June 8, 2010
Credit cards have officially become overwhelmingly accepted among B2B creditors. When asked "Does your company accept credit cards for payment?" in NACM's May monthly survey, an overwhelming 81% of respondents said "yes," while the remaining 19% said "no." Still, many of the "yes" respondents noted that their companies don't accept credit cards in all cases and have very well-defined rules on when their use is approved.
"Yes, but only on severely delinquent accounts and not as a regular form of payment," said one respondent. "We accept credit cards up to a certain dollar amount and only within a certain number of days after invoicing," said another. Many participants noted that they accepted them only up to a certain dollar amount and never on existing balances. "Only for balances that are less than $1,000 as a rule," said one respondent. "We do not accept credit cards on A/R balances," said another "yes" respondent, "only on deposits and COD deliveries."
Many cited improvements in DSO and customer demand as the reasons for accepting this form of payment, whether in a limited capacity or not. "Business has improved the DSO," said one respondent. "We are seeing more and more customers paying this way and, yes, there is a cost of doing business with bank card fees, but it's absolutely worth the cost."
Some "no" respondents made the point that periodic exceptions to their company's rule against credit cards are sometimes necessary, but only in extenuating circumstances. "We make periodic exceptions in emergency situations only—i.e., seriously past due balance where there are no lien rights or the rights have expired, or an emergency situation where the builder or their homeowner cannot possibly pay the bill in any other way because they are seriously over budget in the building process," said one participant.
Still, among the majority of "no" respondents, fees were the greatest barrier to accepting credit cards. "Margins are too thin to pay the swipe fees," said one participant. "I wish we did. I'm asked the question by customers frequently. The problem is the bank charge is too great," said another.
This month's NACM Monthly Survey is now live and deals with incentive pay for collection staff. Click here to participate now!
Jacob Barron, NACM staff writer
Don't Underestimate Recognition
"If I gave you the choice between a satisfied employee or an engaged employee, who would you take and why?" This was a question posed by Chester Elton, this year's Credit Congress General Session speaker. The right choice is an engaged employee, because businesses with engaged employees grow.
So, how do you get, or create, engaged employees? It starts with recognition, and managers are your front line. Elton's book, The Carrot Principle, co-written with Adrian Gostick, shows throughout how recognition can have tangible, positive effects on a company's bottom line. Become a better leader and buy your copy of The Carrot Principle today from the NACM Bookstore.
Read more about the General Session and all other convention happenings on NACM's Credit Congress web pages. Continuing full Credit Congress text and photo coverage will be available in the upcoming July/August issue of Business Credit magazine.
Following a lengthy fight through the lower courts of Washington, D.C., the U.S. Supreme Court is now expected to rule on the constitutionality of the Sarbanes-Oxley Act of 2002 (SOX), possibly as early as this week.
In Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB), the high court will determine whether the PCAOB's existence violates the Constitution's Appointments and Separation of Powers Clauses, which require that important federal officials be appointed by either the president or by Cabinet heads. The PCAOB's members are picked collectively by commissioners at the Securities and Exchange Commission (SEC).
The Competitive Enterprise Institute (CEI) is serving as co-counsel in the case against the PCAOB. CEI General Counsel Sam Kazman noted that "the Appointments Clause may sound like a dry technicality, but the Framers realized that unless government officers are picked by individual officials, accountability is destroyed. And with the PCAOB's destructive accounting mandates we have a prime example of what happens when an agency operates without strong oversight."
Concerns over SOX's reach have been raised on both sides of the political aisle, and many observers have noted that its reporting requirements have hit hardest in the areas of the economy currently most in need of assistance. "The PCAOB may have been intended to protect investors from corporate abuses, but its vastly excessive rules are injuring the ability of honest firms to raise capital, and its costs fall disproportionately on new businesses and smaller public companies," said John Berlau, director of CEI's Center for Investors and Entrepreneurs.
Since SOX was passed without a severability clause, which would allow certain portions of the law to be overturned while leaving others intact, the case's original petitioners (the nonprofit Free Enterprise Fund and the small Nevada accounting firm Beckstead & Watts, LLP) are hoping for an adverse ruling against the PCAOB that would overturn the entire law. A more likely scenario, should the court rule against the PCAOB, is one that would only alter the portions of the law that are unconstitutional, rather than send the entire law back to the drawing board. SOX has been controversial since its passage in 2002, but practices in financial reporting have been so shaped by its existence that a full repeal of the law could prove chaotic.
Stay tuned to NACM's eNews and Credit Real-Time Blog for updates.
