January 4, 2024

The NACM Credit Managers’ Index (CMI) ended 2023 just 0.7 above where it started the year. In December, the Index gained 0.3 to a reading of 52.6. The CMI continues to show considerable weakness but remains above the contraction threshold. “It points to considerable decline in credit conditions that are leading indicators of economic activity,” said NACM Economist Amy Crews Cutts, Ph.D., CBE. “The Fed’s aggressive stance to fight inflation has hit businesses through increased borrowing costs. The CMI is showing these stresses with higher delinquencies on accounts receivables and increasing business bankruptcies.”

The index of favorable factors fell 0.1 to 57.9, led by a 2.3-point drop in sales and a 0.4-point drop in dollar collections. The sales factor was the most volatile in 2023 and is down 8.1 points from a high of 62.0 in June.

The index of unfavorable factors improved by 0.5 but remains in contraction territory for the sixth consecutive month at 49.0. Accounts placed for collections gained 1.2 points to 45.8, its 19^th month under the contraction threshold. “Collection referrals continue to rise,” Cutts said. “The index for accounts placed for collections has been below 50 for an astounding 19 months and we saw bankruptcies rise quickly this year—these two trends are clearly indicating a recession in business activity heading into 2024.”

You can hear more from Cutts in NACM’s latest episode of the Extra Credit podcast, December CMI Signals Continued Weakness in 2024.

What CMI respondents are saying:

• “Sales are essentially stagnant, but business is falling off. We continue to see more and more customers not paying per terms. Our overall delinquency remained the same only because one large delinquent account made a payment.”
• “Customers in distress seem to be having more difficulty catching up and good accounts are maintaining their status.”
• “Within the last three years, we have grown as a company with mergers and acquisitions. We also have had consolidation of some of our warehouses, causing many issues. This led to a small sales increase and many companywide deductions due to lack of training and the ability to find good help since COVID. We have put actions into place to help resolve all the issues we have been having. Now we are seeing an increase in sales and less errors being committed.”
• “Business has slowed way down in the telecom industry. Companies like T-Mobile and AT&T have not had as many projects or hired as many subcontractors as last year.”
• “We have implemented a new ERP system this past year, so I do believe a lot of our deductions are system billing error related.”
• “DIR [direct and indirect remuneration] fees and various claw backs are restricting cash flow of independent pharmacies. Borrowing costs are high.”

Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the December 2023 report. CMI archives also may be viewed on NACM’s website.

As we usher in the new year, we thought we’d examine the shifting currents of the workforce. Let’s unravel the latest labor trends and workforce challenges identified in eNews poll questions. A recent poll indicated that 32% of credit professionals point to an increased workload as a big challenge while navigating layoffs or workforce adjustments within their credit team closely follow. Maintaining team morale amid the fear of potential layoffs is a challenge for 14% of respondents and another 14% have struggled to hire and retain skilled credit managers.

The first nine months of the year saw over 13 million layoffs and discharges across the U.S., according to seasonally adjusted data from the Bureau of Labor Statistics. That's up slightly from the same period in 2022 and 2021 but still below the 2019 pre-pandemic rate of 16 million.  “While the labor market is still strong, experts say there will likely be an uptick in layoffs in the coming months,” reads an article by USA Today.

In December, 170,000 jobs were created, according to a report from the Labor Department. “That would be down from November’s 199,000 but in line with predictions for a cooling job market in 2024,” reads a U.S. News article. “The unemployment rate could also tick up from its current 3.7% level.”

“Presently, I have a vacant position with a noteworthy influx of applications, predominantly from individuals with limited experience seeking a career change,” said Scott Dunlap, director of credit and collections at Coleman Oil Co. (Lewiston, ID). “In my previous role before joining Coleman Oil, the division I worked for failed to offer a competitive wage for their geographic location, which was the primary obstacle preventing us from recruiting qualified individuals.”

To navigate this challenge, Dunlap makes sure to optimize and automate processes wherever feasible, provides cross-training and explores potential opportunities within the current staff. “The swift rise in the minimum wage necessitates a proportional increase in credit manager salaries,” Dunlap said.

