September 5, 2013
The National Association of Credit Management's (NACM's) Credit Managers' Index (CMI) for August returned to the growth patterns of earlier this summer. The numbers look impressive again, and the index sits at 56.4, up nearly a full point from July's 55.5. The last few months were a little volatile, but not unexpected. The surge that kicked off the summer was based primarily on expectations, but as the second quarter came to an end there was some fear that business anticipated too much, too fast. The big jump from the April index's 53.3 to May's 55.6 was followed by a couple of months that looked OK, but which didn't carry the momentum forward significantly. July now looks like a month that gave businesses a chance to regroup and consider what the rest of the year would really look like, as the August numbers are the best in over 18 months, and higher than the previous peak in June.
Sales returned to early summer levels, bouncing up to 63.1 after falling below 62 last month. This is a level not seen in well over a year and a half. New credit applications also jumped, though not as dramatically, and remains a little under the record pace it set in May. The current reading is 58.7, only a little below May's 59.2. Another good sign is that dollar collections jumped into the 60s for the first time since the recession started, sitting at 60.4. The last of the favorable categories, amount of credit extended, showed substantial improvement, although this month did not break the record set in May when it reached 65. The current reading is 63.3, almost a full point better than last month. Overall, the index of favorable factors is back in the 60s. At 61.4, it is the highest level reached in well over two years.
Some important trends showed up in the unfavorable factors index as well. The gain noted in new credit applications, a favorable factor, was somewhat tempered by the lack of progress in rejections of credit applications, which retreated from 53.2 in July to 52.7 in August. "This suggests that some troubled companies are trying to access credit in the hopes they will see a turnaround sooner than later," said NACM Economist Chris Kuehl, PhD. There was also some decline in accounts placed for collection, from 53.6 to 52.5, again suggesting some companies are struggling this summer. "As noted in last month's report, a pattern is developing that will test weaker companies. As major competitors make their move, the others in that sector will struggle to hang onto their market share, and some will be better prepared than others," he said.
The rest of the unfavorable factors showed some progress. Disputes improved from 51 to 51.6. Dollar amount beyond terms made a substantial recovery after slumping to 48.5 in July. It now stands at 51.1—not a record breaker by any stretch, but trending in the right direction, Kuehl noted. Dollar amount of customer deductions also made a very slight gain from 51 to 51.4. Finally, filings for bankruptcies trended slightly higher, from 58.2 to 58.7.
Overall, the index of unfavorable factors was mostly flat, improving slightly from 52.6 to 53. The majority of the action in August was in the favorable categories, while the unfavorable numbers stayed roughly the same. "This bodes pretty well for the coming months, as long as nothing affects sales numbers drastically," Kuehl said.
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The Virginia Small Business Commission continued its study of House Bill 2198 last week with the meeting of an ad hoc committee specifically formed to study the legislation, which would affect commercial credit reporting in the Commonwealth. NACM was in attendance, providing the committee with a necessary perspective from commercial credit professionals that has otherwise been absent from the debate.
Led by Small Business Commission civilian members Owen Van Syckle and Robert Marcus, the meeting began with a discussion of the bill's intent by Delegate Michael Watson, the author and sponsor of HB 2198. Watson, along with two representatives from a local Virginia business that support the bill, noted that the legislation was designed to address a perceived gap in the rights of businesses to identify the source of so-called "negative information" on the commercial credit report. He said that businesses are denied the ability to improve their credit by the currently anonymous way that historical payment information about them is displayed in their credit report.
Richmond-area NACM member Doug Strobel of Titan America, who provided vital testimony at the Small Business Commission's last hearing in June, again offered the perspective of a trade supplier, explaining how he uses commercial credit reports and how he conducts an assessment of a potential customer's creditworthiness. Strobel also discussed how important credit information is to a credit report, and how such reports are integral to his ability to make a fast, accurate credit decision, once again making the case that HB 2198 could limit the amount of information available on businesses in Virginia by requiring commercial credit reporting providers to identify the source of "negative information" on a report.
Strobel added that the bill would (a) dry up information on Virginia businesses, making it harder for them to acquire goods and services on terms; (b) make credit reports on Virginia businesses less accurate, thereby delaying a credit decision which could in turn affect commerce in the Commonwealth; and (c) place Virginia at a competitive disadvantage by restricting the free flow of credit information on businesses within the Commonwealth and not restricting the free flow of credit information on businesses located elsewhere. This last argument had, for the most part, never been made to the Small Business Commission and seemed to resonate with the members in attendance.
