August 31, 2023
August CMI Sounds Recession Alarm Bells
Annacaroline Caruso, editor in chief
NACM’s Credit Managers’ Index (CMI) fell 1.6 points to 50.8 in August—its lowest level since May 2020. This drop once again revives the likelihood of a recession, especially on the business side, said NACM Economist Amy Crews Cutts, Ph.D., CBE.
“In January, given the bleak picture suggested by the CMI, I was ready to declare the recession had started, at least from the business perspective,” Cutts said. “Then the CMI recovered and I changed my mind about how imminent the recession might be. But now the message is clear that businesses are starting to break under current economic stresses.”
Six of the 10 factor indexes are at their lowest since May 2020 and two are at their lowest since June 2020. The index of favorable factors fell 3.1 points to 53.3, led by a 6.1-point drop in sales to 49.5. This is the first time the sales category has fallen into contraction territory since May 2020. “This bodes poorly for economic conditions going forward as more businesses are cutting back on orders now and that means fewer goods and services will be delivered in coming months,” Cutts said.
The index of unfavorable factors fell 0.7 to 49.1, led by a 3.3-point drop in accounts placed for collection to 44.9. This factor has remained in contraction territory for more than a year. Dollar amount beyond terms improved by 2.8 points to 48.9, yet August was the second consecutive month that the index was in contraction territory below 50. Filings for bankruptcies fell 2.1 points to 50.2, balancing on the threshold between contraction and expansion.
“Respondents are indicating that their customers are having more difficulties managing their cash flow,” Cutts said. “These experiences are consistent with the recent report by the Administrative Office of the U.S. Courts regarding a 23.3% rise in business bankruptcy filings over the 12 months ending June 30. We are likely to see businesses under stress as long as borrowing costs remain high, especially if they have loans coming due or large fluctuations in demand.”
What CMI respondents are saying:
- “We have a few accounts that we are keeping a close eye on for fear of bankruptcy.”
- “We are still experiencing some supply chain delays, which are delaying shipments to customers.”
- “Our company is still working through supply chain constraints. We have a large backlog of orders to fulfill.”
- “What happened to Yellow Freight with orders being down is consistent with what is happening in the rest of the transportation industry.”
- “The economy is definitely sending mixed signals. In line with historical trends, we are seeing a seasonal uptick in business as the school year approaches. We have a stronger backlog for future deliveries of food service equipment, especially for the hospitality, lodging and cruise segments. But the smaller, often regional chains are experiencing financial hardships.”
- “Our department is experiencing an increase in fraudulent credit applications received online as part of business identity theft.”
- “Although our delinquencies have fallen, it's largely due to a single payment on a very large debt. There are still cash flow issues with customers and looming collection issues that may require third-party help.”
- “The telecom industry is hurting right now with big leaders like AT&T, T-Mobile and Verizon slowing down tower builds. Big layoffs happened over the last month that include Ericsson and AT&T.”
Why should you participate in the CMI?
Participating in the CMI each month is a valuable investment in your professional development, your organization's financial health, and the growth and resilience of the B2B credit industry. It benefits the broader business community and ensures the future of the credit profession.
“The CMI is a great way to show that you are proud to be a credit manager,” said Andrea Bohr, CCE, chief financial officer at W.J. Sapp & Son, Inc. (Jacksonville, FL), who has been taking the CMI for the last decade. “The CMI is a recognized authority in economic circles. It is something that should bring a lot of pride because we are who business leaders are listening to regarding trends. I use the CMI to discuss the importance of the credit risk management with the C-suite.”
Complete the CMI every month for the next 12 months and automatically be entered into a drawing to win a gift card worth between $100-$250 in 2024. Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the August 2023 report. CMI archives also may be viewed on NACM’s website.
Retail Industry Under Mounting Pressure
Jamilex Gotay, editorial associate
The retail industry is under pressure as consumers pull back on unnecessary spending due to inflation and high interest rates, as well as an increase in theft and rising labor costs.