While some states are on a schedule for annual increases to eventually reach $15 an hour, others still adhere to the federal minimum. “Although the current federal minimum wage of $7.25 (per hour) has not budged since 2009, more than 20 states have provided additional increases in 2024,” reads a Paycor report.

On the other hand, 47% of credit professionals surveyed say they have no recent challenges in navigating layoffs or workforce adjustments. “A pivot in focus to touch even the smallest of balances can help provide cash flow into the business and justify keeping the credit department at full staff,” said Steven Prensner, CBA, senior credit analyst at MasterBrand Cabinets, Inc. (Jasper, IN).

As companies navigate operational efficiency, some are reevaluating workforce structures to ensure optimal task allocation. “Each of our internal team is responsible for certain aspects of the payment cycle, so far we have not had a need to adjust those responsibilities,” said Gweneth Weeks, operations manager at Big D Concrete Inc. (Dallas, TX). “We are looking at a workforce adjustment, however I am turning a part-time position into a full-time position and reallocating duties from one person to another so that we have everyone working their own assigned tasks instead of juggling hats.”

To prevent any challenges in navigating layoffs or workforce adjustments, Weeks has each team member keep a spreadsheet of tasks that they oversee daily, weekly, monthly and by special request. “At the beginning of July, I met with each of them to review their spreadsheets and adjust what they were responsible for to streamline our team and make the workload evenly dispersed. I also advised them to continue adding to the spreadsheet and I would review it again come January 2024.”

To combat increased workload, Weeks advises credit professionals to make sure they have a standard operating procedure (SOP) written out for every position. “You might think you know everything a person handles until you learn about the smaller tasks you don’t see in their day-to-day schedule.”

We all know the saying “cash is king” rings as a true statement in the credit world. It’s critically important to look closely at where and how a business generates its cash, looking no further than the Statement of Cash Flows. This statement provides information on a business's cash during a specified period, helping credit professionals analyze its financial health. Understanding cash flow is critical for assessing risk and the financial outlook of a company.

“Cash is the lifeblood of the firm, so it is not surprising that the statement of cash flows is one of the primary financial statements we use,” said George Schnupp, CCE, director of global AR operations at Anixter, Inc. (Glenview, IL). “It provides investment bankers, commercial lenders, equity analysts and credit professionals with a thorough explanation of the changes that occurred in a firm’s cash balances. And understanding the flow of cash is critical to having a handle on the risk of the firm.”

Knowing what to look for within cash flow statements is an essential skill for all credit professionals. Cash flow statements have three parts, detailing different sources and uses of cash: Operating, investing and financing activities. Operating activities show how much cash is generated from ongoing, regular business activities or operations, such as manufacturing and selling goods or providing a service to customers, while investing activities show the cash generated or spent relating to investment activities, such as a purchase or sale of an asset, cash out due to a merger or acquisition or loan proceeds received. Because cash flow statements include details about cash relating to debt and equity, financing activities show how the business raises capital and pays back its investors. Financing activities include issuing and selling stock, paying cash dividends and adding loans.

Typically, income statements or balance sheets are the what and cash flow statements are the how. Balance sheets show what your assets are, while cash flow statements show how assets are spent and help determine if cash turnover is sufficient to cover expenses. Anyone can acquire several assets but still not be able to pay their bills, so you must know if the cash will turn over within the correct amount of time to get paid.

Schnupp said cash flow statements are just one important piece of the analytical tool puzzle. “They show the adjustments made to net income in order to calculate cash flow from operations,” he explained. “The statements should be analyzed to determine why cash flow from operations is negative or positive. Also, the analyst should consider cash flows over a period, looking for patterns of performance and exploring underlying causes of strength and weakness.”

Though financing activities are an option, some credit professionals find borrowing or financing to be synonymous with unreliability. Many people relied on financing during the pandemic in 2020 for their businesses to stay afloat, however, if companies are still relying on outside sources for financing, it can impact their long-term stability. This causes the risk assessment for those whose cash flow is not from operations to be much bigger. “Too often users of cash flow statements will look at the overall cash flow rather than drilling down to see the cash flow from the components of operating, investing and financing,” said Brian Lazarus, CPA, CGMA, MBA, instructor for NACM’s Graduate School of Credit and Financial Management. “Financially healthier companies will always have a positive cash flow from operations. If not, the needed funds would have to be raised from selling some of its valuable assets or borrowing funds in order to cover its regular operating expenses. This should be a huge red flag for creditors.”

