chris Ring of NACM's Secured Transaction Services about increasingly common and expensive asbestos/mesothelioma litigation. "If subcontractors are installing something that in any way, shape or form has asbestos in it, they can be pulled in. Suppliers may not be pulled in or be in any way related to the product, but they could be stung by the payment issue."
In the meantime, it wouldn't hurt suppliers/creditors to do a little research to see if a subcontractor it is working with has in the past unwittingly installed dangerous products. It could reduce the element of surprise should a customer end up involved in such a lawsuit before any statutory change is made.
The American Subcontractors Association (ASA) filed an amicus curiae brief on Sept. 25 saying that "imposing a burden of strict liability on a contractor ... would impose liability on a party who did not specify or approve the material installed." Subcontractors control none of the risk involved with product approval or review, ASA noted. Essentially, subjecting subcontractors to such lawsuits would represent an unjust domino effect.
Meanwhile, Illinois has had a busy summer regarding laws affecting the construction trade. On top of the passage of a law allowing property owners to bond over mechanic's lien (as noted in the Sept. 24 edition of eNews), the state enacted amendments to the Roofing Industry Licensing Act (SB 838) that includes delaying the law's sunset date from Jan. 1, 2016 to Jan. 1, 2026. The law also clarifies or establishes definitions related to the roofing industry, changes requirements on procedures for license applications or disciplinary procedures and authorizes review of licenses and practices to ensure compliance.
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The average consolidated cost of a data breach is $3.8 million, 23% higher than 2013, according to Ponemon Institute's "2015 Cost of Data Breach Study: Global Analysis," sponsored by IBM. The benchmark study of 350 companies spanning 11 countries further notes that the average cost incurred for each lost or stolen record containing sensitive and confidential information increased 6% from a consolidated average of $145 to $154.
The study also finds the average cost per lost or stolen record varies by industry. While the average global cost is $154 per record, the average cost for a healthcare record can reach $363; education, up to $300; transportation, $121; and public sector, $68. Retail jumped from $105 last year to $165 in the 2015 study.
"Based on our field research, we identified three major reasons why the cost keeps climbing," said Larry Ponemon, the institute's chairman and founder. "First, cyber attacks are increasing both in frequency and the cost it requires to resolve these security incidents. Second, the financial consequences of losing customers in the aftermath of a breach are having a greater impact on the cost. Third, more companies are incurring higher costs in their forensic and investigative activities, assessments and crisis team management."
Key findings of the study include the following:
- Data breaches cost the most in the United States and Germany and the least in Brazil and India. The average total organizational cost ranges from $6.5 million in the U.S. to $1.5 million in India.
- Hackers and criminal insiders cause the most data breaches (47%). The average cost to resolve such an attack per record is $170; system glitches cost $142 per record to fix; and human error or negligence, $134 per record. The United States and Germany spend the most to resolve malicious or criminal attacks, $230 and $224 per record, respectively.
- More than half of the breaches in the Arabian cluster and France are due to hackers and criminal insiders, while about a third in India occurs for that reason. India and Brazil, however, have the most data breaches due to system glitches. Canada has the highest due to human error.
- Active involvement from boards of director following a breach and insurance coverage can reduce data breach costs, down $5.50 and $4.40 per record, respectively.
- The loss of customers increases the cost of a data breach.
- Notification costs remain low ($0.19 million in 2014, $0.17 million in 2015), but costs associated with lost business steadily increase ($1.45 million in 2014, $1.57 million in 2015).
- Certain countries are more likely to have a data breach. Brazil and France are most likely to have one involving a minimum of 10,000 records, and Canada and Germany are the least likely to have one.
- The time it takes to identify and contain a data breach affects the cost. It can take an average of 256 days to identify a malicious attack, while it takes about 158 days to identify a breach due to human error.
- Business continuity management can reduce the cost of data breach by an average of $7.10 per compromised record.
- Diana Mota, NACM associate editor
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