July 21, 2009
The August 1, 2009 deadline for mandatory compliance with the Federal Trade Commission's (FTC) "Red Flags" Rules is just over the horizon. By that date, companies must have a written and senior management-approved program in place to detect, mitigate and respond to instances of identity theft. Business-to-business and trade creditors fall under the definition of "creditor" used in the regulation, though they may not have to comply with the rule if they do not have accounts that have a "reasonably foreseeable risk" of identity theft.
On Tuesday, July 14th, NACM met with FTC attorneys to discuss the "Red Flags" Rules. Over the last couple weeks, as NACM collected comments from members about any lingering concerns they had about the Rules, it became clear that the fluid language of "reasonably foreseeable risk" was the top issue. This persistent uncertainty exists because the language has such a broad interpretation and because companies are given the authority to make their own distinction about what risks their accounts face. Attorneys with the FTC reasserted that since the legislation impacts a wide range of industries, it is impossible to try and enforce a concise set of factors. The agency believes that companies are best-suited to identify what risks their accounts face and how to respond to them. The agency also contends that if the rules' oversight is too constrictive, more problems will arise.
Since the "Red Flags" Rules were enacted in January 2008, the mandatory date for compliance has been pushed back twice. At the time of the July 14th meeting between NACM and the FTC, there was no move to delay mandatory compliance further, but the agency admitted that the possibility does exist. Nonetheless, business-to-business creditors that will be affected by the rules should continue to develop and implement programs, even if just from a best practices standpoint.
For credit managers, as has been stressed over the many months that NACM has covered the "Red Flags" issue, the tenets of the regulation are likely already in place. The Rules target frontline functions, such as sales, that don't always practice due diligence. Credit departments are the corporate functions that are seeking to verify the identity of potential customers as well as their ability to pay. The FTC believes that the "Red Flags" Rules can be a cross-functional communication tool, making a business more secure by facilitating greater responsibilities and communication between the frontline and back office elements.
The establishment of the Consumer Financial Protection Agency (CFPA) and its possible effect on the future oversight of the "Red Flags" Rules was also discussed in the meeting. As the regulation is written, the FTC does not foresee its responsibilities for oversight of the rules being swept under the authority of the new agency. Attorneys with the FTC also stressed that enforcement of the rules will be "good faith effort"-based in the beginning; therefore, as long as companies have tried to establish a written set of procedures to respond, detect and mitigate identity theft, they shouldn't have to worry about facing the $3,500 maximum penalty for each violation of the regulation.
If members have questions or concerns about the FTC's "Red Flags" Rules, they can visit the FTC's website at www.ftc.gov, where the agency has developed an FAQ, a business guide to the regulations and a template for low-risk companies. Members can also turn to the March 2009, May 2009 and July/August 2009 issues of Business Credit magazine for information on the topic.
Matthew Carr, NACM staff writer
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After the success of the first hearing on the ramifications of automaker bankruptcies, the House Judiciary Committee's Subcommittee on Commercial and Administrative Law has scheduled not one, but two sequels, scheduled for today, July 21, and tomorrow, July 22.
The original meeting examined the potential fallout from the bankruptcy filings of the nation's two fallen automotive giants, Chrysler, LLC and General Motors Corp., from a variety of angles. Witnesses testified about the devastating effect the government's approach to the automakers' bankruptcies would have on the economy, the bankruptcy process itself, the local owners of small dealerships and a host of other issues.
Hosted in May, the hearing featured nine witnesses from legal, academic, small business, minority and consumer advocacy fields, but the primary focus was the effect these filings would have on individuals. "Today's hearing will consider the wide-ranging ripple effects, and possibly unintended consequences, presented by automobile industry bankruptcies," said House Judiciary Chairman John Conyers (D-MI) in his opening remarks at the first hearing. "In particular, I want to focus on how various constituencies are being affectedâ€”the workers, the retirees, the auto dealers, the automobile owners and consumers generally."
According to Subcommittee on Commercial and Administrative Law Chairman Steve Cohen (D-TN), these newer hearings will offer President Barack Obama's task force on the auto industry a chance to respond to some of the criticisms leveled at them and the administration's approach in the previous hearing. The witness list for today's hearing consisted of a single witness, Rob Bloom, a senior advisor at the U.S. Treasury and chief of the aforementioned auto industry task force. Today's hearing took place at 11:00am EST, while the hearing tomorrow will begin 10:00am EST and a witness list has yet to be released.
