March 31, 2022
March CMI Indicates Economic Resiliency to Russia-Ukraine Conflict
Annacaroline Caruso, editorial associate
The March NACM Credit Managers’ Index shows resiliency despite the widespread economic uncertainty that followed Russia’s invasion of Ukraine in late February. This month’s combined score rose 1.1 points to 58.9.
However, rising commodity prices and supply-chain disruptions relating to the ongoing conflict may soon start to weigh heavily on businesses, said NACM Economist Amy Crews Cutts, Ph.D., CBE. “Many producers are scrambling to line up new sources of raw materials to replace Russian and Ukrainian supplies, and the prices of affected commodities have jumped as a result,” she said. “I think April will see most of the breadth of the impact of the war on domestic businesses, but for now the CMI supports a strong growth outlook.”
The combined index of favorable factors grew 3.7 points (70.5). Every favorable factor improved. Sales jumped 5.8 points (77.1); new credit applications, 4.7 points (68.8); dollar collections, 3.9 points (67.0); and amount of credit extended, 0.4 points (69.2).
However, the combined index of unfavorable factors saw a 0.6-point drop (51.2). Within the index, all factors declined except for dollar amount beyond terms, which gained 0.3 points (51.2). Disputes and dollar amount of customer deductions both fell deeper into contraction territory, dropping to readings of 48.0 and 49.0, respectively. Accounts placed for collection fell 1.2 points (51.5); filings for bankruptcies, 0.6 points (55.8); and rejections of credit applications, 0.4 points (51.9).
“It’s an embarrassment of riches in terms of demand as represented by the index of favorable factors, yet businesses are struggling to get things done as they can’t get the parts or transportation when they need them,” Cutts said. “Now add in the costs of fuel and other inputs, and they are feeling the squeeze as represented by the index of unfavorable factors, especially disputes and the dollar amount of deductions.”
What respondents are saying:
- “Orders and sales figures partially offset by increased selling prices. Production is down as we are producing to order, not inventory given the higher input prices.”
- “Although sales are improving to specific category groups and demand is still strong for every group, we continue to experience raw material and supply chain disruptions; and this is expected to continue through at least Q3.”
- “We would increase production, but supply chain issues are holding us back.”
- “Parts and component shortages are affecting sales and deliverables. Back orders are extreme from source, Asia Manufacturing.”
- “Supply chain limitations and delays continue to negatively impact production.”
- “Our business is doing great so far this year; and now with the price of oil up, our oil and gas business is really increasing as well.”
- “There are more applicants because customers are shopping sources, but we still are doing all we can near full capacity.”
If you would like to participate in the monthly CMI, sign up to receive survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the March 2022 report. CMI archives also may be viewed on NACM’s website.
Common Challenges Creditors Face When Using Metrics
Bryan Mason, editorial associate
Metrics can help paint a picture of how certain processes are working. However, knowing which metrics to select and analyze can present challenges for the credit department. According to a recent eNews poll, the top three challenges ranked in order of significance by respondents were: results can be misleading when taken out of context, management gets hung up on metrics that don’t matter, and understanding what goes into a metric and how that affects the outcome. Deciding which metrics matter the most followed closely in fourth place.
Toward the bottom of the list were:
- The time it takes to collect data
- Understanding what the metrics tell you and how to use the information
- Educating management on cons of benchmarking against peers
One credit professional stated that measuring the right thing using the wrong data has been an issue in their department. “Employees work the metrics instead of doing the right thing for the company or customer such as not pursuing customers that request refunds for cash on the account because the cash helps offset past due invoices and makes the past due percentage metric look better.”
Not all credit professionals are having to diligently track metrics, however, due to the advancement of software platforms. For example, Heidi Lindgren-Boyce, CCE, senior credit manager for Star Rentals (Kent, WA), recently switched to using a platform that automatically tracks metrics throughout multiple departments within her company. This process has saved valuable time in preparing and analyzing data derived from customer accounts, she said.
Furthermore, upper management was not asking questions pertaining to data reports that were being submitted to them—including DSO, Lindgren-Boyce said. Instead, their main concern is the year-over-year change shown in annually reported data. “We don’t do reports no one is reading,” she continued.
Regardless, there are still important data points to track on a regular basis, Lindgren-Boyce said. Credit professionals should still look at receipts on receivables and their aging accounts to ensure customers are paying in a timely manner.
Each week eNews poses a short poll question to gain more insight into the challenges credit professionals face. Please consider participating to help further the knowledge gained by taking part. The information is invaluable, and you’ll even have an opportunity to propose a future question.
eNews Metrics Series: Measuring Best Possible DSO
Annacaroline Caruso, editorial associate
There are a multitude of ways to calculate days sales outstanding (DSO). According to a recent eNews poll, 21% of respondents use the best possible days sales outstanding (BPDSO) metric—one such example being Ending Current Receivables multiplied by Number of Days in the Period Being Analyzed divided by Credit Sales for the Period.
Think of BPDSO as a snapshot of current invoices whereas standard DSO measures both current and overdue invoices. BPDSO looks at your receivables in the current month and tells you “How quickly your customers are paying right now,” said Darrell Horton, ICCE, director of credit with Litigation Services, LLC (Las Vegas) and NACM chairman. “It is a very focused look, so it makes sense to use BPDSO against other metrics rather than alone.”
The closer your standard DSO number is to your BPDSO, the better. If your standard DSO falls within roughly 20% of your BPDSO, it is safe to say your company has a healthy cash flow.
The metric also can help locate if collection problems are with your current accounts or those in the past, Horton added. “It will help you answer a few questions about how well your credit policies are doing right now. Are your credit terms too loose? Is the sales team selling to the wrong people? Best possible DSO can help you decide if your process is working well for you on a real-time basis,” he explained.