As of June 2023, year-over-year spending growth slipped from 4.2% in the first quarter to 1.6% in the second. “Consumers are still spending but are under financial pressure and have been adjusting how much they buy while also shifting from goods to services,” said National Retail Federation Chief Economist Jack Kleinhenz. “While job and wage gains have counterbalanced inflation, the stockpile of savings accumulated during the pandemic is dwindling and is no longer providing as much spending power as previously available.”
Just last week, two major retail chains reported that their earnings are suffering from a decrease in consumer spending. “Dick’s Sporting Good's stock plunged 24% on Aug. 22 after the concerns helped prompt the company to lower its earnings outlook,” reads an Axios article. Macy’s said it was “caught off guard by the rising number of credit card customers who aren't paying their bills. Delinquencies caused sales in the company's ‘other revenue’ segment to plunge from $234 million a year earlier to $150 million in its most recent quarter and shares closed down 14%.”
Dick’s Sporting Goods CEO Lauren Hobard partly blamed lower earnings to an increase in theft. “Organized retail crime and theft in general is an increasingly serious issue impacting many retailers,” she said. “The impact of theft on our shrink was meaningful to both our Q2 results and our go forward expectations for the balance of the year.”
Rising labor costs have also affected retailers as wages and salaries increased 4.7% for the 12-month period ending in June 2023, per the Bureau of Labor Statistics. “Benefit costs increased 5.2% … and the prior year increase was 3.6%,” the report reads.
The economic hardship of the retail industry will have a trickle effect on trade creditors who work closely with or have customers in the retail industry. This may lead to an increase in payment delays and bankruptcies.
Aaron Braun-Duin, CBA, credit manager at American Woodmark Corporation (Winchester, VA) has seen a pullback from consumer spending as a kitchen and cabinet manufacturer. “We’re tied pretty closely to the housing market and building materials industry,” he said. “For our smaller retailers, we’ve definitely seen a pullback and an increase in payment delinquencies over the last year. It’s been challenging to predict because some folks will pay slower and struggle but you can manage their exposure. Others follow their payment patterns and then shut down the next day. It’s important to note that in 2020 and 2021, a lot of our smaller customers had Paycheck Protection Program (PPP) loans, which provided a direct incentive for small businesses to keep their workers on payroll. But that benefit is no longer available so some companies will struggle more now.”
High interest rates play a large role in the pressure weighing on the retail industry, said Braun-Duin. “Most of the people out there have an interest rate on their house that is much lower than what the current rate is,” he said. “They’re not really looking into taking on a second mortgage, refinancing to remodel or moving into new homes. That alone, we’ve seen a slowdown in volume for our customers based on what we sell.”
Some retailers, however, are faring better than others amid the mounting economic volatility. “I’ve noticed that our retail dealers who have a mix of online and physical locations are paying better than our retailers with physical locations only,” said Misty Menashe, credit supervisor at a retail company. “Our seasonal product sales have been disrupted by swings in weather, while our work product has been steady and our retail dealers have shared the same sentiment. Overall, I think retailers will be placing smaller orders while they manage to sell their backlog of overstock, mainly due to trade creditors tightening limits. Hopefully end consumers will demand what is on the shelf and enable the retailers to recover.”
Payment delinquencies have increased and more customers are using credit cards for payment as a way to extend terms, said Regina Stricklin, CBF, senior credit analyst at Robert Bosch Tool Corporation (Mount Prospect, IL). “I’m also noticing distributors are making inventory corrections by limiting their inventory therefore, more returns to the manufacturers. Again, retailers are limiting their inventory so as not be overstocked. As far as expecting retailers to recover, it all depends on the economy and interest rates. However, some retailers are doing better than others.”
Statute Changes to New Mexico’s Mechanic’s Lien Law
Kendall Payton, editorial associate
New Mexico House Bill 179, signed into law by Governor Michelle Lujan Grisham, went into effect June 16, 2023. Under this new law, credit professionals must change the way they serve a copy of the recorded mechanic’s lien to the owner for protection measures in New Mexico.