Because cash flow statements are a significant indicator of where a company gets its money and if the money is enough to keep the company alive—U.S. regulators are scrutinizing cash flow statements, how companies treat errors within them and the quality of the information that companies provide, according to the WSJ. But one major issue that stands out to the Securities and Exchange Commission (SEC) specifically is how companies treat errors within these cash flow statements. The most common error is misclassification, the WSJ revealed. Companies who fill out incorrect information when labeling cash flow under investing, operating or financing activities are not valid reasons to the SEC.

“Auditors play an important role in auditing financial statements, however, every credit professional must be cognizant of the limitations of an audit,” explained Lazarus. “An audit does not guarantee that the audited company has no embezzlement or fraud issues. So, it is critical that creditors familiarize themselves with the standard audit cover letter to fully understand how the audit was conducted and what its limitations are.”

The Anti-Money Laundering Act of 2020 (AMLA) established the Corporate Transparency Act (CTA), which requires FinCEN to establish and maintain a national registry of beneficial owners of entities that are considered to be reporting companies. Information collected pursuant to the CTA will be stored in a private database, according to the American Bar Association (ABA). Enacted in 2021 but taking effect on January 1 of this year, the CTA intends to combat illicit activity including tax fraud, money laundering and financing for terrorism by capturing more ownership information for specific U.S. businesses operating in or accessing the country’s market.

Under the new legislation, businesses that meet certain criteria must submit a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), providing details identifying individuals who are associated with the reporting company. This must be administered by every new corporation, limited liability company (LLC), limited partnership and any entity whose existence is created by a filing with a Secretary of State in any state.

According to the CTA, an individual qualifies as a beneficial owner if they directly or indirectly have a significant ownership stake in a company. The individual either has a major influence on the reporting company’s decisions or operations, owns at least 25% of the company's shares or has a similar level of control over the company's equity.

This filing requires the business name, current address, state of formation and tax identification number for the entity. The filing also requires the name, birth date, address and a copy of a government-issued photo ID such as a driver’s license or passport of every direct and indirect owner.

Why It Matters: The CTA, which went into effect on Jan. 1, impacts millions of small businesses across the U.S. The CTA prevents individuals with malicious intent “from hiding or benefitting from the ownership of their U.S. entities to facilitate illegal operations which, according to Congress, is a widely used tactic that affects national security and economic integrity,” reads an article by CO.

Each of the 32 million or more entities will almost certainly involve a filing by more than one person, according to Kiplinger. “The inclusion of this information for indirect owners creates both complexity and a very broad range of who qualifies as an indirect owner, requiring the filing of individual, otherwise personal information,” reads the article. “Penalties for failure to comply are high—$500 a day up to $10,000 and up to two years in jail (per occurrence).”

The CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.

Exceptions to CTA Reporting per Kiplinger

• Regulated companies such as banks and credit unions.
• Large companies are defined as having more than 20 employees and $5 million in annual revenue.
• Companies that are inactive or dormant—but inactive is defined as not holding any kind or type of assets and has not sent or received any funds greater than $1,000 directly or indirectly, was in existence on Jan. 1, 2020, and is not owned by a foreign person. This is a much more limited exception than the title “inactive” would imply.

Legal Concerns

According to the ABA, it is unclear whether the CTA reporting obligation applies to business lawyers responsible for the formation of business entities for clients. The act raises a number of issues for business lawyers who cause the formation of business entities for clients. “A primary concern is the need to balance requirements under the CTA with professional ethical responsibilities to their clients,” reads an ABA article. “The CTA defines the term applicant as any individual who files an application to form an entity or registers a foreign entity to do business in the United States. Lawyers frequently undertake such acts, but it is unclear as to whether the reporting obligation will be imposed on the ‘applicant’ or the entity itself.”