Following Strobel's discussion, Delegate John Cox (R), a member of the Commission in attendance at the work group meeting who had previously shown mild support for HB 2198, spoke out against the bill, specifically stating that he believes it would make Virginia a less friendly state for businesses and place Virginia businesses at a competitive disadvantage because it would restrict the free flow of credit information.
Former NACM National Chairman Jack Clark, CCE also spoke about how incorrect information is handled in commercial credit reports, explaining that such information is removed from a report as quickly as possible and that a business that routinely reports incorrect information on subject companies would be prevented from submitting information for violating the terms of this exchange, which specifically addressed some of the committee member's concerns about how this information is maintained. Also attending in support of NACM's position were Virginia attorney Jim Fullerton, Stacey Jones, CGA of NACM South Atlantic, and Karen Gothard and Roger Troup from Ferguson Enterprises.
The ad hoc committee now will compile a report on HB 2198 that will be presented to the full Small Business Commission at their next meeting on September 10. It was unclear whether or not the report would be a recommendation for or against HB 2198 or simply a summary of the arguments, but NACM plans to submit more documents to the Commission ahead of its final considerations.
NACM continues to oppose HB 2198, as it does any bill that threatens the free and open exchange of credit information, and will be monitoring the legislation through the Virginia legislature. If you have any questions or comments about HB 2198, please contact Jacob Barron, CICP at firstname.lastname@example.org.
- Jacob Barron, CICP, NACM staff writer
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In a case that NACM's Secured Transaction Services (STS) characterized as a real-life "David versus Goliath" scenario, the American Subcontractors Association (ASA) filed an amicus curiae brief aiming to protect the little guys in the nation's highest court on the issue of venue shopping.
ASA filed its brief in a Supreme Court of the United States' case that is reviewing a lower court ruling in Atlantic Marine Construction Company, Inc. v. J-Crew Management, Inc. The case revolved around a lawsuit of a withheld final payment from a general contractor to a subcontractor, and that general contractor's attempt to move the case to a Virginia court despite the small (five-employee) subcontractor being based in and doing all work on the project in question in the state of Texas. According to ASA's court documents, the U.S. District Court of the Western District of Texas declined to transfer the case, which was upheld by the Fifth Circuit Court of Appeals. ASA argued in its brief:
"Reversing the well-reasoned opinion on appeal will unfairly and unreasonably tie the hands of federal judges from at least considering state law when faced with a venue challenge premised solely on a forum selection clause. Reversing the Fifth Circuit would also embolden general contractors to openly defy the law of many states by creating substantial barriers to a subcontractor's right to seek redress in a court near the project site."
STS National Sales Representative Chris Ring said ASA is rightly coming to the aid of "David" and noted that the importance of venue jurisdiction awareness is paramount for creditors, especially those involved directly or indirectly with material suppliers. "When ASA came to the aid of subcontractors, they de facto came to the aid of material suppliers as well," Ring said. "Material suppliers often hear the phrase 'I can't pay you because I haven't been paid.' If a subcontractor is not getting paid because they are in a dispute with the general contractor and they are forced by contract to have the dispute resolved in a far-off jurisdiction, this can create hardship for that subcontractor. When a subcontractor is able to address disputes in a local jurisdiction, that may reduce legal costs and increase the odds of the dispute being resolved amicably."
Ring noted such a case also drives home the deep importance of having credit, sales and upper management on the same page where contracts are concerned. By elevating the role of credit and fighting for it, a skilled credit professional may just save the company a lot in resources, not to mention headaches, should a legal situation arise out of nonpayment.
"What credit managers working for material suppliers who sell to contractors should take away from this case is that the devil is in the contract details," Ring said. "As a credit manager, you need to fight for your right to be privy to contracts that your company agrees to, up front, especially with large-dollar contracts."
- Brian Shappell, CBA, CICP, NACM staff writer
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The results of an NACM survey about what is to blame for customers' late payments indicate that cash issues, rather than technical errors, are the dominant cause for delays. A 36.3% plurality of respondents said that only 0-10% of the customers' late payments are caused by billing, invoicing or other technical errors, while 90-100% of them were caused by cash issues.
The second most popular response still leans heavily toward cash being the culprit for most delays, with 17.2% of participants saying that only 10-20% of their customers' late payments are caused by errors, and 80-90% of them caused by cash issues.
