eNews July 5, 2018

Overdue B2B Invoices Hurting Businesses in the Americas

Overdue invoices are crushing the business-to-business (B2B) marketplace. According to a recent report and survey from credit insurer Atradius, more than two-thirds of respondents in the Americas said they are affected by late invoices. This is impacting business cash flow and payments to suppliers, among other issues.

The proportion of B2B sales made on credit declined to 41.3% in 2018 in the Americas, down several points from a year ago. Brazil offered the highest percentage of B2B sales on credit as was also the case in 2017; however, last year was roughly 5% higher than this year, according to Atradius. Canada, Mexico and the United States followed in the most recent survey.

The top reasons to not grant trade credit were poor payment performance and high currency risk, which can be seen in the difference between domestic B2B customers and foreign ones. Nearly half of respondents were more likely to extend credit terms to domestic B2B customers, while just over a third sold to foreign customers on credit. “We firmly believe that by selling on credit we can grow our customer base; in addition, our company has a secure sale and an increase in profits,” said one survey respondent.

A positive note is that late payments declined slightly, yet more than nine out of every 10 respondents are still reporting late payments from B2B customers. Mexico was the only country that saw an increase in payment delays this year. The proportion of overdue invoices also increased across the region to 50%, up modestly from 2017. The U.S. was the only country to see a decline in this category.

Days sales outstanding (DSO) also took a hit in the Americas in 2018. The new figure is 37 days, which is two days longer than last year; however, more than 50% of survey respondents don’t expect DSO to change in the next year. Just over two-fifths of respondents expect a DSO increase during that time.

The No. 1 reason businesses are waiting for payment from domestic customers is insufficient availability of funds with nearly 50% of respondents reporting the problem. The top factor impacting foreign B2B customers was the complexity of payment procedures—roughly a third of respondents. Average payment durations also increased slightly from year to year. The Americas’ average payment duration increased two days to 63 days in 2018. The U.S. and Canada increased, while Mexico declined four days to 71 days. Mexico still takes the longest time for businesses to convert invoices to cash. Canada took the shortest time to turn invoices into cash at 54 days.

The proportion of uncollectable B2B receivables decreased from 2.1% to 1.8% in the Americas, this is mostly due to bankruptcies. Brazil had the hardest time with uncollectable receivables at 2.5%—again the main reason is bankruptcy.

The International Credit & Collections Surveys from FCIB show a similar trend to what is reported by Atradius. FCIB respondents are reporting an increase in payment terms, according to the latest survey on Canada (June 2018). However, members said payment delays are decreasing compared to the previous survey from November 2017. The opposite is true for Mexico. Respondents said payment terms are shortening, but payment delays are increasing. The July survey for South America, including Brazil, is currently open.

—Michael Miller, managing editor

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Kroger Extends Payment Period to 90 Days

Grocery retailer Kroger announced last week it will be standardizing payment terms to 90 days across the organization, effective Aug. 1. Instead of the usual quick turnaround for perishable goods, suppliers will likely not receive payments for about three months, unless suppliers are willing to accept a discounted payment.

Kroger said in a letter to its suppliers last week the switch to this standard payment period serves as a way to “smooth [its] cash conversion cycle,” better manage working capital and “harmonize” terms with similar retailers. A payment term this long is unusual for a company that sells perishable goods, with many produce groups speaking against the change, including the California Fresh Fruits Association. Much of the concern revolves around the Perishable Agricultural Commodities Act (PACA), which revokes payment protections on terms longer than 30 days.

PACA, originally designed to even out competition between corporations and family-owned businesses, gives suppliers senior lien rights, effectively placing them above the secured creditors. While the new 90-day term may make sense for the portion of Kroger that sells nonperishable foods, the perishable suppliers will need to be more careful next month when purchasing from Kroger.

“A lot of times when your bank is in any kind of lending agreement, they have you carve out in your reporting any PACA items you may have because if there’s ever a liquidation, those items are going to get paid out before even the secured creditors,” said Mark Speiser, CCE, a senior credit manager at SuperValu. “If you go beyond [30 days], you lose your PACA rights and you lose your senior secured rights. I think the produce suppliers are definitely going to kick back.”

Although the 90-day terms are mandatory for all suppliers, Kroger will offer an option for suppliers to receive their payments sooner. Kroger announced a partnership with Citibank, allowing suppliers to receive full payments “at a very small discount,” due to Kroger’s strong credit profile. The company said opting in for this method may even save suppliers money by using other means of capital.

While this approach to payments is new to the food and perishable foods industry, other brick-and-mortar companies like Walmart have done this or are attempting this approach, Speiser said. With stores like Walmart selling beyond just food, playing around with payment terms was more flexible. Grocery stores continue to face tighter margins, especially national brands.

“Consumers are going out and buying a lot more of the store brand that are a cheaper price,” Speiser said. “With the tougher margin, that impacts the company’s cash flow. What a lot of these companies are doing is thinking about where they can bring in more cash, you can only go out and borrow so much money, so they’re looking at it from a working capital perspective.”

Kroger still remains the pioneer of the 90-day payment terms for food. It’s unclear if other companies will mimic Kroger’s idea, but if the new policy proves to be effective, others may adopt this payment term.

“I would not be surprised if we see other big retailers taking the same approach,” Speiser said.

