eNews April 22
In the News
April 22, 2021
|I. A Glimpse at How Management and Credit Teams Measure AR Performance|
|II. Four Things Needed for Recovery|
A Glimpse at How Management and Credit Teams
Measure AR Performance
Bryan Mason, editorial associate
Metrics are a staple for measuring and analyzing productivity. However, how companies measure and track their credit performance differs from how their credit managers measure and track team performance, according to two recent eNews polls.
In the first poll, credit leaders were asked to share how their management tracks credit performance. Responders were permitted to choose more than one answer, which explains the spillover in percentages. The top three responses for how companies measure receivables performance include:
- Days sales outstanding (DSO), 71.57%
- Change in past dues, 55.88%
- Cash collections to forecast target, 23.53%
On the other hand, credit managers chose the following when they track their teams:
- Dollars past due, 56.41%
- Average days delinquent (ADD), 43.59%
- DSO, 41.03%
Although both DSO and dollars past due reflect the time it takes to turn receivables into cash, they highlight different factors.
“DSO is driven more by payment terms, sales levels and a mix of the percent of the portfolio that has various terms rather than by how well the receivables are being collected,” said Val Venable, CCE, ICCE, FCIB’s International Credit & Risk Management instructor. “It is not a strong indicator of how well the credit team is doing at managing the portfolio.”
Fluctuations in sales levels and payment terms can cause inaccuracies in DSO reporting, Venable explained. Although some DSO formulas diminish the influence these factors have on the final calculation, none of them eliminate it entirely.
Oftentimes, credit professionals inherit the metrics they use. “Many metrics were preset for my company in terms of formulas for DSO and past due AR,” said JoAnn Malz, CCE, ICCE, credit collections manager with Hydraulics Americas. “I am slowly educating them on the importance of using percentages as well as dollars to conduct better trend analysis and ensure performance is stable; raw dollars don’t always provide that view.”
No single metric unilaterally illustrates a credit team’s performance and the AR portfolio, Venable pointed out. “Credit professionals use a mixture of measures to best exemplify performance of their team and portfolio.” Despite its more than 56% poll ranking, dollars past due can be unreliable due to a wide variation in invoice sizes, which can create drastic swings, she added. Venable recommends using a combination of ADD and dollars past due to provide a clear and complete picture of team performance.
“The variance in metrics used might be a result of system capabilities and inability to calculate some of the other metrics without a lot of manual work,” Malz said. “Or, it might be they just want to keep their metrics and reporting streamlined and simple. Their companies may also be of such a size that they would have no one to discuss metrics with on a regular basis like the top five or disputes.”
When it comes to metrics, “there’s no one size fits all,” said Darrell Horton, ICCE, director of credit for Litigation Services. “You have to find the metric that your team truly has control over. It’s not good to hold someone accountable for something they cannot control.”
Four Things Needed for Recovery
Chris Kuehl, Ph.D., NACM economist
As far as the economy is concerned, four questions have dominated from the beginning of the pandemic, and they all center on consumers. The first is whether consumers would choose to resume old habits that drove economies prior to the pandemic. The second is whether they would be able to resume these old habits after lockdowns were lifted. The third is whether they would have the money and jobs to support these habits. And, fourth is whether the pandemic would alter consumer habits permanently. We are just starting to get some answers to these questions, and thus far these responses have been generally positive.
The responses tend to be jumbled; each is dependent to some degree on the other. Consumers always asserted they would embrace a return to their old habits. They would go to restaurants and events again. They would interact with people again and travel again. They would resume their lives to the extent they were allowed.
The data thus far show several variations. Those in states that have opened up are seeing a swift resumption of old habits, but there have also been more cases of the virus and that has slowed some consumers down. The data is more anecdotal than solid; but from polls, it seems that roughly 25% of the population has never taken the pandemic seriously and did little to interrupt their lifestyles. About 25% are deeply worried about the pandemic and have radically altered their behaviors, and about 50% are taking some precautions but maintain a desire to go back to old patterns.
Lifting lockdowns will have little impact on about 50% of the population because they have either ignored them or they are too worried to accept the end of them. It comes down to the 50% who are waiting for official decisions to be made. The trend thus far has been to reduce and remove restrictions, but that has varied from state to state. The loosening has meant a surge in infections, but thus far there has not been a move to reimpose the most draconian of the rules in most states. The emphasis on vaccination continues to be the primary weapon.
This brings us from willingness to ability. Here is where the news gets a lot better. It is one thing to want to resume normal activity and quite another to have the wherewithal. It has been noted by Moody’s that there is an extra $5.4 trillion in savings around the world. That is fuel for a recovery of some substance.
