September 1, 2022

The August NACM Credit Managers’ Combined Index remained unchanged at 55.0 points, with improvement in unfavorable factor indexes offsetting deterioration in favorable factor indexes. But the favorable factor index is at its lowest reading since June 2020, and the unfavorable factor index is at its second lowest since that time, said NACM Economist Amy Crews Cutts, Ph.D., CBE.

“The CMI is still indicating solid economic growth, but there is more to the story than just value of the current level of 55 points,” said Cutts. “Slowing payment speeds and lower collections amounts are also appearing in the CMI responses, consistent with some payors having difficulties now, perhaps an early indicator of the coming broader economic stress … But at the same time, the combination of all these factor indexes is pointing to a pretty good situation currently despite possible storm clouds forming.”

However, the manufacturing and service sectors are indicating very different economic conditions. The manufacturing sector index is pointing more toward recession conditions as it nears contraction territory while the services sector is indicating continued economic growth.

“The abrupt drop in the manufacturing sector CMI this month is quite telling,” Cutts said. “The large decline in most of the factor indexes, especially those indexes tied to sales, dollar collections and dollar amount beyond terms, suggest that the recession may be starting in the sector. Credit underwriting appears to be getting tighter, with more customers being denied on their credit applications. The impacts of [the Fed’s] monetary policy tightening is now showing up in the manufacturing sector.”

The manufacturing CMI lost 2.5 points in August, dropping to a reading of 51.6, its worst since May 2020. The index of unfavorable factors lost 0.8 points to 48.7, while the index of favorable factors slid 4.9 points to 56.0. All favorable factor indexes have recorded declines in each of the past four surveys. The favorable factor leading the decline in the August survey is the sales index with an 8.8-point loss to 52.9, which is 12.3 points lower than a year ago and its lowest value since May 2020.

What CMI respondents are saying:

•  “Manufactured products are even to prior months. Sales and the value of new orders are up due to pricing initiatives dating back to fall 21 and as recently as July 22.”
•  “I see the companies I deal with are struggling internally with the capacity to process invoices timely. Staffing, vacations not sure why?”
•  “Seeing increase in 1-30 delinquency.”
• “Supply chain and unavailable labor issues are negatively impacting production.”
•  “Still dealing with supply chain issues and customers holding onto too much inventory.”
•  “We are still having supply chain and raw material issues with demand slightly down.”

Sign up to receive monthly CMI survey participation alerts. There is more information about manufacturing and service sector data and graphics provided in the August 2022 report. For more information, the CMI archives are located on NACM's website.

Automation can be a literal life saver for credit departments as it saves time, effort and money. Yet the majority of credit departments use a limited amount of automation in their processes, and some don’t use any at all. According to a recent eNews poll, most credit departments (70%) use automation in 25% or less of their processes.

Christopher Finley, CICP, global credit risk analyst at Club Bar, LLC (Huntersville, NC) said his department is in the infancy stage of automation. Only about 5% of processes in his department are digitized, including some credit releasing functions and collection reminders. He would like more technology to help with setting credit lines, handling invoice disputes, processing customer payments and sending statements. However, upper management can be a major barrier between credit departments and automation.

“We have a couple accounts that require a lot of hand holding, but if we had automation in other areas, we would be able to pay closer attention to those that need it,” Finley said. “[Upper management is] consistently focusing on the short term cost rather than the long term benefits of the software, which often leads to inaction.”

B2B trade is still dependent on paper documents and manual processes despite efforts to digitize. On average, one cross-border transaction requires the exchange of 36 documents and 240 copies, according to a report from enVoy. That’s a lot of work for the credit department to handle for each customer.

About 25% of the processes in the department where Charlotte Vasek, CCRA, CBA, director of credit at Wurth Wood Group (Charlotte, NC) works are automated. Her department uses an online payment portal for customers. “The more processes we can have automated, the better off we are—from a workload standpoint but also an information accuracy standpoint.”

