March 24, 2022

	I. Shipping Your Products Just Got More Expensive
	II. Tribal Construction Projects: How They Differ and How You Can Stay Protected

	III. Should You Trust Your Feelings?
	IV. Putting DSO in Its Place

Oil prices were creeping toward $100 a barrel in February due to tight supply that existed prior to Russia’s invasion of Ukraine. The crisis, however, pushed oil prices over the edge, sending them skyrocketing to $130 a barrel earlier this month. Prices have softened a bit since then, but they remain consistently higher than normal.

Even as crude oil prices continue to rise and fall, diesel fuel likely will remain high for the near future. “That’s a big problem,” reads a Washington Post article. “Diesel is the workhorse of the global economy. It keeps trucks and vans, excavators and heavy machinery, freight trains and ships all buzzing.”

Fuel surcharges are one way freight carriers pass along substantial hikes in oil prices. Many companies have started implementing surcharges and rate hikes in response to the Russia-Ukraine war and others will likely follow, said Eric Dance, CPA, chief financial officer with Alliance Trucking LP (Arlington, TX).

“Normally we see a single price increase per year from our material suppliers, but we’ve seen companies raise rates this year already in response to increasing diesel and other operating cost increases,” he said. “The large publicly traded companies were very aggressive about raising prices three or four times during FY21, and now the smaller companies are following in their footsteps in FY 22 with the run up in diesel.”

Some businesses indirectly charge their customers for fuel by marking up the price of their products rather than tacking on a percentage. But this makes the price increase more permanent, Dance said. “Our vendors are raising unit prices as an indirect fuel charge so now we are following their lead to compensate,” he said. “But as diesel prices soften, I don’t think these suppliers will lower prices. It is harder to change unit costs whereas surcharge percentages are easy to dial up and down.”

Freight carriers are not the only ones to use surcharges. It may be time for your company to add a fuel surcharge to avoid absorbing expensive shipping costs, said Joe Lange, CCE, ICCE, CCRA, credit manager with Brenntag Great Lakes, LLC (Wauwatosa, WI). Lange’s company started adding a transportation surcharge in 2018, which has helped “offset the costs when we see price increases from our suppliers on the backend.”

Brenntag adjusts surcharge prices on a monthly basis as fuel prices move up and down. Historically, the extra fee has remained fairly stable. But Lange anticipates that it will increase substantially next month as fuel prices remain volatile. “A rule of thumb is that for every five-cent increase in diesel prices, container transport companies add one percent to their fuel surcharge to customers,” Neil Chambers, director of Container Transport Alliance Australia, told the Financial Review.

When it comes to passing the costs down to your own customers, Dance said it is important to get the correct language in your contracts. “You need to peg the freight price adjustments to something measurable, like cost inputs for material and fuel, for example,” he said.

Dance uses the following language when he emails quotes to customers:

Materials

If, during the performance of this Quote, the price of materials significantly increases, through no fault of [Company Name] the price of the materials shall be equitably adjusted by an amount reasonably necessary to cover any such significant price increases. As used herein, a significant price increase shall mean any increase in price exceeding x% experienced by [Company Name] from the date of the quote signing or ordering of materials by Customer. Such price increases shall be documented through quotes, invoices, or receipts.

Fuel

If, during the performance of this Quote, the price of fuel significantly increases, through no fault of [Company Name], the price of the delivery shall be equitably adjusted by an amount reasonably necessary to cover any such significant price increases. As used herein, a significant price increase shall mean any increase in price exceeding $X.XX/gal from the date of the quote signing or ordering of materials by Customer. Such price increases shall be documented as reported by the U.S. Department of Energy Information Administration On-Highway Diesel Fuel Prices index.

In addition to getting the language correct in your contracts, it is also imperative to give your customers a heads up, Lange said. “We made sure we clearly communicated to our customers an explanation as to why we are building transportation into our prices. If you communicate it correctly to your customers, they will be willing to pay.”

More opportunities to participate in tribal construction projects could be on the horizon. The Infrastructure Investment and Jobs Act legislation passed in November includes more than $13 billion for tribal communities across the country, and makes them eligible for billions more, according to a White House statement.

“The trends in tribal construction will be all over the map depending on tribal needs and available funding,” said James Sander, attorney for Larkin Hoffman (Minneapolis, MN). “Housing is a perennial issue, but many tribes are exploring business developments such as hotels and resort facilities to build on casino revenues.”