—Christie Citranglo, editorial associate

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Future Construction: Where’s the Sector Headed Financially?

Where is your company headed? No matter your industry, answering this question gives any business the opportunity to not only review its past and present ups and downs but also utilize that information to look toward the future. Despite the rocky road currently guiding credit managers through today’s construction industry, some experts say smooth surfaces lie ahead.

The Washington, DC-based Equipment Leasing & Finance Foundation (ELFF), a nonprofit organization, recently released its 2018-19 Vertical Market Series—Construction report, where it combined various source data, in collaboration with ORC International business intelligence, to determine a two-year outlook for the construction sector. The biggest takeaways: strong spending, high confidence and hopeful expansion in commercial, residential and nonresidential construction.

According to the 2018 Construction Forecast—Oldcastle Building Solutions, single-family construction spending held strong in 2016-17, increasing 9% each year. Data suggests this will continue for the remainder of 2018; however, ELFF stated it will depend on Millennials buying homes and their ability to afford rising mortgage rates. Unfortunately, multifamily construction spending declined 1% in 2018 and could fall further in the near future.

Nonresidential construction roughly doubled between 2017 and 2018, increasing from 2% to 4%. Significant gains were reported in office and retail, health care, public buildings and industrial facilities, while hotels and other nonresidential projects dropped. The Oldcastle report also showed nonbuilding construction at 4% in 2018, the same result as 2017.

“Construction starts are forecasted for 2018 at $773.1 billion,” the ELFF report stated, citing analyses by several institutes and associations. “Commercial construction (offices, parking garages and transportation terminals) is expected to have a 12.4% increase in starts in 2018, with conservative growth out through 2021.” Industrial and retail construction are worse off as predictions indicate declines.

Respondents in Wells Fargo’s Construction Industry Forecast: 2018—A Year of Continued Optimism concluded in the next two years, the majority of contractors (61%) and distributors (72%) expect moderate expansion—up from contractors (58%) and distributors (61%) 2017 responses to the same questions. Nearly half of both parties also anticipate moderate (5% to 14%) to significant (15% or more) gains in net profits.

Although these reports are hopeful, there is still the possibility of roadblocks that could impact the industry. In regard to public construction, Chris Ring, of NACM’s Secured Transaction Services (STS), said many economists are unsure where funds—state, local or private—will come from for the U.S. administration’s plans to boost infrastructure. Meanwhile, interest rates and costs of goods will continue driving public construction.

“The Fed is looking at a ‘moderate’ rate hike later this year, so that will affect how much it costs to borrow money for new construction, and it’s always a factor on decisions to move forward,” Ring said. “Tariff wars always affect costs of goods, so rhetoric turning into reality affects investors for large-scale commercial projects related to large commodities, such as steel.”

—Andrew Michaels, editorial associate

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Small Businesses Prefer Human Accountants Over AI

Technology can replace a lot of things but the “personal touch” found in the creditor-debtor relationship isn’t one of them. Many companies recognize the importance of the latest software or machinery to their businesses’ survival. Whether that actually means employees are losing their jobs or simply shifting roles is becoming clearer, most recently in the accounting department.

In November, McKinsey Global Institution consulting firm explored technology’s current place in the workforce and how it may evolve in the next two decades. According to its findings, about 50% of “current work activities” are “technically automatable,” with six out of 10 occupations having more than 30% of these activities. Automation is more likely to affect physical job activities as well as those involving data collection and processing, such as accounting—the profession ranked at 11% demand in the U.S. by 2030, depending on the speed of artificial intelligence (AI) adoption, the second-lowest ranking behind Japan (2%).

A Forbes article on the digital transformation of accounting, published in June, listed the accounts payable/receivable processing, supplier onboarding and chatbots as some of the tasks AI may replace. For example, existing invoice management systems run by AI are capable of learning accounting codes. AI can also run credit checks on companies to give creditors a better idea before they make decisions to extend credit.

“Chatbots are used to efficiently solve common questions or queries from customers,” the article’s author, Bernard Marr, said, “including the latest account balances, when certain bills are due, the status on accounts and more.”

However, accountants shouldn’t let this news affect their work because small business accounting firm Xero and spending management company Ivalua don’t see “robot accountants” in the picture anytime soon. In separate reports by both companies, released in June, analysts concluded small businesses rely heavily on human accountants versus AI. Out of the 512 small business owners surveyed in the Xero report, 72% said they prefer input from a human accountant.

“Two-thirds (65%) of small business owners find the advice provided by their accountant very, or extremely, beneficial to their business,” Xero stated. “An additional 80% of small business owners plan to continue working with their accountant over the next 12 months.”

Xero Americas President Keri Gohman added technology will never be a one-stop-shop solution nor present a “doomsday scenario” for human accountants. Similarly, the Ivalua report explained while more than half of its survey’s respondents plan to invest significantly in AI through 2020, the technology still struggles to “make informed and accurate decisions.” More than 400 finance, procurement and supply chain executives in the U.S., United Kingdom, France and Germany participated in the Ivalua study.

Rather than fret over what it could replace, these analysts agree accountants can embrace AI for its capabilities to complete “menial tasks.” Ivalua Corporate CEO David Khuat-Duy said in a Business Wire article using AI for “low-value tasks” will leave a “transformational impact” on accounting departments with great improvement in efficiency.

—Andrew Michaels, editorial associate

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