Vasek recommends building your case for automation by starting with a foundation of customer service benefits, then adding workload and revenue benefits. “Help management understand that automation is something the customer wants. It’s also all about the bottom line from an executive standpoint, so help them understand how automation can save the company money because it won’t take as many people to process the same level of payment. We will be able to get more accurate information and grow the business without necessarily adding more people.”

Alaina Worden, CCE, credit and collections manager at CECO, Inc. (Portland, OR) has had success in convincing upper management to increase technology software in the credit department. Her department uses automation for roughly 50% of its processes, with the goal to be 75% automated over the next five years. “We are working towards fully automating our cash apps department, and moving towards electronic billing over the next 12 months.”

Include both intangible and tangible benefits in your argument for automation, Worden said. For example, automation leads to “less employee burnout. Typically, with increased growth comes more work for the team. Having solutions in place to offset those demands allows the employee to have a workflow that can be accomplished daily.”

Worden suggests finding the right type of automation that will bring the highest return on investment (ROI). “When presenting to leadership, make sure you are armed with your ROI. Cost and implementation are the biggest obstacles to overcome, however having a strong ROI has been beneficial to my arguments.”

Credit departments are expected to do more with less in today’s world, but it does not have to be that way. Bring current news events to the attention of upper management so they understand the pressure your team is under, and how automation can help alleviate that pressure. “Disrupted supply chains, price inflation and staff shortages are exerting increasing pressure on finance teams to find ways to scale according to ever-changing needs and capacity,” reads a report from insight software and Hanover Research. “Automation and digitization will continue to be keys to success, as finance teams work to eliminate tedious manual processes and find ways to access data from multiple business systems in real time.”

Commercial bankruptcy trends have taken everyone by surprise, as most businesses were able to survive the pandemic with stimulus checks. But as the economic tides turn, businesses will likely be strapped for cash and unable to pay their creditors. Jason Torf, Esq., creditors’ rights attorney at Tucker Ellis LLP (Chicago); John Simon, partner at Foley & Lardner LLP (Houston); and Sharon Beausoleil, senior counsel at Foley & Lardner LLP explain how creditors can spot customers in distress.

Q: What current trends are you seeing with commercial bankruptcies?

Torf: I’ve noticed that Chapter 11 filings were down very slightly year over year. But as far as trends, it’s difficult to tell at this point if we’re headed into a recession.

Simon: We’ve seen companies in the supply chain that have been under pressure due to a variety of factors now in financial distress. There’s been an increase in companies coming to us and trying to renegotiate customer contracts in order to get higher prices for the increase of labor and material costs, as well as fluctuation in demand and supply that they’ve faced within the past year for price relief.

Beausoleil: We are seeing more companies who have vendors or customers who are facing financial distress. Because of this, many of them are taking another look at their contracts to see what they can do to mitigate risk if their customer goes into bankruptcy. 

Q: What are the first signs that a customer could be in financial distress and headed for bankruptcy?

Torf: One of the more obvious ways that a customer might be headed into bankruptcy is if they hire restructuring advisors—financially or through a law firm. Other ways that could throw up a red flag for bankruptcy risk is when payments are coming in later than before, with you or with any vendors.

Simon: There’s many issues you can look at and see as your relationship unfolds with a customer. One of the most common things we spot is slow pay. Oftentimes a big warning sign is if there’s an increase in the time for that customer to pay its bills.

Beausoleil: A company’s slow pay can indicate larger issues. If credit managers are not getting any calls back from customers or vendors, that’s also a red flag that something else is going on.

Q: What advice would you give to credit professionals to make the best out of these situations?

Torf: Departments should take a good proactive approach looking at credit underwriting for new customers and for existing customers that might have changed circumstances as we enter a recession. An ounce of prevention is worth a pound of cure—if you’re only in reactive mode, you’re not going to do as well with your company. Proactive remedies could be reevaluating credit policies, reevaluate how you underwrite credit and making sure you can do everything you can as a credit department to protect your company and backend recovery.