Jacob Barron, NACM staff writer
Attention Credit Champs
What was the most successful solution your credit department implemented this past year? Was it new software, a new machine/computer, a new process for staff or another new resource? The experts in credit management are you, the people who practice it every day. You can share your knowledge with your profession while earning recognition and Roadmap points! Submit an article, or short story, to Business Credit magazine. We'd like to hear from you.
September/October's Business Credit will feature articles on solutions and troubleshooting, particularly in regard to technology. To submit an article or short story, email an abstract with the anticipated word count by July 1st to firstname.lastname@example.org. The article/short story is then due by July 15th. Please include "BCM submission" in the subject line of your email.
BP's struggles to stop the largest oil spill in U.S. history almost ensures that it will become intensely difficult for the company to prevent its credit rating, not to mention its image, from sinking for years to come. Still, NACM's economic analyst believes the problem is relegated to just one company in the oil sector and other small industry sectors, meaning a massive national economic impact remains unlikely—that is, unless a worst-case scenario rears its head during hurricane season.
BP, which has continued to botch its efforts to stop the massive Gulf Coast leak more than a month after an explosion and failed cut-off started the growing mess, saw its credit rating dropped this week by all three major ratings agencies: Moody's Investment Services, Fitch Ratings and, following its counterparts' lead, Standard & Poor's. Despite the ratings agencies' own ongoing credibility problems (see related story below), the lower ratings could signal big problems for BP. The ratings agencies explained their respective decisions by noting concerns that include the potential for mounting cleanup and legal costs that could be long-term, the possibility of federally levied criminal charges or cease/desist orders that will prevent future BP drilling and a lack of confidence in the company's ability to stop the leak.
NACM Economic Analyst Chris Kuehl, Ph.D, of Armada Corporate Intelligence, said he believes most other oil companies won't be badly wounded by this situation. However, it is likely BP will become subject to rampant rumors of takeovers in the coming years and will be spending large amounts of effort cleaning up its mess while its competitors are moving into new profitable areas. Kuehl said the oil drilling industry, even in the Gulf, is unlikely to be brought to a halt because the drilling areas are dependent on three major industries: oil, fishing and tourism. And BP's snafu has pretty much destroyed the latter two.
"But tourism and fishing still only bring in less than one-quarter of what oil brings in," said Kuehl, noting there are more than 4,000 rigs and accompanying jobs in the Gulf alone. "That's the economic reality of their world. If you take away oil, what are they going to have left?"
Kuehl also reiterated that the general economy very likely won't be affected significantly by this disaster. He called it an emotional issue more than a real economic issue, mainly because of the environmental degradation and media stories on struggling fisherman from the Gulf area. Kuehl noted that oil spills of this magnitude have occurred in Nigeria for 20 years, but few discuss or even know about them. The true threat to the economy, long shot that it is, would be a sort of perfect storm during the 2010 hurricane season. Forecasts aren't calling for a particularly active and strong storm season in the spill's heavily impacted area, but anything can change.
"If you get a really badly placed storm that drives the oil over all the barriers and shifts prevailing winds in different directions [like toward the Texas coast or beyond the Florida peninsula], and the cleanup is truly catastrophic, the interdiction efforts will become overwhelmed," said Kuehl. "That could end up inundating cities and driving oil into farm country, where you'd see things affected like cotton and rice."
Brian Shappell, NACM staff writer
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Both the sales and credit departments of any business are essential for its success and can't truly function well without the other, especially in a strained economy. Still, to call the relationship between the two sides contentious in many situations would be an understatement of epic proportions.
The next NACM teleconference, on June 16th at 3 p.m. EST, will delve into breaking through negativity in order to promote smoother sailing at the office for both departments. Susan Archibeque, CCE, director of credit and assistant controller for Utah-based Nicholas and Company Inc., will hit on why different motivations and personalities often lead to clouded judgment in the decision-making process—not to mention unneeded conflict—and how to get past such differences.
Archibeque, who was named Instructor of the Year in 2004 and Credit Executive of the Year in 2005 by her affiliate NACM Business Credit Services, has spoken both directly and indirectly on the topic at many venues, including the last two Credit Congress events. In previous presentations, Archibeque has likened the ongoing credit/sales rivalry to that of the Hatfield's and the McCoy's or the Montague's and the Capulet's.
Sometimes the secret is trying to understand the other side instead of ramming ideas or directives down their throats.
"Do what we call a 'walk-a-mile.' See what their life is like. Get to know them on a personal level," explained Archibeque during a past Credit Congress educational session "They can come across as being authoritative, and 'You have to do it my way.' But I found you have to go in there with open arms and open eyes."
She continued that the reality is that both departments work for the same company and are parts of a single team. It's become an undeniable necessity that credit and sales need to understand the goals and objectives of the company and establish a partnership to meet the company's future growth plans.