Prior to this bill, New Mexico's lien laws did not require contractors to send a notice after filing a lien claim. But the new law incentivizes contractors to provide notice to the property owner. It also tightens the filing window from 120 to 15 days.
HB 179 states: “A person filing a claim for a lien with a county clerk pursuant to Subsection A of this section shall mail, email, send by certified mail with return receipt requested or hand deliver a copy of the filed claim for a lien to the owner or reputed owner, if known, stated in the claim within fifteen days of filing the claim with the county clerk. The copy of the filed claim for a lien shall be sent or delivered to owner or reputed owner at the owner or reputed owner’s last known address. If the owner or reputed owner’s address is not known, the copy of the filed claim for a lien shall be sent to the address of the owner of the property as listed in the county’s assessor’s files. The failure of the claimant to serve the notice may preclude the recovery of interest, attorney’s fees or costs.”
“It’s more likely they’ll get paid if the owner knows the lien claim attaches to the property,” said Jim Reed, partner at Udall Shumway (Mesa, AZ). Compared to some other states, serving the owner within 15 days of the recording date also means you can get paid sooner. “If there’s money left over in the budget, it makes it easier for you to be paid without having to seek foreclosure of the lien claimant in court. The sooner the owner knows you haven’t been paid and that you have a lien claim reported against the property, the more money they’re likely to have in that budget.”
The new statute may add an extra step in the claimant’s process, but it serves the maximum amount of protection and ensures a higher likelihood of getting paid before spending time and money on law proceedings. It is also important to note the statute requires service of a copy of the recorded lien claim, meaning the unrecorded copy should not be served without a stamp from your county clerk. Both the copy and date must be recorded.
Some state statutes are not obligated to notify the property owner of a lien being filed, such as Arizona, Vermont and Missouri, however, it is still recommended to send a copy or notice of claim in order to receive compensation of dispute. “Anyone who does their own lien filings or has an attorney complete their lien filings should make sure to double check and ask,” said Chris Ring of NACM’s Secured Transaction Services. “When you file the mechanic’s lien, under the statute, you must legally notify the property owner. If not, the lien itself is invalid.”
The addition of email as a means of proper service to the new law is an effective way to deliver recorded mechanic’s liens to the owner, however, it can come with some difficulties if precautionary measures are not taken. For example, technology complication may occur. Sending large attachments to new email addresses could trigger the recipient’s junk folder or may not deliver at all. It also is essential to include key words and double check for any spelling errors in the sender’s domain.
Overall, changes to New Mexico’s statute are seen to have a more positive than negative impact for all parties involved. Ultimately, it is to protect both the owner and claimant. More times than not, the owner typically pays, Ring said. “If a subcontractor or general contractor has not paid, it is best for the owner to find out if a lien is on the piece of property to figure out who did not pay and get the material supplier paid.”
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When and How to Write Off Bad Debt
Jamilex Gotay, editorial associate
Bad debt write-offs are nothing short of a nightmare for credit professionals—and some have reported a slight increase in their annual bad debt write off as a percent of net sales. According to a recent eNews poll, 70% of credit professionals (up 8% from last year) say their company’s annual bad debt write-off as a percent of net sales is less than 0.50%.. Nearly a quarter (22%) say it is between 0.50% and 1%.
What Is Bad Debt?
By definition, bad debt is the amount of money that a creditor must write off if a borrower defaults on their loans. Shortly after, the bad debt becomes uncollectable and is recorded as a charge-off. These entities can estimate how much of their receivables may become uncollectable by using either the accounts receivable (AR) aging method or the percentage of sales method.