To fulfill these needs, indigenous communities often turn to sources outside their nations. “Tribal communities may not have the expertise or access to skilled labor, equipment or materials needed for the projects,” said Sam Smith, regional finance manager for Crescent Electric Supply (East Dubuque, IL). “They have to contract with companies outside the tribe for these materials and services. From a credit perspective, the biggest challenge for outside organizations doing tribal work is evaluating the risk of nonpayment.”

Creditors must be aware that tribal projects are performed under the ownership of the sovereign government within the tribal land, Sander said. “Tribal governments enjoy sovereign immunity. For the construction industry, this means tribal lands are ‘outside’ a particular state. So, state laws on mechanic liens, construction liens and contract laws, to some extent, do not apply.”

You are bound to the tribal construction policy and must follow all tribal laws governing the construction of all projects, said Ty Knox, ICCE, director of credit and risk for EFCO Corp. (Des Moines, IA). “Each tribe has its own set of tribal laws. Get educated on the tribal laws governing the project, and try to ensure there is a bond before committing to the project.”

Creditors must treat any work or services performed as unsecured unless some form of security is put in place, Smith said. “If your organization is going to provide labor or goods to a tribal project with no security, a thorough understanding of the tribal court process needs to be researched.”

Tribal governments cannot be sued unless the tribe agrees to waive its immunity, said Connie Baker, CBA, director of operations for NACM’s Secured Transaction Services. Liens cannot be filed on sovereign land, so unless the general contractor takes out a payment bond, there would be no security. Suppliers would only have the right to sue their customer for nonpayment, she continued.

“Inquire about the availability of a payment bond,” Smith said. “There is no requirement for a tribe to have a payment bond in place, but tribes understand the concern regarding payment delinquency on projects. So, in order to console contractors and suppliers, a payment bond may be issued.” If a bond is issued, have a qualified individual review it to understand your rights and any requirements or timelines it may contain, he continued.

Subcontractors and suppliers are excluded from prime contracts with the tribal entity, so they depend on the steps the prime contractor takes to protect payment rights, Sander said. “Subcontractors and suppliers should understand what the project is, how it is being funded and what measures, if any, the prime contractor has taken to protect payment. As with any contract now, one of the important contract clauses is price escalation.”

Subcontractors and suppliers must watch out for “pay if paid” language that could leave them without payment protection if the project or prime contractor should fail. Additionally, look for a waiver of sovereign immunity clause in the prime contract, he continued. “This would permit a tribal entity to be sued in state or federal court.”

Depending on the type of project, a lien on the leasehold interest may be a possibility, Smith said. “For example, if a tribe leases oil rights on its property to an outside driller that you supply material to, a lien on the lease may be possible to secure your payment in the event of nonpayment from your customer.”

Creditors also can ask for a joint check, which will not guarantee payment, but would allow the general contractor to cut the check in both the subcontractor’s and supplier’s names, Baker said.

If you hear yourself saying things like, “they don’t care,” “he isn’t engaged” or “she thinks she’s above it all,” then you are operating off of emotions and not observation. In other words, you are relying on your emotional brain rather than your executive brain.

As a leader, it is self-regulation that helps you initiate conversations that get results. Unbridled emotion is a sign you are living in the survival zone, which leads to mismanaged conflict.

Here’s how to know whether you are operating from your prefrontal cortex or your limbic system:

• Harboring resentment about an employee
• Avoiding conversations because you know what they will say
• Moving employees around on the chessboard
• Initiating global conversations instead of addressing the issue head on and individually
• Retaliation

What to do instead

Increase your self-awareness by observing your inner dialogue. Is it full of blame, anger and resentment? Realize that any unwanted emotion probably means there is a conversation that needs to happen.

Don’t believe every thought you think. Instead, take a breath, then question your perceptions by addressing observable behaviors. It goes like this: “Parul, I noticed you haven’t spoken up at the last two meetings. My perception is that you’re checked out. Walk me through what’s going on.”

Parul now has an opportunity to share concerns. What if Parul says, “Not at all, it’s just your perception.” That’s your opportunity to say, “Perhaps it is. What I need from you is for you to offer your input and engage in the next meeting. Can I get that from you?”

Whether the employee was checked out or not, chances are their behavior will change because you maintained composure, addressed the observed behavior and shared your perception without preaching or judging.