To learn more, or to register, click here.
Brian Shappell, NACM staff writer
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Every crisis has its scapegoats and villains. And now lawmakers on two continents are pointing fingers and spewing venom in the direction of the three top credit ratings agencies in part because their analyses were well off the mark leading up to the U.S. and worldwide financial meltdowns.
Lawmakers in the U.S. Senate and appointees on the Financial Crisis Inquiry Commission have focused their on Moody's Investment Services, Fitch Ratings and Standard & Poor's of late. The agencies, especially Moody's, have been taken to task because a high percentage of their top or "AAA" rated mortgage-backed securities from the boom years have been downgraded significantly. By some estimates, more than 90% of such securities have fallen below investor-grade status. Some characterized Moody's as "a AAA factory" that literally handed out top-level ratings.
The commission, as well as a late-passed amendment to the massive U.S financial reform package, seeks to regulate activities of the agencies more closely. Specifically, they aim to ban the agencies from rating some of the products they were themselves creating and rubber-stamping. Sen. Al Franken (D-MN) proposed the ratings agency-related amendment to financial reform that cleared the Senate floor, though it is uncertain whether it will make it through a conference committee spearheaded by House Financial Services Chairman Barney Frank (D-MA). Frank didn't include such provisions in previously passed House legislation and hasn't offered public support for the effort to date.
"What we saw was a basic conflict of interest: The issuers of securities and bonds were paying the ratings agencies to do their work, and ratings agencies were aware if they gave low ratings they wouldn't get the next job," said Franken. "It was Upton Sinclair who said, 'It's very hard to get a man to understand when his salary depends on him not understanding.' They [Moody's, Fitch, S&P] didn't want to understand."
The agencies also are facing state-level lawsuits, including one from Ohio Attorney General Richard Cordray, who claims their negligence and/or decisions based on conflicts of interest cost retirement and pension funds millions of dollars. Cordray noted, "Imagine if they had done their job and properly labeled those as junk bonds...million of Americans would still have their savings, homes and jobs they lost."
Meanwhile, the European Union turned up the heat on the agencies, in part as a backlash after all three decisively downgraded the credit ratings of Greece and Spain despite eurozone-backed austerity plans to curb the nations' debt crises. Already in the works are the establishment of a new European agency to officially regulate the U.S.-based ratings firms and an effort to create a ratings agency based there.
Economist Xiaobing Shuai, of Chmura Economics & Analytics, said some of the criticism deserves merit, though he believes it's possible that the agencies' models simply did a poor job of assessing risk during the boom. After all, most experts botched their mid- and late-decade projections of the economy's growth arc and recovery. Still, Shuai says it's time for the big three to "take some responsibility."
"Going forward, I think there is a need for an independent rating agency," Shuai said. "Or, at the minimum, new consumer protection agencies or the Federal Reserve should increase its supervision and audits of the ratings agencies."
Brian Shappell, NACM staff writer
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For more information on NACM's MLBS, click here.
A new bill wending its way through the California State Assembly would make it much harder for the state's many struggling municipalities to file for bankruptcy.
Assembly Bill 155, introduced by Tony Mendoza (D), would require any bankruptcy filing by a municipality to undergo a review by the California Debt and Investment Advisory Commission (CDIAC). In its original form, AB 155 would've actually barred municipalities from filing bankruptcy without CDIAC approval. The bill has since been watered down however, and the Commission will only serve in an advisory role and allow local governments to disregard its findings.
While Mendoza originally introduced the bill in April, it has only recently made it through the Senate Appropriations Committee, after a months-long delay in the Senate Local Government Committee. "I believe municipal bankruptcy has a profound impact on communities and it should only be used as a last resort," said Mendoza. "AB 155 goes a long way in reassuring the residents of California that bankruptcy will only be used after all options are exhausted."
Critics say the measure is geared toward ensuring that union contracts for public employees are safe from the potential changes a municipal bankruptcy could bring. California's budget crisis is no secret, and its reach extends into the state's various locales. Vallejo is the only city in the state to have filed for bankruptcy so far, but others, including Los Angeles, have considered it as an option to get out from underneath their creditors and properly reorganize.
Bankruptcy would allow these filing municipalities to cancel union contracts, which critics believe is the real aim of the law. Many have also noted that even though the CDIAC's role is only advisory, AB 155 will still require a review. This could delay the process of filing bankruptcy and make it harder for cities to move quickly to resolve their budget emergencies.
The bill is still currently sitting on the CA State Senate floor. A veto from Gov. Arnold Schwarzenegger (R) could be possible should the bill ever make it out of the Senate.