Simon: Having a team at the company that is comprised of those from finance, sales, legal and purchasing department that review if there are any financially troubled suppliers or customers in order to be prepared and review for these types of situations in advance. It’s important to have a fast and flexible team to review the customer and supply base for signs of distress.

Q: How could a recession impact a credit professional’s ability to manage customers in financial distress?

Torf: I can’t predict what happens—but if and when a recession happens and filings pick up, certainly with more bankruptcy filings comes increased activity within credit departments. I think one of the reactive things that’ll happen is that you’ll have credit departments becoming busier on the backend of work rather than evaluating credit for new customers; you’ll be dealing with the recovery aspect. I think it should cause companies to take a closer look at their credit policies and evaluate them with the recession in lens.

Simon: We’re seeing lenders now getting increasingly aggressive. These specific lenders have made forbearance agreements that let borrowers in financial trouble continue to borrow and not default on their loans over a period of time now. However, banks are getting more aggressive in saying no to granting forbearance. You have to find a solution, which often times can be a sale of the business or a restructuring in a Chapter 11 bankruptcy case.

Beausoleil: I think it depends on your industry or whether you’re a purchaser or seller. For instance, a company could have loans or credit facilities that have maturity dates coming due. If the company has ability to pull more credit, they may be able to weather the recession. If a company has already gone up against their credit lines or lenders are unwilling to lend more money, they may have to seek a restructuring or sell assets in this environment.

To learn more from Simon and Beausoleil about protecting your company from financially distressed suppliers and customers, be sure to register for their webinar on Sept. 13.

Construction employment increased in 250 (or 70%) of 358 metro areas between July 2021 and July 2022, according to an analysis by the Associated General Contractors of America of new government employment data. But association officials cautioned that most construction firms report they are struggling to find enough qualified workers to hire.

“It is good to see construction employment top year-ago levels in more than two-thirds of the nation’s metro areas,” said Ken Simonson, the association’s chief economist. “However, the record number of construction job openings at the end of June and the near-record low for construction unemployment, as well as our own survey, indicate industry employment would have been even higher if there were enough qualified workers.”

The unemployment rate for jobseekers with construction experience plunged to 3.5% in July from 6.1% a year earlier, Simonson noted. He added that there were 330,000 job openings in construction at the end of June, the highest June total in the 22-year history of the government data.

Houston-The Woodlands-Sugar Land, Texas added the most construction jobs (31,000 jobs or 15%), followed by Dallas-Plano-Irving, Texas (9,900 jobs, 7%) and Chicago-Naperville-Arlington Heights, Illinois (8,100 jobs, 6%). Cheyenne, Wyoming had the largest percentage gain (17%, 700 jobs), followed by Bloomington, Illinois (16%, 500 jobs) and Duluth, Minnesota-Wisconsin (16%, 1,500 jobs).

Construction jobs declined over the year in 59 metro areas and were unchanged in 49 areas. The largest loss occurred in Orlando-Kissimmee-Sanford, Florida (-6,300 jobs, -8%), followed by Bergen-Hudson-Passaic, New Jersey (-3,400 jobs, -11%); Richmond, Virginia (-2,500 jobs, -6%) and Baton Rouge, Louisiana (-2,300 jobs, -6%). The largest percentage decline was in Bergen-Hudson-Passaic, followed by Monroe, Michigan (-10%, -200 jobs); Ithaca, New York (-8%, -100 jobs); Charleston, West Virginia (-8%, -500 jobs); and Orlando-Kissimmee-Sanford, Florida.

Association officials said workforce shortages may undermine the potential benefits of new federal investments in infrastructure, manufacturing and energy production. They urged public leaders to boost investments in construction-focused career and technical education programs to expose more current and future workers to construction career opportunities. They also called for allowing more workers with construction skills to lawfully enter the country to help firms keep pace with demand.