NACM’s Credit Managers’ Index Starts 2016 with Upward Trend

Despite market volatility, the January report of the Credit Managers' Index joins the list of economic indicators, including housing and employment data, now pointing in a positive direction. The latest CMI's combined reading of 53.5, up from December's 52.8, "puts the numbers back to what they were in October of last year. ... The trend is certainly in the right direction of late," said NACM Economist Chris Kuehl, Ph.D.

The favorable categories gained slightly more than 1.5 points, while the unfavorable categories remained even at 50.3. Favorable factors such as new credit applications, dollar collections and amount of credit extended all increased by two points, while sales moved up slightly from 55 to 55.8.

"Data on the unfavorable categories are not as encouraging, but at least the big declines seem to have come to an end for now," Kuehl explained. With many companies still experiencing some economic distress, four of the unfavorable factors, up from three in December, are in the contraction zone (any sub-50 reading). Regarding the dip from 52.8 to 52.2 in the rejections of credit applications, Kuehl noted that companies are getting desperate and hoping for an extension of more credit, but "that is not happening much of late."

"In general, the CMI report [for manufacturing] is more upbeat than has been the case in the recent past," said Kuehl. The combined score improved from 51.6 to 52.5, with the biggest jump seen in the amount of credit extended (55.4 to 59.3). This was somewhat offset by a two-point drop in the rejections of credit applications, similar to the scenario in the CMI combined sectors. "There are companies that are in trouble right now and seek someone to throw them a lifeline by offering credit when that would likely be a bad idea," Kuehl noted. "Many of the companies are not offering that credit rescue these days and thus reject a lot of the applications that are coming in."

Like manufacturing, the service sector had a modest upward trend, with the favorable factors breaking the 60 barrier. Dollar collections led this group with the largest increase. Also similar to manufacturing, the unfavorable factors were mostly unchanged. All but one of these subcategories (dollar amount beyond terms) is in the 50s. "These slow pays are often a precursor for some future issues, and it is common to see the number of accounts out for collection rise when the dollars beyond terms gets worse," Kuehl noted. However, "The filings for bankruptcies improved a little, as it went from 54.5 to 55.3. This is better than it looks as this is often the time of year that some retailers give up. If they didn't prosper in the holiday spending season, they are unlikely to last until they get another opportunity this year."

Kuehl concluded that positive trends are in place in both the manufacturing and service sectors; this provides hope of some better news in the form of spring growth.

- NACM staff



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Risk Professionals Should Prepare for Political, Economic Threats Worldwide

As more businesses expand worldwide, they become exposed to a wide variety of global credit and political risks. "Multinational risk professionals must now be prepared for virtually any type of political or economic risk threat in both developed and emerging markets," according to the Geopolitical Threats for the Year Ahead: Marsh's Political Risk Map 2016 report. "As falling oil prices and other factors continue to put pressure on several countries' economies, it's critical for businesses to be prepared for the possibility that political violence, unrest or other large-scale crises will quickly develop in virtually any part of the world—including those countries that were historically seen as safe or stable."

A government in crisis often loses its ability to honor financial obligations, the Marsh report says. "This can create a chain reaction of default that spreads into the private sector. Businesses should review their credit risks and credit-control policies and procedures, and evaluate the potential impact of political risk on the countries in which they, their customers and suppliers operate."

The annual report, provided by the insurance broking and risk management firm, draws on information from BMI Research, a source of political, macroeconomic, financial and industry risk analysis. It identifies at least eight major political risks that could impact business this year, including the following:

  • Terrorism and heightened conflict in the Middle East
  • Emerging economy struggles
  • 2016 U.S. elections
  • Anti-establishment parties in Europe
  • Continued falling commodity prices
  • Succession risks
  • Centralization vs. federalism
  • Rivalries among leading nations

The report identifies India as "a bright spot among emerging economies." The country's business-friendly government has launched several initiatives to boost economic investment and stabilize the Indian rupee. "Industrial production is also expected to increase as many companies have announced plans to build factories in India in 2016," it says.

More than 20 countries with aging, longstanding leaders lack "clear plans or frameworks for the transition of power," the report says. In the past, this has often resulted in "civil war or substantial political unrest and violence," it notes. "Among the countries that could experience similar turmoil in the next few years are Angola, Cameroon, Cuba, Equatorial Guinea, Iran, Kazakhstan, Oman, Saudi Arabia, Thailand, Uzbekistan and Zimbabwe."

Credit and political risk insurance can protect against a variety of risks, including expropriation, political violence, currency inconvertibility, nonpayment and contract frustration, Marsh noted.


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Cash Should Still Be King

It doesn't matter how many orders a business has, if the amount of time it takes a business to convert its investments in inventory and other resources into cash is too lengthy, then the business could suffer. According to several recent surveys and news reports, late payments and increased debt loads are limiting businesses' cash flow.

Small- and medium-sized businesses (SMEs) in the UK have more than ÂŁ500 billion in outstanding invoices, an increase of more than 70% over the past two years, according to the latest Lloyds Bank Commercial Banking Business in Britain research. Of those SMEs surveyed, 31% said that late payments were impacting their cash flow, and 30% expect more customers to demand deferred payment terms in the next six months. This new research comes on the heels of an announcement by the United Arab Bank (UAB) that it is closing its SME unit following an $80 million surge of debt defaults among small business owners.