Marlene Chism, president of Marlene Chism Consulting, works with leaders to build drama-free cultures that drive growth and reduce costly mistakes. On April 21, from 11 a.m. to 12:30 p.m., NACM and FCIB members can meet Marlene during the next Author Chat via Zoom as she discusses her new book, From Conflict to Courage: How to Stop Avoiding and Start Leading. Register to become a part of the discussion.

If you can’t measure it, you can’t improve it—a sentiment that many credit professionals are familiar with. Knowing what to measure, how to measure and what the result means are important tasks for credit managers. On their own, metrics are just numbers. Although companies often use different approaches to apply metrics, the analysis and steps taken based on the results are what give them meaning.

Over the next several weeks, eNews will cover a variety of metrics used in credit departments, to provide more insight into how best to use and decipher them. We are kicking off the series with the metric that many credit professionals—though not fans of—are required by their management to track: days sales outstanding (DSO). DSO remains a long-standing benchmark for C-Suite members for measuring receivables performance because it measures the number of days it takes to turn sales into cash. There are a number of ways to compute the ratio such as accounts receivable divided by net credit sales multiplied by 365.

What You Should Know About DSO

Overall, a low DSO is favorable because it shows the company takes less time to turn accounts receivable into cash. However, payment terms granted to customers is the primary driver of DSO, and it is difficult to compare the DSO of one company to another because of variations in product mix and terms. The ability to collect on the due date can add to the collection period.

DSO has erroneously been translated into how well credit teams manage accounts receivables (AR), said Val Venable, CCE, ICCE, FCIB’s International Credit & Risk Management course instructor. “The C-Suite continues to use DSO because they are familiar with it. It is a metric used by many as a means of measuring the efficiency in which a company turns sales into cash. And DSO does that, but it has been misunderstood to mean a measure of effectiveness of the credit and collections operations.” 

DSO is largely dependent on the sales department, said Darrell Horton, ICCE, director of credit for Litigation Services, LLC (Las Vegas) and NACM chairman. “It is a good number, but it should not be used in isolation because it is out of the credit manager’s control. The credit team only impacts it if they are not collecting within payment terms.”

Factors such as fluctuations in sales, disproportionate mix of terms and seasonal sales can influence DSO. “The only time DSO correlates to receivables performance is if sales levels are steady and all sales are made with exactly the same payment terms,” Venable said.

Creditors should use DSO to assess internal gaps and areas for improvement in managing accounts receivables, invoicing processes and sales fluctuations, said Courtney Brightman, CCE, credit manager for Sensata Technologies, Inc. (Attleboro, MA).

Depending on the formula used to measure DSO, shifts in terms may not be evident for a few months, which could result in unnoticed terms creep. For example, if a company begins extending terms, a DSO calculation will not pick up the change the first month or so. 

“All of the new longer-term sales will still be in the current bucket, aligned with current month sales,” Venable explained. “Use of an average DSO or even sales weighted DSO won’t immediately identify the shift in terms.” However, she added, one DSO calculation that will pick up the shift sooner is to track the terms granted by each individual invoice. “This may be an overly burdensome task for companies with portfolios consisting of thousands of open invoices with a wide multitude of payment terms,” Venable said.

Metrics such as average days delinquent or other past-due measures would indicate better how well their credit team turns receivables into cash. These types of metrics provide an indicator of how well the credit team enforces payment terms and on-time collections.

DSO only serves as an indicator of the average payment term and does not quantify whether invoices are current or past due, Venable added.

Five reasons DSO does not reflect credit department performance:

1. It does not account for the terms agreed upon in the sales contract.
2. It does not account for industry standards regarding terms.
3. It ignores seasonal shifts out of the credit department’s control.
4. It ignores company marketing efforts such as special offers.
5. It is biased toward sales.

Senior management will often review DSO on a monthly or quarterly basis to see if the credit approval process is too strict or too lenient, Brightman said. However, DSO relates more to the customer’s ability or willingness to pay on time. Other factors that can reduce or increase DSO include:

• The creditor’s risk tolerance
• Percent collected on current targets
• Sales extending credit to riskier customers
• Effective billing practices from customer service

Credit departments often take different approaches to using DSO depending on the company’s industry and objectives. For credit managers to get the most out of DSO, they must find ways to combine it with other metrics to create a clearer objective tailored to their team. Next week, we’ll review best possible DSO.