March 16, 2023

To misquote Alfred Tennyson, “Tis better to have failed and lost than never to have failed at all.” In order to learn, people must make mistakes. But when the credit department makes a mistake, like forgetting to file a mechanic’s lien on time or not performing a thorough credit investigation on a customer, it can cost a company a lot of money. With the stakes already high, credit managers must be willing to learn from failure in order to minimize risk in the future.

Follow these steps in order to learn from failure … the right way.

Step #1: Analyze the Situation

Learning from failure begins by getting to the root of the problem. What went wrong? When did the problem start? Who was involved? These questions will direct you on what course of action to take as a credit manager.

It might be uncomfortable to replay the scenario in your head, but if you do not truly understand how the mistake happened, you will not be able to fix it for the future. It is important to create a work environment where your employees feel safe coming to you for help. “All I ask is that employees let me know when they make a mistake so that we can work together to fix it,” said Kevin Stinner, CCE, CCRA, credit manager at Simplot AB Retail Sub, Inc. (Loveland, CO). “We’ll review it and see what should’ve been done so that we don’t make the same mistake again.”

Step #2: Take Responsibility

A large part of learning from failure is accountability. By acknowledging what you did wrong, you can prevent yourself and others from making the same mistake. “Failing gracefully is about owning the failure, admitting to it and learning from it,” said Amy Cook, CCE, credit manager at McNaughton-McKay Electric Company (Madison Heights, MI). “My mistake helped me gain empathy for and relate better to my employees who’ve been through similar situations.”

As a manager, some responsibility for mistakes made within your department is likely to fall on your shoulders. “I had somebody tell me about a mistake they made only to find out that one of my employees instructed them to do it,” Stinner said. “So, I had to ask myself, do I blame them or do I take the responsibility for not training them properly?”

Step #3: Make a Change

Instead of getting frustrated or focusing on who is to blame, try to see what you can learn from the experience. “If you’re not making a mistake, you’re being too careful or too cautious, which means you’re not doing your job correctly,” Stinner said.

This may mean changing your credit policy as a result of the experience. “In my mistake, I placed a lot of weight on the character and capacity aspects of credit,” said Eve Sahnow, CCE, corporate credit manager at OrePac Holding Company DBA OrePac Building Products (Wilsonville, OR). “I did not put enough weight on potential collateral, capital and conditions.”

Sahnow suggests that credit managers balance all five C’s of credit in a reasonable weight that works for their company. “For example, if a customer who specializes in large residential projects cannot pay you within reasonable extension of terms yet refuses project accounts that offer your company security, look twice at capital before proceeding.”

Step #4: Move On

Make sure that you take the adequate amount of time reflecting on your mistake. However, dwelling on a mistake will not improve your chances at success. “There are times when I had a bad day or something didn’t go as planned and I’d go home feeling miserable about it,” Cook said. “My stomach would turn and my head ached as I thought about what I could have done differently. But as a leader, I had to hide that inner turmoil from my team. If the team is aware of what is going on, they need to see all the pieces and changes happening to get back on top.”

By moving on from mistakes, employees are more productive and their morale is better. And instead of focusing on the negative, credit managers and staff can celebrate mutual success in finding a solution to the problem.

The U.S. is in danger of defaulting as early as June if Congress does not reach an agreement to raise the debt limit or suspend it for some time. The nation hit its $31.4 trillion debt ceiling in January and has since been using “extraordinary measures” to prevent default, such as halting full investment into the Government Securities Investment Fund, selling existing investments and suspending reinvestments of the Civil Service Retirement Fund, according to CNN. “The extraordinary measures should last at least until early June, Yellen has said, though she stressed that her forecast is subject to ‘considerable uncertainty’,” the article reads.

Not much progress toward a solution has been made since January and if lawmakers are unable to come to a mutual agreement to raise the limit, the likelihood of an immediate recession is very high. “People are using this debt ceiling issue as a political football to get what they want in the future when it is really supposed to be about obligations we already owe,” said NACM Economist Amy Crews Cutts, Ph.D., CBE, in a recent episode of the Extra Credit^SM podcast. “If Congress does not fix this, we will be in a heap of hurt. Economists are on edge because we are not sure how long Congress is willing to play chicken.”