The Hackett Group's 2015 U.S. Working Capital Survey shows that "companies have learned very little from the Great Recession in terms of their cash management strategies, taking on alarming amounts of debt to fund increased investment activities while doing very little operationally to improve their own internal cash generation." Now, with the global economy hitting the brakes, companies can no longer afford to ignore cash management as a way to generate cash independently.

On February 10 and 11, Todd Glassmaker, management consultant for the Hackett Group, will walk FCIB members through the U.S. and Europe 2015 working capital surveys as well as discuss the role of working capital as a source of cash and the value associated with working capital performance. Attendees will gain insight into how to assess a company's working capital performance and develop a successful strategy for the uncertain year ahead.


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Working Capital Survey Outcomes

USA  (Day 1) - Feb. 10
Europe (Day 2) - Feb. 11

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Consumer Spending Expected to Move Economy Forward

This year has gotten off to a slow start economically. "It's not like the economy is falling apart, but the overall rate, I think, understates what's going on underneath the economy," said Wells Fargo Global Economist Jay Bryson, during the firm's Monthly Economic Monthly Outlook—January 2016.

Transitory activity fed into slow U.S. gross domestic product (GDP) growth for fourth-quarter 2015, Bryson said. "If you look at inventories, there was a pretty big build in inventories early in the year; now we're starting to get some payback. That will probably slice half a percentage point off." Net exports have also showed weakened growth with some of the U.S.'s major trading partners. In addition, consumer and investment spending have slowed a bit.

Overall, the core part of the economy, consumer spending, has continued to support economic growth as job gains and wage improvement show continued real disposable income gains. Its growth, however, as well as investment spending is expected to downshift slightly relative to prior market expectations. "Consumer spending outlook remains modest, or OK," Bryson noted. "But we've lost a little bit of momentum."

Although the labor market finished strong in fourth-quarter 2015, "we don't think the Feds will be raising rates any time soon." The Wells Fargo team projects increases once every three months over the current year.

Bryson doesn't anticipate that the United States will experience much fallout from China's slowdown. China is a "relatively small part of the [U.S.'s] overall economy," he said. "We export about $120 billion to China, that's a big number, but keep in mind, we're a $17 trillion economy, so that's pretty small. What's happening in China ... won't pull the U.S. into recession, certainly not this year, but it is something that could cause growth to be little bit slower than what people expect it to be. It's also unlikely China will fall apart and go into a massive recession," Bryson added.

On the upside, gains in the automobile sector, which were strong last year, could further support GDP growth this year. Low oil prices put more money into consumers' pockets; the labor market continues to create income; and balance sheets are looking good, Bryson concluded. He anticipates that the consumer sector will continue to move the U.S. economy forward.



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Investigations, Penalties for Range of Perceived DBE Violations Continue

Federal and state agencies picked up in January where they left off in 2015, with heightened investigations of Disadvantaged Business Enterprise (DBE) and Minority Business Enterprise (MBE) activity on government-backed projects. Some examples of this last month were apparent in Tennessee, where a construction contractor was banned from working on federal projects for three years, and Massachusetts, where state officials charged a consulting company based on allegations of making false statements about a DBE's level of activity on a job.

On the heels of investigations and penalties in several states early last year, many construction suppliers and contractors have noted they are being increasingly scrutinized by regulators, oftentimes to the point where such activity, in their estimation, resembles a "cash grab" more than fair enforcement of statutes. The fines and/or arranged settlements typically stem from allegations that contractors are using a DBE or MBE, the use of which many federal and state programs mandate as a way to boost opportunity and participation of minority- and female-owned companies, for pass-through purposes instead of commercially useful functions.

"There's no question regulation is increasing in the model created by the federal Department of Transportation," said Jim Fullerton, Esq., president of the law firm Fullerton & Knowles, P.C. and presenter of Monday's NACM teleconference on methods for avoiding such costly investigations and fines. "Enforcement on all levels only will increase both for public policy reasons and the potential to generate penalty income. This is going to be hard for prosecutors to resist."

The most important thing to remember when working with DBEs is to involve them at the earliest stages of a project, Fullerton said. Otherwise, problems are very likely to happen downstream. "If you, the supplier, have been negotiating price, quality or quantity and payment for materials with the end user, like an electrical subcontractor, or with the prime contractor and then decided to put it through the DBE after that, alarm bells will go off," Fullerton said. "That will never be deemed an acceptable commercially useful function."

Although the focus on contractors is not new, materialmen found themselves in the crosshairs of federal and state agencies much more in 2015. Notably, one unnamed national construction material supplier agreed under pressure from the U.S. Department of Transportation, which administers the DBE program, to pay a $4.945 million "settlement" even though no formal charges were filed against the company. In addition, despite the fact that states are responsible for certifying businesses as DBEs, they are forcing contractors and suppliers to ensure DBE participants are legitimate. This adds extra layers of responsibility and risk for those in credit departments of construction-related businesses, especially ones operating in states where attorneys general have been aggressive on enforcement.

- Brian Shappell, CBA, CICP, NACM managing editor


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