February 1, 2024

Declining 1.4 points to 51.1, NACM's January Credit Managers' Index continues to point to weakness in the business economy. The fluctuation in the CMI suggests that the business economy is experiencing instability rather than a clear downward trend. “The CMI continues to show considerable weakness but without a deliberate trend other than bouncing around just above the contraction threshold,” said NACM Economist Amy Crews Cutts, Ph.D., CBE.

The index for favorable factors fell 2.3 points to 55.4.

• This was led by a 5.3-point drop in new credit applications to 55.1 points.
• Dollar collections declined 2.6 points to 56.1.
• The amount of credit extended factor index declined 0.3 to its lowest level since last August.
• The sales factor index has been the most volatile since the pandemic and is down 8.3 points from its recent high of 62.0 in June.

The index for unfavorable factors deteriorated by 0.8 to 48.2.

• The unfavorable factors recorded its seventh consecutive month below 50.
• Dollar amount beyond terms saw the largest decline, falling 4.6 points to 43.6, a new low for the post-pandemic period and the seventh consecutive month below the 50 threshold.
• Rejections of credit applications led with a rise of 1.6 points to 50.7, its first value in over the expansion threshold in five months.

Manufacturing vs Service Sectors

 The Manufacturing Sector CMI deteriorated 2.7 points in the January survey to a level of 50.8—its lowest reading since May 2020. The Service Sector CMI was unchanged from its December level, standing at 51.4.

 “We are seeing the effects of inflation and monetary policy in business credit markets,” Cutts said. “The Service Sector CMI fell sharply over the summer of 2022 and has continued to hug the 51-point mark since then. However, the Manufacturing Sector CMI has shown more volatility though a smoother general decline since the start of 2022.”

What CMI Survey respondents are saying:

• “We’ve had an increase in year-end sales as companies use up budgets, but a decrease in payments as people take vacations or hang onto cash to make end-of-year balance sheets look better.”
• “We had a very slow December. It was the lowest month of 2023 for sales and down 1% year-over-year.”
• “This was our worst collection month of the last 12 months.”

Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the January 2024 report. CMI archives also may be viewed on NACM’s website.

The bottom line: Understanding the fluctuations in the CMI is crucial as they indicate potential instability within the business economy, which can impact credit management decisions and overall financial strategies.

Credit managers are the link between customers and many other business functions such as marketing, sales, logistics, customer service, accounts payable and treasury. The responsibilities of a credit manager often overlap with the traditional roles in other departments.

Why it matters: Understanding the interconnectedness of the credit department with other business functions is critical for effective collaboration and ensuring a smooth flow of operations.

Treasury vs Credit

Traditionally, the treasury department oversees the management of money and financial risks in a business. Its priority is to ensure the business has the money it needs to manage its day-to-day obligations, while also helping develop its long-term financial strategy and policies.

The credit department is responsible for the management of accounts receivable. It is involved with the order-to-cash cycle from placement of an order to the collection of payment. Credit professionals gather and analyze all information available about a customer, which culminates in the best possible position to mitigate risk.

However, as businesses modernize, these two roles become more intertwined. Credit managers often find themselves in charge of tasks that would typically be handled by treasury—like cash flow forecasting and hedging.

This integration of responsibilities highlights the need for credit managers to possess a comprehensive understanding of financial management principles and techniques.

Other treasury-related functions that the credit department may manage include:

• Protecting and managing the investment in the accounts receivable portfolio.
• The timely conversion of receivables into cash.
• Financial analysis.
• Handling of collateral that secures a customer’s account.
• Deposit of funds and the relationship with banks.

Due to their shared responsibilities, for some companies, the treasury and credit departments work together closely to accomplish financial goals. “The credit team provides insights into customer creditworthiness, helping treasury manage cash flow effectively,” said Joshua Nolan, CCE, senior director of financial operations at PrePass (Phoenix, AZ). “We've fostered a symbiotic relationship where credit decisions directly influence treasury activities, ensuring a harmonious financial strategy.”

The size and structure of your company may determine how closely the credit department and treasury department can work together. For example, in larger companies, the finance or treasury departments manage working capital. In smaller or family-owned businesses, the owners or top executives often manage working capital.

David Webber, VP of credit at Capital Lighting & Supply LLC (Upper Marlboro, MD) said his company works with a lot of small businesses and does not report to the treasury department. “I report to the operating company president, which is a sales alignment,” Webber said. “Our credit department's mission is to bolster sales by providing ample credit for all sales opportunities, while also mitigating risk and conducting financial analysis. Occasionally, this involves redefining acceptable risk and contract terms to facilitate sales. Thus, the role of credit is more akin to an art than a rigid process.”