A live stream of the discussions can be found on the Judiciary's website (http://www.judiciary.house.gov/).
Jacob Barron, NACM staff writer
After the Storm: Bankruptcy and Credit in the Wake of Chrysler and GM
After months of discussion, criticism, government funding and management posturing, two of America's automotive titans, Chrysler LLC and General Motors Corp. (GM), filed for protection under Chapter 11 of the U.S. Bankruptcy Code, in late April and early June, respectively.
The reasons for both company's lamentable fiduciary positions are well-known now, but whereas any other company in any other industry that made the same mistakes would've filed for Chapter 11, redrawn its business model, renegotiated its contracts, pursued its preferences and, with any luck, clawed its way back into solvency, the enormity of the American auto industry, as well as its previous reliance on taxpayer finance, has led the U.S. government to intercede in these landmark cases, engineering what was intended to be a swift, "surgical" bankruptcy for use in extreme circumstances such as these. The question that remains, however, is whether or not this is a one-time occurrence, or a precedent denoting a marked change in bankruptcy procedure.
To read more about the potential long-term effects of the government's foray into the Chapter 11 process for both Chrysler and GM, be sure to read the related article in the July/August 2009 issue of Business Credit magazine. Click here to get your subscription started today.
The United States and Cuba have been at odds ever since Fidel Castro took power more than half a century ago. Under the brutal dictator Fulgencio Batista, the U.S. and its Caribbean neighbor enjoyed an economic partnership that was profitable, but not without its seedy elements. Then Castro tried to clean up the rampant corruption that took root under Batista and his predecessors and, in turn, confiscated more than $1 billion in U.S. private properties and businesses.
The rift in the relationship between the two countries became vast and storied from that point forward.
After facing a year of filibusters, in 1996, two Republican senators finally won their fight for the passage of the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act. The late Jesse Helms (R-NC) and Senator Daniel Burton (R-ID) pushed for the bill that strengthened the embargoes the United States already had in place against Cuba, targeted companies that traded with Cuba and involved former U.S. properties that had been expropriated by Castro's regime.
It quickly became an unpopular piece of legislation with European countries since, under Title III of the Act, the United States could enforce sanctions and penalties against companies worldwide that did business with Cuba and were deemed trafficking in what was rightfully U.S. property. The European Union (EU) quickly demanded that the World Trade Organization (WTO) rectify the situation, though that pursuit ultimately fizzled out when the U.S. and the EU formed an agreement in 1998, while Mexico and Canada each passed laws nullifying the scope of the more commonly known Helms-Burton Act. The passage of the Helms-Burton Act also meant that Cuba could not be eligible for funding from institutions like the World Bank or the International Monetary Fund (IMF).
Since the law was first passed in July 1996, the president has had the authority to suspend the rights of U.S. citizens under Title III to bring lawsuits against companies and individuals trafficking in expropriated U.S. goods. Former U.S. President Bill Clinton began the suspensions in 1996, they were continued during the two terms of President George W. Bush and now President Barack Obama has adopted the suspensions, which are renewed every six months.
Potential liability has long been established and continues to accrue under Title III. Clinton began the tradition of suspending the rights to pursue damages by U.S. citizens and former Cuban refugees who are now U.S. citizens, in that, the United States and its allies continue to strive for a Cuban transition to democracy. Obama repeated this mantra in his letter last week to the House Committee on Foreign Affairs, the House and Senate Committees on Appropriations and the Senate Committee on Foreign Relations that it "is necessary to the national interests of the United States," and will ultimately lead to an expedited move to democracy, for section 306(c)(2) of Title III to be suspended for an additional six months.
For 13 years, that section of the Helms-Burton Act has been set aside. Now, with Fidel on the sidelines, his aging brother Raul Castro in charge and mounting pressure to completely lift the U.S. sanctions and embargoes with Cuba as European competitors swoop into the Caribbean nation's market, the move is deserving of note. The shifting relationship between the two nations has been slow, but since the easing of U.S. agricultural and pharmaceutical sales to Cuba in 2000, the United States has positioned itself as one of Cuba's top five trading partners.
Matthew Carr, NACM staff writer
Outposts and Allies: Politics, Money and Moral Dilemmas in International Trade
Nations change. "Ally" and "enemy" are rotating labels anointed with each shift in leadership. There is a future awaiting the world where Kim Jung Il will be no moreâ€”regardless how supreme of a title he grants himselfâ€”just as Chairman Mao Zedong's hard line dissolved in China. North Korea will one day have its own Deng Xiaoping who will be followed by a further line of reformers. But that is "some day." Now, the United States is face to face with one of the most contentious modern trade debates: Cuba.