This has been computed by looking at additional savings compared to the 2019 spending patterns. That there is a buildup of savings comes as little shock. The primary factor is that consumers were cut off from what they usually spent money on. In the U.S., consumers spend upward of 65% of disposable income on services and most of that spending was made impossible. People spent somewhat more on things than before, but for the most part they just stopped spending. In addition to this savings surge, stimulus money went to millions of people. The first rounds of that stimulus were generally distributed—an attempt to power out of the recession with consumer activity. The miscalculation was that much of that additional cash had nowhere to go and ended up in savings.
The last question to answer may take a while. How much did all of this change the way that people act? Will online shopping continue to grow and dominate, or will people want to go back to the store again? Will people change the way they travel, more driving and less flying? Will people avoid attending events and facing crowds? It is still hard to tell because people have just started to get the opportunity to resume these old habits.
Pushback on Texas House Bill
Gets Pre-Lien Language Dropped
Bryan Mason, editorial associate
A seemingly innocuous Texas House bill turned contentious after the state House of Representatives' Business & Industry Committee considered a revised version that required subcontractors to send pre-lien notices at the start of each new project.
The bill as originally drafted would not have created a lot of problems for NACM members, said Perrin Fourmy, senior associate at Bell Nunnally and Martin LLP.
However, Rep. Andrew Murr (R), the author of HB2621, gave the committee a revised bill, Fourmy added. “In that bill, he had added a requirement of pre-work notice from all subcontractors.”
The angst was short-lived, however. “We realized we needed to alert [NACM Southwest] membership and also make Rep. Murr aware of the concerns,” he explained. “Fortunately, we were able to engage with Rep. Murr and remove that language requiring a pre-work notice.”
As currently drafted, Texas HB2621 would amend Section 53.024 of property code title 5, “Exempt Property and Liens,” to limit the amount of a subcontractor's lien for labor or materials. Under the proposed guidelines, a subcontractor’s lien could not exceed:
- An amount equal to the total subcontract price including labor, materials, overhead costs and other expenses minus the sum of previous payments received by the claimant on the subcontract.
- The contract price minus previous payments received by the original contractor and the claimant on the subcontract.
In essence, this legislation would ensure that a lien is not greater than the contract price between the owner and the original contractor, Fourmy said. “While it intends to limit the amount of a lien claim, it is practical that an owner would not typically expect a lien for greater than an original contract value. We don’t think this will affect the number of liens filed and shouldn’t substantially affect the relationships between original contractors, subcontractors and suppliers going forward.”
The proposed legislation “appears to be largely designed to address a very rare circumstance where a subcontractor charged more than the original contract was worth,” he added. In the normal course of business, “this shouldn’t come up … because an original contractor wouldn’t agree to pay a subcontractor more than his contract value with the owner; if so, he would be guaranteed to be underwater on a project.”
The bill came to NACM Southwest’s attention during a public hearing for Texas HB2237, which would change mechanic’s lien notice requirements and deadlines. Both bills are currently pending in committee. Read more about Texas HB 2237.
Pandemic-induced economic stress will continue to exacerbate global political risk throughout 2021 and amplify threats facing already-fragile economies, according to a new report by Marsh.
The Political Risk Map 2021, published by Marsh Specialty, shows larger increases than ever before in country economic risk across all regions globally. Marsh credits the change to increases in deficit spending over the last 12 months, which adds to sovereign and commercial credit risks in less-developed economies. Strains on public financing in emerging markets will result from increases in sovereign indebtedness and may create unfavorable conditions for domestic and foreign-owned businesses, the report finds.
Findings from this year's Political Risk Map 2021 mirror those in the World Economic Forum's Global Risks Report 2021, which reported that the COVID-19 pandemic is increasing disparities between emerging economies and industrialized nations. It is also driving social fragmentation, which will weaken geopolitical stability in the next five to 10 years.
Social inequality is a pervasive risk across multiple regions—particularly in the Americas and Europe, according to Marsh’s report. In the future, inequality is likely to influence elections, contribute to political and economic nationalism, and create conditions that spark open conflict.
In response to the pandemic, many countries established or amended state-backed trade credit schemes to provide economic stability. Critics argue theses programs are keeping zombie companies afloat. The Political Risk Map 2021 points to the risk of mass bankruptcies among zombie companies once these government-backed schemes expire.
The Political Risk Map 2021 is based on data from Marsh Specialty’s World Risk Review platform. It rates 197 countries and territories across nine indicators relating to security, trading and investments.
|An Exporter’s Perspective of Incoterms
Speaker: Phillip Poland, DHL Global Forwarding
|Credit Management Automation Insight: Dashboards
Speaker: Leonel Torrejon, CICP, ICCE
|Alternatives to Bankruptcy:
What Trade Creditors Need to Know
Speakers: Bruce Nathan, Esq. and Michael Papandrea, Esq.