However, it is important to remember with all DSO calculations, the numbers can quickly fluctuate, Horton said. “DSO calculations are a combination of both the sales and credit departments; so, company wise, sure, DSO is a good number to use. But it is not always a good number to hold the credit team accountable.”
You can lower the risk of outliers and fluctuations by comparing DSO and BPDSO to previous years. Tracking the difference between your actual DSO and BPDSO consistently rather than sporadically also will help give you a more accurate picture.
Note: Updated on April 1.
Take Five: Stop Meeting Back-to-Back-to-Back!
Ed Batista, executive coach
Most of my clients who worked remotely during the pandemic have resumed a range of in-person activities, from occasional days in the office to executive offsites to full-company retreats. And yet almost all of them expect to continue working remotely, at least in part. In some cases, this is because they or their employees have relocated, or because they've hired in new geographies, making a full-time return to an office logistically infeasible. But in addition, unless they're involved in the production or transport of physical goods or the delivery of in-person services, they've recognized that the nature of their work has changed, as I noted last year:
Rather than viewing remote work during the pandemic as a temporary response to a crisis, my clients generally see it as a learning experience that enabled their organizations to become more flexible on a permanent basis. The benefits of this flexibility include responsiveness to employees' preferences, the ability to attract and retain talent in a wider range of geographical locations, and even increased productivity in some circumstances.
But even as my clients begin this next chapter in which remote work will be a normal part of their daily or weekly routine, a surprising number of them are persisting with a practice that I view as one of the most toxic by-products of the hastily arranged transition to remote work at the start of the pandemic: back-to-back-to-back meetings, without a single break in between, sometimes for hours on end.
Not only does the lack of a break between meetings exacerbate mental and physical fatigue, it also prevents effective context-shifting. In the blink of an eye, people go from a detail-oriented tactical agenda to a high-level strategic discussion, or they're thrust out of a large group setting into an intimate one-on-one, or vice versa. (It's grimly fitting that the service so many of us are using to facilitate these abrupt jumps is called Zoom.)
These problems are only made worse by the complexity of the current environment. War, climate change, political polarization and the persistent effects of the pandemic are taking a toll on even the most resilient people and organizations. My clients and their employees are finding themselves in unexpectedly emotional conversations with colleagues and that's unlikely to end any time soon. In this context, it's more important than ever to take a moment to reset, compose ourselves and prepare for the next event on our calendars.
The solution, as with so many issues in my practice, is simple but not easy: End every event at least five minutes before the next one begins. This may seem patently obvious, but as with many potentially productive behaviors, it's very easy to create a set of aspirational rules and very difficult to change actual norms, as I've discussed previously:
“You've probably worked as a group to identify some "ground rules" to improve the quality of your meetings—that's a common exercise and one I've conducted myself. But despite these efforts, your meetings haven't really improved. One reason why is the difference between rules, which are what we intend to do, or what we're supposed to do, and norms, which are what we actually do. To repeat: Norms are informal social regularities that individuals feel obligated to follow, and patterns of behavior based on shared beliefs about how individuals should behave.”
So, what are the keys to putting this simple guideline into place? As I describe in the piece cited above, there are four necessary conditions for the establishment of a productive norm:
- A set of shared beliefs regarding productive behavior. This is the easy part—the group simply needs to agree on a guideline that every event will end at least five minutes before the next one begins. But note that this won't be enough to change behavior, because rules aren't norms. Behavioral change only occurs when all of these conditions have been met.
- Sufficient mutual esteem among group members so that its withdrawal would be felt as a loss by any individual. Here's where it starts to get harder—the members of the group need to care about each other. This is why it's so important to invest in relationship-building and cultivate a sense of social cohesion, in ways that range from making small talk to in-person experiences such as offsites and retreats. So, the leader has a special responsibility to promote these activities because a group's mutual esteem can't be summoned at will: It can only be created over time.
- A willingness by members to openly acknowledge a norm violation by a peer. The degree of difficulty continues to increase—group members must be willing to speak up instead of silently colluding when the guideline is violated (as it inevitably will be). When the leader violates the guideline (also inevitable), other members must speak up and the leader must be receptive to their input. But when other members violate the guideline, speaking up can't be the sole responsibility of the leader: Members must be willing to call out their peers.
- A willingness by members to withhold esteem from a peer as a consequence of a norm violation. Finally, group members must be willing to hold each other accountable, and the easiest way to accomplish this is by withholding esteem, as noted by legal scholar Richard McAdams:
“Withholding esteem is, under certain conditions, a costless means of inflicting costs on others. These costs are often extremely small. ... But ... dynamic forces can cause the weak desire for esteem to produce powerful norms, sometimes because individuals struggle to avoid deviance, sometimes because they compete to be heroic.”
The withholding of esteem need not be harsh or rancorous, and it's actually most effective when conveyed with a light touch or even a sense of humor. But yet again, peers can't leave this task to the leader—on occasion the leader may have to enforce a rule, but that doesn't make it a norm.
Credit Congress Spotlight Session: Take Your Game
to the Next Level—Using Emotional Intelligence to Advance Your Career
Speaker: Jake Hillemeyer, Dolese Bros. Co.
Duration: 60 minutes
Credit Congress Spotlight Session:
When and If to Help a Distressed Customer
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Duration: 60 minutes
Get Yourself Ready for 2024: Goal Setting and Future Planning
Speaker: Hailey Zureich, zHailey Coaching
Duration: 60 minutes
Mastering Mechanic's Liens in Iowa: Distinguishing Commercial, Residential and Public Projects
Speaker: Chris Ring, NACM’s Secured Transaction Services
Duration: 60 minutes