Some House conservatives issued new demands last week before they say they would agree to vote on the debt ceiling, including federal budget cuts, work requirements for Medicaid and an end to federal regulations on domestic energy production, CNBC reported. “With 222 Republicans and 218 votes needed to pass legislation in the House, Speaker Kevin McCarthy's path forward is complicated because he cannot afford to lose more than four members of his caucus on any given vote without Democratic support,” the article reads. “The House Freedom Caucus, with around 45 members, represents more than enough votes to sink practically any piece of legislation unless McCarthy strikes a deal with Democrats.”

Even if the U.S. does not default, coming close to the debt limit can be detrimental. For example, when the U.S. came close to default in 2011, it cost taxpayers $1.3 billion in additional borrowing costs, Cutts said. “This situation is still serious even if we don’t get all the way to default, and it gets worse the longer Congress waits to come to a resolution.”

While this is not the first time the U.S. has hit the debt limit, it seems to be more serious than in the past. “Odds that lawmakers are unable to resolve their differences and avoid a breach of the debt limit appear meaningfully greater than zero,” reads an analysis from Moody’s. “Getting any legislation through the legislative process is tough under typical circumstances. Getting highly contentious debt limit legislation signed into law through this Congress before a potential breach will be a heavy lift.”

A sovereign default in the U.S. would cause significant knock-on effects for the global economy. “It’s like when one kid gets in trouble and the entire class loses recess,” Cutts explained. “The U.S. is in the position of being the reserve currency of the world. The U.S. is supposed to be considered rock solid from a credit standpoint, which means we borrow at very low rates. The impact of a default on NACM members would be a rapid increase in borrowing costs and the inability of some customers to get financing. For example, if a customer is working on a government contract and won’t get paid.”

Social Security, Medicare benefits, military salaries, tax refunds and interest on the national debt are some of the legal financial obligations to be paid. Some of the biggest factors that have hindered the financial obligations are inflation, time and commitment—and the most important point is to pay bills that the U.S. already committed to, said Cutts. “When Congress made social security obligations or employed people in the military, nowhere in the contract did it say, ‘and you are in a second payment position,’ relative to investors in our treasury securities. So, one could argue the pot of money that comes in from taxes and other revenue sources is who gets paid out of that first?”

Under the contingency plan that was placed in 2011, there was no default on Treasury securities and they continued to pay interest on securities as they became due. The U.S. Treasury would also delay payments for all other obligations until it had at least enough cash to pay a full day’s obligations—meaning it would delay payments to agencies, Social Security beneficiaries and Medicare providers instead of choosing which payments to make that are due on the specific day.

Conflict is unavoidable. It can arise at any moment in your personal life and professional settings, whether between peers or even within yourself. But what do you do when conflict crosses over the line of leadership?

Being able to settle differences respectfully and effectively with upper management is key to getting the credit team recognized by the C-suite, said Kevin Chandler, CCE, director of financial services at Zachry Industrial, Inc. (San Antonio, TX). “You need to understand their motivation,” he explained. “What is the business driver that will lead them down the path to see your point of view? Credit is not black and white; it is full of grey areas. If you want a seat at the table with the CEOs on how to get things done, you must be perceived as adding value to the business process—and that means you cannot make credit decisions in a vacuum.”

There may come a time when you and your boss disagree about a credit decision. Maybe you will feel like a customer’s credit profile make them too risky while upper management sees the sale as necessary. Take this as an opportunity to think outside of the box and use different risk mitigation tools. “Credit is not the end all, be all final decision maker,” Chandler said. “You must be comfortable with playing your role in your company. That means sometimes people will go against your decision and as long as you give the right information, then that’s the business decision and that’s okay. You cannot let your ego be hurt because someone makes a different choice.”

Disagreements can pave the way for a stronger relationship between credit and upper management when handled appropriately because it creates an opportunity for more conversations, said Craig Pluff, credit manager at Graco, Inc. (Rogers, MN). “I’ve learned that the more time you spend with business leaders and conversations you have with them, the more equity you’ve built with them,” he said. “Difficult conversations can foster trust and respect so that when I have a different opinion, I am heard.”

The job of a credit professional is not to eliminate risk entirely, but to mitigate and accept the risk where it happens. “If there’s a riskier credit decision that wouldn’t be touched traditionally, we can still make a business decision to say we are going to take a risk and if it comes back to bite us, it won’t come back on to the credit team as far as not collecting,” Pluff said. “Just make sure you have done everything possible in terms of additional security to try and make the transaction safer.”