In the comments, respondents acknowledged that "cash issues" weren't necessarily just tied to the customer's inability to pay. Many of them reported that their customers are fully capable of making payment according to terms, but simply don't for various reasons. "The majority of our late payments occur as a result of a customer cash management decision," said one participant. "These decisions have more to do with financial metrics than cash availability."
Other respondents blamed a "built-in slow-pay culture" for some customers' late payments. A number of participants from the construction industry also argued that poorly-written contracts with "pay-when-paid" clauses led to cash issues for their customers, which then trickled down to delay payments to companies further down the ladder of supply.
Of the smaller group of respondents that had a greater percentage of late payments due to errors, specific problems with shipping, pricing and invoicing were the primary causes. Many also noted that their bigger customers were more likely than their smaller buyers to cite errors when making past-due payments.
The two-part survey also asked participants which department in their company was responsible for reconciling any errors that result in late payments, a task overwhelmingly performed by credit, apparently. A whopping 59.5% of respondents said that it was the credit department's job to fix any errors and act as a facilitator for any billing, invoicing or other issue that required reconciliation. "Credit facilitates the resolution of issues by bringing in the correct department and then following up until confirmation has been received from both the customer and the department involved that all issues have been resolved," said one participant.
Many respondents noted that the credit department was charged with fixing errors despite the fact that these mistakes often originate in some other corner of the company's operations. "Pricing is the dominant issue and is caused by the sales team," said one participant. "However, the credit department has to facilitate resolution."
- Jacob Barron, CICP, NACM staff writer
Businesses risk billions of dollars each year on sales on credit. How do you find your way between fact and fiction, hope and charity, and faith and foolishness?
Join an NACM industry credit group.
Industry credit groups open communication lines for the exchange of credit information. Credit executives receive invaluable factual credit information upon which to base independent decisions with respect to the extension of credit.
Managed and operated by NACM Affiliates nationwide, credit groups:
- Provide unparalleled networking opportunities
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equipment and other credit management functions
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Contact your local NACM Affiliate to learn more about NACM credit groups and to find the group for your industry.
Despite a heated push from the California Public Employees' Retirement System (CalPERS), San Bernardino, California has been declared eligible for Chapter 9 municipal bankruptcy protection. Sidestepping various delay tactics from stakeholders, U.S. District Court Judge Meredith Jury stayed true to her stated goal of hearing the eligibility case on August 28, approximately one year after the city initially filed for protection.
Reeling from problems tied to expensive contracts with current and retired public workers, especially for pension and health care, Jury intimated that it would be nearly impossible to argue that the city is anything but insolvent. It stands as a significant victory, one that could conceivably be used as a template by others, in increasingly common battles between cash-strapped municipalities and public employee/retiree groups.
Representatives for retirees in Detroit also faced a significant defeat last week, as U.S. Bankruptcy Court Judge Steven Rhodes ruled that he would not consider the constitutionality agreement during eligibility proceedings. Those proceedings have been moved up by more than a month to September 18, it was confirmed last week. The General Retirement System of the City of Detroit and Police and Fire Retirement System of the City of Detroit were among the largest stakeholder groups fighting the Detroit bankruptcy's eligibility. One civil suit against the city challenged the authority of local state officials to promote a Chapter 9 because of what was interpreted by the plaintiff as a violation of a 1963 article of the Michigan constitution that bans actions "that would in any way impair the accrued financial benefits of the Retirement Systems' plan participants and beneficiaries."
Meanwhile, in Harrisburg, Pennsylvania, the city whose failed attempt at filing a Chapter 9 put the municipal bankruptcy trend on the map a couple of years ago, a deal that will avert a second attempt at filing has been struck. City Receiver William Lynch, appointed by the state to handle the debt-stricken municipality's finances, filed a plan with the Commonwealth Court of Pennsylvania outlining plans to address its debt, now nearing $400 million. Creditors tied to an infamously failed trash incinerator project will accept losses of more than $100 million on the front end, though some of that could be recouped as the city leases its parking structures for the next four decades. The city also reportedly agreed to sell control of the incinerator operation.
The plan still must be approved by the court. A rejection on the part of the court would put Harrisburg squarely back in the danger zone for another attempt at the Chapter 9 protection that the state has fought at every turn.
- Brian Shappell, CBA, CICP, NACM staff writer
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