A Castro is still in power, but the United States and the rest of the world see ample opportunities in a market that has long been closed. Read more in the July/August issue of Business Credit magazine. Don't have a subscription? Get one here.
As many businesses in several sectors have discovered, one of the unfortunate side effects of a major financial crisis is a notable increase in bankruptcy filings. Businesses that lose bank financing or become overleveraged, as one is wont to do in an economic crisis, may be forced to make the tough decision to head to the courts or, conversely, find a way out of their troubles without the help of the judicial system.
While its reputation is shifting from something to be ashamed of to just another part of American finance, the filing of a bankruptcy petition, whether a Chapter 11 or Chapter 7, can be as hard on debtors as it is on creditors. For this reason, many companies have sought solace in out-of-court liquidations and workouts. This isn't a bad thing for creditors either, since, if done correctly, these proceedings can often net a vendor more on their claims than an actual bankruptcy proceeding. In a recent NACM-sponsored teleconference, "Out-of-Court Liquidations and Workouts: What Creditors Need to Know," Deborah Thorne, Esq. of Barnes & Thornburg, LLP offered her tips and suggestions for creditors and debtors looking to take advantage of the absence of the rules and procedures that bind the two parties in a bankruptcy proceeding.
Several types of out-of-court proceedings can be commenced, and Thorne outlined the intricacies of many of them in her presentation. First were self-liquidations, wherein a debtor sells its own assets itself. "Sometimes you hear that someone has shut their doors, they're selling their assets and now they're trying to do some kind of distributions to creditors without the court," she said, using her experiences with a particularly successful self-liquidation as a model for others. "It was only successful because there was a lot of transparency, and the creditors could really see through everything," said Thorne. "They were clearly over the cliff and they decided that they should liquidate their assets, and we said they could do this but only if they could provide us with terrific information about what was going on with other creditors."
Thorne noted that this openness and information-sharing was a three-way street from debtors to creditors, creditors to debtors and creditors to other creditors. "We provided information to them, information they wouldn't have received on a bankruptcy schedule," she said. "There was a lot of hand-holding and a lot of sharing information among the creditor body, and although it was time-consuming, creditors made out better than they would have in bankruptcy."
"However, all self-liquidations are not really like that," she cautioned.
When debtors and creditors become more secretive, or a debtor treats certain creditors preferentially to the chagrin of other smaller creditors, an involuntary proceeding, whereby a debtor is forced into bankruptcy court, may be worth considering.
"The next type of out-of-court agreement is an extension agreement," Thorne continued. "This is essentially a workout plan outside of bankruptcy, but really it provides for full payment of debts over a period of time." These agreements are only fitting to certain types of creditors, namely ones whose business has the potential for continued growth. "To do one, a debtor would have to provide good cash flow projections, offer a payment schedule and, again, really let creditors know what's going on," she said, referring to importance of transparency in out-of-court proceedings. "It will work in the right situation, but obviously an extension agreement that is not honest is going to beg for someone to file an involuntary liquidation."
Other topics covered included composition agreements and assignments for the benefit of creditors (ABCs), among others. To learn more about NACM's upcoming teleconferences, or to register, click here.
Jacob Barron, NACM staff writer
Advanced Issues in Financial Analysis
As the downfall of the subprime mortgage industry indicated, credit extended to unworthy customers frequently turns out to be profit lost, which is why the first stage in credit extension, the customer review, is so important. By being able to effectively analyze a customer's financial information, a well-trained credit professional can wind up saving their company a great deal of stress by being able to spot a customer that will or will not pay back what it owes. For a convenient, thorough look at how to go even deeper into a customer's financial documents, be sure to join DJ Masson, Ph.D., CTP in his upcoming NACM-sponsored teleconference, "Advanced Issues In Financial Analysis," on July 29 at 3:00pm EST. Using his considerable expertise, Masson will discuss how to specifically get the most out of your customer's documents and also offer solutions to common issues that come up in the analysis process. To learn more, or to register, click here.
It wasn't that long ago that America's agribusinesses were thriving. Farm incomes were breaking records and the outlook for commodities, particularly corn with the nation's push towards ethanol, were blazing bright. But the economy began to crumble, first in financials and real estate, with the infection now spreading outward to every sector. Now, the agriculture industry is suffering. Defaults and delinquencies are rising, credit and financing has vaporized and, for some sectors like dairy, the financial landscape is arid and fast approaching crisis.