Be sure to keep a paper trail if the credit department and upper management have ideas that do not align, said Brett Hanft, CBA, credit manager at American International Forest Products LLC (Beaverton, OR). “You have to document everything, as much as possible,” he explained. “If I can provide due-diligence and share my findings with upper management, I may not agree with a decision to move forward accepting a sale on open account terms. If the credit team does not feel like it is a good risk to accept, I want clear and concise documentation in our credit file confirming the decision to sell was not approved by credit, but by upper management.”

When running a company or managing a team, the ability to speak openly about disagreements and settle differences is essential. “In some of my past roles, it’s been much more rigid in which there was a clear ladder approach that you had to go through,” Pluff added. “If I had an issue, I had to go through my boss to get to the next boss and so forth.”

Severe weather and climate change events add an additional layer of risk for credit professionals, and these events are becoming increasingly more common. Everything from hurricanes to droughts, snow storms and wildfires, the weather is contributing to rising prices and payment delays. In order to prevent future losses, credit professionals must be proactive when disaster strikes.

According to the National Oceanic and Atmospheric Administration (NOAA), in 2022, there were 18 weather or climate disaster events with losses exceeding $1 billion each. And total economic losses from natural disasters in 2022 are estimated at $313 billion, according to a report from AON. “Though 2022 was far from record-breaking in terms of overall losses, it saw many impactful and costly events across the globe,” the report reads.

Severe weather events have disrupted the construction industry, especially in California. “Flooding caused a state of emergency,” said Sherry Raposo, corporate credit manager at VSS Emultech (West Sacramento, CA). “Our concrete company got super busy supplying sand, rock and concrete due to flooding. But at the same time, some smaller customers had to stop working and receivables slowed down.”

Northern Texas has also been affected by an increase in rainfall in February and March of this year. A lot of projects have been pushed back and started impacting the customers' ability to pay, said Richard Fowler, CBF, credit manager at United States Lime & Minerals, Inc. (Dallas, TX). “Some of our customers are involved in construction commercial projects across town and when all these projects are halted, nobody is able to work and nothing gets done,” he said.

As severe weather events become more common, insurance becomes more costly. Roughly 42% of direct aggregated economic losses were covered by public and private insurance entities, translating to a global protection gap of 58%. While a large part of the global disaster losses remains uninsured, this was one of the lowest protection gaps ever recorded, close to the record year of 2005 when roughly 40% of losses were covered, per AON. “One of the things we’re seeing in Louisiana is that a lot of the insurers that would cover these natural disasters are pulling out of the state,” said Mary Lou Schwartz, credit manager at Ferguson Enterprises LLC (Metairie, LA). “Some homeowners are opting out from renewing because they can’t afford it due to storm damage from hurricanes.”

Even companies who are used to the seasonal change in business say this winter has been worse than in the past. “We are in Utah and over the last several years our winter weather has been very mild,” said Kandie Haymore, CCE, credit manager at Geneva Rock Products, Inc. (Murray, UT). “This year however has been very different.  We started with our first major snow storm the beginning of November and it hasn’t stopped. We supply concrete and aggregates for many contractors in the Wasatch Front and our construction division has many projects going also. Many of our customers, due to the boom of the past few years have counted on those mild winters to keep their funds flowing year-round. This year has been very different. Not only has the weather slowed down production but jobs have been delayed and that has impacted their cash flow and in turn, created a slowdown in payments to us. Although we have a broad customer base, we are seeing invoices creeping out further than in years past.” 

Climate change also impacts the pricing for agriculture producers, said Jason Mott, CCE, NACM Board director and corporate credit manager at MFA Incorporated (Columbia, MO). “A severe drought in 2012 affected the Midwest significantly, causing prices for crops to go up because there were not enough being produced. It also caused significant changes in regards to livestock because people had to euthanize their herds because there weren’t enough to eat.” He saw a higher level of past-due payments from producers that year and into 2013 while other companies had to use money intended to pay off debt to fund feed purchases for livestock.

The risk of severe weather conditions and climate change will never go away. But no matter the unpredictability, credit professionals must prepare for the worst in regards to their policies and payment terms. “Weather and climate change are going to continue to have a direct impact on agriculture and ability to pay,” Mott said. “It’s up to us as agricultural lenders to be cognizant of what’s going on and try to be as proactive as we can.”