eNews August 2, 2018

July CMI Reflects Imminent Problems for Economy Long Term

NACM’s Credit Managers’ Index (CMI) saw a small downturn in June, and this trend of dropping numbers continued in the month of July. The combined score fell just shy of a point, reaching a low of 55.5 that hasn’t been seen since January.

Sales, in particular, saw the biggest fall in both sectors, a combined drop of 5.7 points from last month. Even though the American economy appears to be thriving with a Q2 growth of 4.1% and unemployment down to 3.8%, this sharp drop in sales and tumble in the combined sectors indicates challenges for the future. NACM Economist Chris Kuehl, Ph.D., said many of the positives come in the form of concentrated, deliberate preparation.

“It seems that credit managers are seeing some of these warning signs and are not as impressed with these good news reports,” said Kuehl. “Much of what drove the fast growth in Q2 came from higher export levels, which took place as buyers of soybeans and other agriculture products rushed to get their orders filled before tariffs took effect. Sales will now start to fall like a rock.”

Despite the apprehension in sales, Kuehl noted the number reads above 60 at 63.9, which is still a solid reading. The hype from the tax cuts in the new tax reform has begun to calm, meaning sales are calming down with it. Just as sales are fading, so are dollar collections and amount of credit extended.

The manufacturing sector saw a slightly smaller decline than service, falling a total of half a point to 55.4 compared to service’s fall of about one point. The smaller drop in manufacturing likely comes from small- and medium-sized businesses finally purchasing the machines needed for years following the recession. While this did bring the score up, it appears to be only a temporary fix and not a sustainable one for the future.

“What is worrisome is that there are still lots of sagging readings in the nonfavorable sectors,” Kuehl said. “If companies are still struggling to get out of a rut this long into a robust recovery, what will they look like when there are issues later with a slowing economy?”

Looking at the service sector, sales dropped significantly by about five points, but the score is at 65.3—a decent reading. This sector also saw a jump in new credit applications, likely due to retail stores building up inventory for the upcoming shopping season.

Perhaps the most positive category in the service sector is the filings for bankruptcies, which rose by just over half a point. More companies in this sector continued to brave obstacles rather than close businesses entirely.

While some readings in July’s CMI appeared to boast a positive outlook, Kuehl said credit managers should remain cautious in the future as much of the growth is not sustainable.

“The fear now is some of the factors that had been keeping the economy functioning reasonably well are starting to fade. Inflation threats are becoming very real with the recent rise of wages to accompany the rise in commodity prices,” Kuehl said. “If there are further hikes due to the tariff and trade wars, the inflation threat becomes imminent and serious, and very difficult to walk back from.”

—Christie Citranglo, editorial associate


Click here for a complete breakdown of the manufacturing and service sector data and graphics. CMI archives may also be viewed here.

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Possible Canadian Lien Law Changes on Horizon

Getting paid is the ultimate goal of any creditor. However, this goes further in the construction industry, where the speed of the payment is also a major factor. Time periods within the industry are very important for owners, contractors, subcontractors, suppliers and others involved during the life of a project.

There are certain avenues parties can follow for construction projects within the United States depending on the project type and location (e.g., public vs. private; residential vs. commercial; or federal projects, which would fall under the Miller Act, requiring contractors to furnish a payment bond if the project meets specific guidelines).

Like America’s state statutes for private and public projects, Canada has mechanic’s lien laws that differ by province. Over the past several years and months, different provinces have implemented new laws, introduced new legislation or started reviewing the potential for amending lien laws.

In December, Ontario passed the Construction Lien Amendment Act, 2017 to modernize the law governing construction projects in the province. It was the biggest change to the law in more than 34 years.

The increase in late payments and the collection period in the construction industry from roughly 57 days to 71 days between 2002 and 2013 was a driving factor behind the amendments. The lien and holdback process went into effect first on July 1, 2018, while the prompt payment and adjudication changes will go into effect Oct. 1, 2019, in order to give ample time to prepare for the amendments.

“These changes will have a real impact on people’s lives, giving workers assurance they will be paid on time and in full, and help to ensure disputes are resolved quickly,” said former Ontario Attorney General Yasir Naqvi in a release.

Saskatchewan is expected to introduce prompt payment legislation this fall, and Manitoba already has the Prompt Payments in the Construction Industry Act in the process of moving though the legislature. Meanwhile, British Columbia has a movement underway from Prompt Payment B.C. and the British Columbia Construction Association to have a prompt payment law implemented.