The dairy industry has historically weathered the waves of volatile price swings that make dairy farming an exceptionally challenging enterprise. Unfortunately, over the last year, it has taken more than its fair share of lumps as high feed costs increased more than 35% and energy costs rose more than 30%, both weighing heavily on output prices and forcing profits to the lowest levels seen in 25 years.
"Prices have fallen to record lows even as the cost of production continues to riseâ€”pushing scores of farms out of business," testified Congressman Peter Welch (D-VT) before the House Agriculture Subcommittee on Livestock, Dairy and Poultry. "In the past five years alone, Vermont has lost over 250 dairy farms, leaving us with only 1,046 today." He added that 32 of those farms have had to shut their doors in just the first six months of this year alone. For Vermont's agricultural economy, the losses are momentous. Dairy represents 70% of the state's agribusiness, and Vermont is on the brink of witnessing wholesale failure of its entire agricultural infrastructure, pushing feed dealers, equipment suppliers, processing plants and creditors away.
According to Welch, Vermont businesses that reported a stake in dairy recorded $426 million in sales in 2001 and employed close to 8,000 people. And the state's Department of Agriculture reports that 96% of supplies used on dairy farms are purchased locally. A collapse in the dairy industry would have reverberations that would spread quickly. The congressman is pushing for increased assistance programs like Milk Income Loss Contract (MILC) payments and introduced legislation this month titled the Dairy Fairness Act of 2009, which would link MILC payments to inflation.
"While MILC has helped ward off full-scale disaster so far, the disparity between the price of milk and the cost of production warrants a reevaluation of its payment formula," suggested Welch. "With farmers spending nearly $19 and earning back less than $12 for every hundredweight they produce, MILC payments between $2 and $3 are simply not enough to keep them afloat."
In April, Welch, along with the Northeast Association of State Departments of Agriculture, asked Congress to raise the MILC payment rate from 45% to 75% and reconsider the current cap of 2.95 billion pounds of annual production.
In 2007, cash receipts for milk hit a record of $35.5 billion. In 2008, this tapered off some to $34.8 billion. It wasn't until late 2008 that tragedy struck as the USDA's Economic Research Service (ERS) reported in December that high feed costs reduced net cash income for dairy producers by an estimated 40%. This year, cash receipts are expected to fall to $23 billion with feed costs representing between 70-80% of variable operating costs.
Exports have also plummeted after hitting a record of $4 billion in fiscal year 2008. The forecast for 2009 is a sharp decline to $2.3 billion, while cheese exports have dropped by half, butter exports have collapsed 80% and milk powder exports are down 70%.
The about-face in income also creates major problems as 70% of dairy farms utilize debt. "Some of the largest dairy farms are the most heavily indebted," said Under Secretary of Agriculture, Farm and Foreign Agricultural Services, James Miller. "Across all sectors in agriculture, dairy ranks third in the average debt to asset ratio, behind poultry and hogs. The financial crisis has made the credit needs of dairy producers all the more pressing."
Blame for the dairy industry buckling has been based on the allegations of rising imports and on the more factual reality of falling exports; nonetheless, the sector can only clean up after the devastation the perfect economic storm has left in its wake.
"As serious as this economic situation isâ€”and it is very seriousâ€”there is little that can be done now to alleviate it. It simply must pass," stated Brad Bouma, president, Select Milk Producers, Inc. "This crisis has shown the need for better price risk management by dairy farmers. Those dairymen who weather this storm the best will be, for the most part, those who had the foresight to manage their price risk before the markets failed."
There were no decisions made in the recent hearing. The Subcommittee is planning to weigh more testimony later this month as members consider what policies to adopt and what direction assistance may take.
Matthew Carr, NACM staff writer
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While many consumer advocates have enthusiastically applauded President Barack Obama's plan for financial regulatory reform, and most notably the establishment of a new consumer-centric agency, the Consumer Financial Protection Agency (CFPA), other groups have just as enthusiastically criticized the proposal. The U.S. Chamber of Commerce declared its opposition shortly after the proposal was revealed and now the American Bankers Association (ABA) has also lent its voice to the anti-CFPA movement.