Most times, a customer does not pay because it doesn’t have enough operating cash to meet its current obligations. “Sometimes, customers are forced to use whatever cash they have available to meet other obligations—like making payroll or making payroll tax payments,” said Carl Davidson, director of credit and collections at Blue Water Industries LLC (Jacksonville, FL) whose annual bad debt write-off as a percent of net sales is less than 0.50%. “Maybe they can’t pay because they haven’t been paid and if we have a good working relationship with that customer, we’re going to work with them before we take any aggressive action.”
Making the Decision
Although writing an account off as bad debt is typically a last resort if a customer files for bankruptcy or just does not pay, the real challenge is deciding when it is time to do so. “We put a hold on the account at 30 days, but if the customer communicates with us and at least makes partial payments, then we will continue to work with them,” Davidson said. “But at 90 days, if there’s no communication or payment plan, then it is placed with either an attorney or an NACM Affiliate for collections. We don’t write it off until those parties confirm that there’s absolutely no likelihood of collection or there’re no assets to go after.”
For some, writing an account off as bad debt is a seasonal decision in which potential for recovery is heavily considered. “It depends on what time of year it is according to our fiscal year end,” said Christopher Roshong, credit manager at Graves Lumber Company (Akron, OH) whose annual bad debt write-off as a percent of net sales is 0.10%. “If at any point in the collections process we feel the debt is unrecoverable, then we write it off as bad debt or if it is placed under a Chapter 7 or Chapter 13 bankruptcy and we see no viability, then we write it off as bad debt. But if there is any recovery of assets early on, we file a proof of claim if asked to do so by the court and we show it as bad debt recovery in the next fiscal year. But if at any point we see viability, we don’t write it off.”
Work with customers to create an affordable payment plan in order to avoid a bad debt write-off. “If someone is in a cash flow situation, we explore other options and limit the dollar amount when extending credit,” Roshong said. “We take a second mortgage on a property as security and establish a payment plan as recovery since it’s worth significantly more than the debt is owed. We still keep them as a customer and work through problems with them.”
Set Up a Bad Debt Reserve
Setting up a bad debt reserve that accurately reflects your company’s needs requires careful planning. Bad debt reserves act as a safety net if one of your customers does not pay or goes bankrupt. It’s important that you try to get as realistic a number as possible to avoid getting in trouble with the IRS. “There used to be a lot of leeway in building a large bad debt reserve, but now the IRS has created more specific guidelines of how it has to be done,” said Rick Smith, director of financial services at TTI, Inc. (Fort Worth, TX). The new rules add clarity and consistency to calculating the size of a bad debt account, but credit professionals still have a variety of tools to help calculate it, Smith added.
According to an NACM eNews poll, the majority of respondents said they determine the amount of money that goes into their companies’ bad debt reserve on a case-by-case basis (29%). Other creditors said they use a sliding scale based off of past-due receivables (21%), a general reserve for bad debt (18%) or a percentage based on historical bad debt to sales (17%).
Martha Hirsch, CCE, CICP, chief financial officer at Alloy Machine Works (Houston, TX) keeps her annual bad debt write-off as a percent of net sales less than 0.50% by setting aside 0.01% of AR in a bad debt reserve each month. “This way, when I do write an account off as bad debt, it’s against the bad debt reserve.”
Limiting Bad Debt Write Offs
By knowing your customer, you know what to expect and can negotiate in times of financial difficulty or nonpayment. “If the payments are getting slower, reach out and see why,” Roshong said. “If it's a new customer, I question why and follow up with them. Unless we have a scenario and anticipate it going to bad debt, we don’t hedge or accumulate bad debt and that’s because we’re so hands on early in the process.”
Having a strict credit policy and thorough credit investigations can limit the risk of nonpayment and accrued bad debt. “We want to know who we’re selling to,” Davidson said. By conducting a thorough credit investigation and periodic credit reports, he decides as to whether to extend credit or not. “We use Credit Bureaus and the NACM National Trade Credit Report when assessing a customer’s creditworthiness. We also do a Google search on the company and the officers of the company. If the officer had another company that went under, then that’s grounds for rejection.”
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