Defining the Role of a Credit Manager

The complex nature of the credit profession, owing to its integration with other business roles, results in a variety of job titles. These titles can range from more general ones, such as order-to-cash manager, to more specific ones like accounts receivable manager. This diversity can potentially confuse new hires as they attempt to grasp their role.

To alleviate confusion, it is important for companies to clearly define the role of the credit manager and provide a comprehensive job description that outlines their responsibilities, including their involvement in treasury-related functions and the collaborative nature of their work with other departments.

For example, Vimal Patel, CBF, regional credit manager at OneSource Distributors, LLC (Oceanside, CA), said his title as a credit and collections analyst for a previous employer was misleading. “The word ‘collections’ has a negative connotation and from a credit department perspective, it makes us seem like we're a collection agency, which we aren’t,” Patel said. “I believe eliminating 'collections' from job titles in credit streamlines our focus and allows for other credit facets. We aim to establish tiers in our credit department, where beginners can start as a credit analyst or representative and so on. No matter the level, we want to make sure people have the chance to progress within the field.”

Despite their job title, potential hires and seasoned professionals must understand their roles as a credit professional in a company to be successful. “What sets the B2B credit profession apart is the ability to balance the company's fiscal health while maintaining solid partnerships with their customers,” said Nolan. “Credit professionals are not just gatekeepers of credit—they’re architects of trust.”

The bottom line: Understanding the diverse roles and responsibilities within the credit department and its integration with other business functions is key for attracting and retaining talent in the credit profession.

In response to global conflicts, the U.S. and its allies have increased economic sanctions and enforcement measures against various countries. Businesses can minimize their exposure to these changes by regularly monitoring sanction updates, understanding applicable laws, integrating sanctions compliance into regulatory processes and strengthening Know-Your-Customer (KYC) policies.

Why it matters: The noticeable surge in, attention to and enforcement of international trade requirements and regulations underscore the need for credit managers to stay vigilant and be aware of potential economic sanctions tied to their interactions with the U.S. government.

Credit managers play a crucial role by staying informed and being cognizant of potential economic sanctions—especially as geopolitical tensions grow amid the Israel-Hamas war and ongoing Russia-Ukraine conflict.

“We saw in the past year expanded sanctions authority in architecture, construction, engineering, manufacturing, metals and mining and transportation sectors of the Russian economy,” said Justin Angotti, associate at Reed Smith LLP (McLean, VA), during a live NACM webinar on Sanction Developments for the Upcoming Year. “This allows the Office of Foreign Assets Control (OFAC) to designate more persons under the existing executive orders in a broader swath of the Russian economy. There are bans on certain metal products, diamonds, export controls on advanced technology and certain industrial goods as well as the EU’s prohibition on the export of ERP systems to Russia.”

Understanding the consequences

With the emphasis on secondary sanctions against non-U.S. financial institutions, the DOJ National Security Division continues to ramp up its enforcement, hiring 25 prosecutors located around the country specifically focused on sanctions and export control violations and compliance. Those parties are investigating and working with agencies to catch people who violate those laws. “It's a huge increase in the amount of staff in the national security division, and you’re not going to get that kind of money if the division doesn’t think it’ll see the return in the investment,” said Angotti. “There’s going to be an incredible number of prosecutions, cases and settlements that come out of this because it’s an increase in the number of prosecutors focused on this.”

The DOJ is cracking down harder on compliance laws this year. Major trends such as continued multi-jurisdictional coordination and alignment will occur. Countries associated with potential sanctions evasion (Armenia, China—including Hong Kong and Macau, India, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan) as well as designations under Executive Order 14114 are more trends to look for as well.

“Everything falls under your customer KYC screening process and making sure you understand where the party you’re doing business with resides,” said Lizbeth Rodriguez-Johnson, Esq., counsel at Reed Smith LLP (Mc Lean, VA). “If companies are not being careful with KYC policies and making sure they address the risks currently around this area of the law, they can face OFAC fines due to a violation of their regulatory requirements of the sanctions, and you get penalized for that.”

Create procedures to monitor sanction changes. Regularly monitoring economic news and information regarding sanctions in different countries can help your business stay ahead of the curve on new developments in the broader scope of sanctions. Sanctions are a huge liability because you can commit an offense unknowingly, but being unaware of a customer in a sanctioned area is still your responsibility.