In testimony before the Senate Banking Committee, Edward Yingling, ABA president and CEO, noted that while the industry fully supports the concept of effective consumer protection, the establishment of a new agency with powers as broad as those of the CFPA would further complicate regulatory schemes and, even worse, fail to address the problems that led to the current economic crisis. "The biggest failures of the current regulatory system, including consumer protection failures, have not been in the regulated banking system, but in the unregulated or weakly regulated sectors," said Yingling. "The most pressing need is to close the regulatory gaps outside of the banking industry through better supervision and regulation."
Using the Administration's own numbers, which indicated that 94% of high-cost mortgages existed beyond the sphere of regulated banking products, Yingling suggested that this unregulated, non-banking sector poses problems because it functions on a completely different business model, one that often includes incentives that essentially reward lending that is unsafe and unsound. "These entities have not been subjected to the breadth of consumer protection laws and regulations with which banks must comply," he said. "The need is for the same bank-like structure, supervision and examination to be applied to non-bank financial service providers."
Yingling also noted that giving the CFPA such broad, decisive powers over what products and services banks can and can't offer will only stifle innovation in the sector and limit the industry's ability to respond to consumer demand. Another primary concern for both the ABA and the U.S. Chamber is the potential for duplicate and conflicting regulations among the CFPA and the government's other myriad consumer and banking regulators.
As reported in last week's eNews, Congressman Barney Frank (D-MA), chairman of the House Financial Services Committee has already introduced legislation, H.R. 3126, to enact the president's amended proposal. The bill currently has 12 cosponsors and has been referred to both Frank's committee and the House Committee on Energy and Commerce.
Jacob Barron, NACM staff writer
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Four out of five of the world's largest companies are unable to accurately forecast mid-term cash flow, according to a new study from The Hackett Group, Inc., its REL working capital division and the National Association of Corporate Treasurers (NACT). This uncertainty creates a potentially dangerous scenario when combined with shrinking levels of cash on hand in most industries, plummeting revenues, reduced margins and limited availability of credit and cash from other external sources.
The Hackett study found that only 22% of companies say they can forecast mid-term (two-three months out) operating cash flow to within 5% accuracy. Previous Hackett research also showed that only one in three companies can forecast earnings to within 5% accuracy, and less than half can make the same claim about sales forecasting. Top performers do significantly better than their peers. A total of 74% are able to forecast mid-term cash within 5% accuracy. These top performers also complete their forecasts in less than half the time it takes typical companies and require fewer staff to complete the process.
Several major findings from the study looked at how companies must improve organizational collaboration and alignment and the underlying technologies that support cash forecasting. Specifically, about 70% of all companies surveyed rely almost exclusively on standalone spreadsheets as their primary cash forecasting tool, with few turning to best-of-breed applications or ERP-related systems. The best companies also have cross-functional teams with significant operational involvement, which is critical given the number of groups outside of finance that have a role in the forecasting process. Top performers drive greater effectiveness by achieving much higher levels of intimacy with customers and suppliers, developing a better understanding of their customers' financial positions and conducting more frequent credit reviews. They also have more structured, interactive customer and supplier dispute processes in place.
A related Hackett survey also found that while forecast accuracy is measured by most companies, 80% don't set accuracy targets and 85% don't have any form of incentives in place to promote improved forecasting accuracy.
The study identified several other best practice areas where top performing companies focus to improve their ability to forecast cash flow. Performance management is one area where the best companies excel. Top performers are much more likely to rely on an array of analytical techniques to turn cash forecasting information into business insight. They look at operational leading indicators and macroeconomic assumptions 40% more often than typical companies, are 62% more likely to rely on best/worst case assumptions and turn to what-if analyses 79% more frequently.
Top performers also provide more detail to their analysis and are about 50% more likely to offer a range of numbers, footnotes and scenario analysis as part of their forecast.
The study is based on responses from 85 U.S. and European companies with an average revenue of over $12 billion. "It's disturbing to think that most companies are virtually flying blind in this critical area," said Hackett Chief Research Officer Michel Janssen. "This problem is by no means a new one. But it's been exacerbated by the current economic climate, where it's more critical than ever for companies to be able to understand and predict their cash flow from operations."
According to REL President Mark Tennant, "The bottom line is simpleâ€”you can miss the mark on sales or earnings forecasts occasionally and survive. But you can only run out of cash once. This study clearly details the practices and procedures that companies can use to avoid a calamity and get a handle on this key area. Companies would be well advised to consider whether they're leaders or laggards here, and how they can make changes to improve cash forecasting accuracy."
Selected portions of this research are available free, with registration, at the following URL: www.thehackettgroup.com/forecastingcash.
Source: The Hackett Group
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