Jacob Barron, NACM staff writer
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As a battle between the owner and general contractor of the $8.5 billion CityCenter development in Las Vegas continues to percolate, some subcontractors may have hope to sidestep the western-style standoff. Still, full resolution appears far off on the frontier.
MGM Mirage, still facing a $492 million mechanic's lien filed by Perini Building, has set a June 9th meeting with subcontractors who worked on the CityCenter project in an apparent attempt to get some of them paid. Perini, which previously met with Nevada Gov. Jim Gibbons (R) without MGM, has not been invited. In addition, MGM Mirage attorneys told a Nevada judge that it has reached payment agreements with about 25 "first-tier subcontractors" owned money for work on the project. That represents slightly more than 10% of the subs involved in CityCenter's construction.
After remaining silent about the dispute for weeks, MGM Mirage claims Perini badly mishandled paperwork for billing to the tune of 300,000 haphazardly organized documents, paid itself instead of subcontractors from the millions it received in earlier payments and failed to even present MGM Mirage with a final bill before filing the record mechanic's lien. That's not to mention the allegations that Perini and some subcontractors botched the construction of CityCenter's Harmon Hotel, which had to be reduced by more than 20 floors from its original design.
For its part, Perini alleged MGM Mirage abruptly stopped paying for work already completed earlier this year, made thousands of change orders on the project's design well after an agreed-upon deadline and is trying to buy time because of its financial struggles of late. Perini said nearly $400 million of the mechanic's lien represents what is owed to subcontractors.
Greg Powelson, director of NACM's Mechanic's Lien & Bond Services, called the ongoing spat "a mess" that has the potential to cause significant cash-flow problems for many of the subcontractors caught in the crossfire. Like disputes with other massive Las Vegas projects such as Fontainebleau and the Venetian, the situation doesn't appear to be one that will be settled quickly.
"We're in the first stages of an 18- to 24-month process," said Powelson. "The next step in the process will be to determine counterclaims and back charges. My advice for all suppliers and laborers is to get your notices served and, regardless of your trade, recognize this is as a dual-use property. A 15-Day Notice of Intent to Lien will be required."
Randy Clark, of Nevada-based Young Electric Sign Co. (YESCO), said that's exactly what his company is in the process of doing in order to protect itself. About two months ago, Clark predicted that, despite the size of the lien, the dispute would be settled out of court because of the good reputation of both main parties. He is still somewhat optimistic that things won't drag out for years, but the escalating rhetoric between the two sides appears to have weakened his confidence.
"While I believe the CityCenter Land LLC/MGM Mirage Resorts litigation will probably linger on for quite some time, I'm told that the 'owners' [MGM Mirage and partners] are going to try to be good local corporate citizens and get the poor lowly subcontractors as well as minority- and women-owned businesses paid as best they can once they figure out what's what," said Clark.
Brian Shappell, NACM staff writer
There has been a great deal of concern in the financial sector in the last month as the world reacts to the mounting threats from the "Greek disease." While it has been acknowledged that the crisis is disrupting the markets in Europe as well as the rest of the world, there has been relatively little impact on the rest of the global economy to this point. The data from May's Credit Managers' Index, issued by the National Association of Credit Management (NACM), seem to suggest that this turmoil is having an impact on the U.S. credit and business community—perhaps more than most people realize.
"Over the last few years the CMI has tended to be a harbinger of things to come as far as the overall economy is concerned as it presages the activity in the credit and financial communities," said Chris Kuehl, Ph.D., NACM economic advisor, who prepares the CMI report each month. The CMI dipped in 2008, three months before the rest of the economy started to react to the banking debacle that engulfed the U.S. and the rest of the world soon after. Now the CMI is dipping again—and dramatically—while at the same time the rest of the economic indicators have barely started to respond. "The sense among observers has been that the Greek crisis and its implications would soon have the same kind of impact on the credit environment that the sub-prime crisis had in 2008. Last month's data seems to bear this out."
There has been deterioration in both positive and negative factors across the board. Sales have slipped from 65.7 to 64.5. The level of dollar collections fell as well—from 62.1 to 59.7. There was also a reduction in the level of credit as the financial system tightened again.
Some of the more urgent changes took place in the negative categories. The dollar amount of customer deductions fell from 55.7 to 51.8. There is a sense that accounts have become nervous again and have started to worry about their access to capital in the coming months as well as their ability to keep generating sufficient demand to maintain their growth expectations. "There is not the level of panic that existed in the months leading up to the credit meltdown, but there is far more concern about what is happening in the global markets than existed even a few weeks ago," said Kuehl.
The full report for May, complete with additional analyses, tables and graphs, along with the CMI archives, may be viewed here.
To view past eNews issues or to visit the NACM Archives, click here.