Know which sanction laws apply to your area of business. It’s important to identify any areas of exposure or potential triggers, so, conducting a risk assessment is one way to help minimize any risk and put necessary controls in place.

Include sanctions compliance in regulatory compliance processes. Regulatory compliance processes such as anti-bribery, fraud, procurement or contract procedures should be integrated with sanctions compliance. Businesses who include both are more likely to prevent any sanctions risks across the board of all operations.

When in doubt, ‘KYC’ it out. Your credit department’s KYC policies and procedures should be airtight. For example, you must maintain a certificate of the posted accounts on behalf of customers who do business in sanctioned areas. Your company will always be liable and you ultimately own the final decision. If you happen to deal with a variety of customers depending on your industry, it’s a good idea to provide adequate training to your compliance team, customer service to anyone interacting with third parties at your company and running continuous credit checks. It’s essential that the KYC process goes beyond basic screening.

The bottom line: In light of increasing global conflicts and economic sanctions, businesses must prioritize regularly monitoring sanction updates, understanding relevant laws, integrating sanctions compliance into regulatory processes and bolstering KYC policies to mitigate exposure to these changes.

Construction contracts are the foundation of building projects, defining terms, responsibilities and expectations for all involved. They protect both contractors and clients by detailing project scope, timelines, costs and quality standards of a project. However, misunderstandings in contracts can lead to project delays, financial losses and legal disputes.

Why it matters: When credit professionals know how to manage construction contracts, they can reduce risk and successfully complete construction projects smoothly.

When working on a construction project, large or small, there are multiple types of construction contracts to consider:

• The general contract: a legally binding contract between the owner and the general contractor (GC). It outlines the details of a project, such as specific tasks that need to be completed.
• A subcontractor agreement: a contract between a GC and a subcontractor(s) to perform work for the GC's client. It serves as both a hiring contract and a request for proposal (RFP).
• The purchase order (PO): a contract where a supplier agrees to provide specified items to a subcontractor, who in turn agrees to pay the stated amount.
• And last, a credit application: a contract between the material supplier customer and a subcontractor or GC. Depending on the information in the credit application, the payment terms may be modified by the customer.

As a credit management professional, managing construction contracts may not be in your purview. However, gaining knowledge and skills in risk mitigation concerning construction contracts is essential.

Securing Lien and Bond Rights

Credit professionals can use mechanic's liens and bonds to reduce nonpayment risk. A mechanic's lien legally safeguards contractors and material suppliers from nonpayment on private projects. A construction bond is a surety bond that investors use to shield themselves from events that could hinder project completion, such as the builder's failure to meet contract specifications or insolvency.

“Make sure the contracts you're signing aren't negating any of your mechanic’s lien rights or any of your legal rights that you could pursue later if something were to happen with the project to where you can’t get paid,” said Isaac Kotila, credit support manager at Insulation Distributors Inc. (Chanhassen, MN). “Also, make sure that you understand the terminology within that contract and that it's not referencing a separate contract that includes details that maybe aren't present to you in the contract that you're signing.”

Before you begin work in a new state, it’s recommended that you review the mechanic’s lien laws so you know what to expect. If you don’t follow the law, you could lose your right to file a lien.

Prepare for the “Battle of the Forms”

Credit professionals must understand what language is in these contracts and what their risk exposure is to minimize credit risk. The battle of the forms arises when multiple parties exchange documents with conflicting terms, start to act on these documents and then dispute which terms to follow. Despite the conflicting language, the contract that was signed last typically has precedent. For instance, if a credit application has 30-day terms but a customer's purchase order requires 60- or 90-day terms, you must adhere to the latter. “Once you execute that purchase order, that’s the last contract that’s in, and that means that that purchase order may trump your credit application,” said Chris Ring of NACM’s Secured Transaction Services (STS).

Seeking legal counsel can help prevent and offset conflicting contractual language. “We send the contracts to our CFO, and they will work with our legal counsel if they have any questions as they're the only ones authorized to sign off on them,” said Adam Aune, credit manager at Butler Machinery (Fargo, ND). “The CFO would then provide feedback before we circle back with the customer. We try to be proactive and ask for changes or adjustments to be made before signing the contracts so that it doesn't come up after the fact that we sign this, and they sign this and now these don't align.”

The bottom line: Credit professionals must attain a deep understanding and manage construction contracts effectively to reduce risk, guarantee project completion, protect lien and bond rights and handle potential conflicts in contractual terms.