New Brunswick is also in the planning stages of an act similar to the one in Ontario. The Law Reform Notes from the Legislative Services Branch of the Office of the Attorney General asked for responses and suggestions to be sent by July 15 on their outline to modernize the Mechanics’ Lien Act. The items to consider were prompt payment; expedited interim dispute resolution (adjudication); and Crown immunity, the Crown Construction Contracts Act claims process and bonds for public projects.

The Canadian Bar Association-New Brunswick Branch (CBA-NB) made several recommendations throughout the Law Reform Notes about potential amendments to the law. Among them were clarifying definitions, simplifying the procedures for filing liens against condos and vacating liens and clarifying whether preliminary notices to owners would be for residential or all construction projects.

The CBA-NB also suggested that a way is needed to request a copy of labor and material payment bonds; however, the Notes, citing one contractor, said this would make life more difficult for contractors. Bonds should be used more frequently on public projects, and “a prompt payment scheme similar to that in Ontario should be adopted in New Brunswick,” according to the Law Reform Notes.

—Michael Miller, managing editor


Online Courses

Connect, Network, Learn and Share

Regional conferences are a wonderful opportunity for members to learn and grow by attending educational sessions and networking with fellow credit professionals from their respective geographic regions.

Central Region Credit Conference
September 13, 2018
Minneapolis, MN
Hosted by: NACM North Central

Western Region Credit Conference
October 10-12, 2018
Salt Lake City, UT
Hosted by: NACM Business Credit Services, Utah & Arizona

All-South Credit Conference
October 21-23, 2018
Clearwater Beach, FL
Hosted by: NACM Tampa

For more information and to register, contact the local Affiliate.

US Corporates’ Working Capital Soars, but at What Cost?

At first glance, the working capital performance of U.S. public companies in 2017 was off the charts, showing the strongest readings in nearly a decade. A survey of 1,000 corporates and their figurative genetic makeup of assets and liabilities improved for the second consecutive year, overcoming rising interest rates, increasing mergers and acquisitions (M&A) and climbing raw material prices.

Such revelations give the appearance of thriving credit departments; however, The Hackett Group consultancy firm found corporates were achieving this newfound success by lengthening payment terms to suppliers, in some cases, exceeding 90 days. Not all issues were dodged, as the survey concluded that stretching supplier payments “masked” worrisome findings, such as dwindling receivables and poor inventory management. Mounting debt levels also outweighed revenue when compared to pre-recession numbers.

According to Hackett’s 2018 Working Capital Survey, days payable outstanding (DPO) saw a 6% improvement—an average of 56.7 days—in part by lengthened payment terms seen in the automotive manufacturing sector as well as chemicals, retail, machinery, apparel and computer hardware. Airline, engineering and hospitality industries were less fortunate, having “less leverage over their core suppliers.” Compared to 2016, corporates took an average of nearly 3.5 days longer to pay suppliers.

“The primary strategy many companies are using to improve working capital performance is simply to hold back payments to suppliers, in some cases extending payment terms up to 120 days,” Craig Bailey, The Hackett Group’s associate principal, said in a statement. “Payables are often the easiest starting point for working capital improvement, as the processes are largely in finance’s area of control, and it has less risk of impacting customers.”

Days sales outstanding (DSO) and days inventory outstanding (DIO) increased as well by 4.4% to 39.5 days and 0.6% to 51 days, respectively. Since 2008, when total debt was measured at 35% and revenue at 65%, total debt has risen and surpassed revenue, the former now at 51%. Analysts attributed growing debt to last year’s high number of M&A, an occurrence that persists in 2018.

In a statement, Director of Strategy and Operations Shawn Townsend, of The Hackett Group, explained how companies can still achieve a promising working capital performance without hurting their suppliers. In addition to sorting supplier payments between those that are critical versus noncritical, Townsend said robotic process automation (RPA) is useful in developing procurement and supplier payment processes. However, a March study by Hackett revealed that companies are not quite ready to use software bots—a decision that results from poor planning, reported The Wall Street Journal.

—Andrew Michaels, editorial associate


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Accounting Association Raises SMB Tax Reform Questions

The American Institute of Certified Public Accountants (AICPA) is seeking some clarification regarding small- to medium-sized business (SMB) accounting procedures presented in the U.S. administration’s Tax Cuts and Jobs Act of 2017 (TCJA). The association, whose nearly half a million members span 137 countries, submitted recommendations via letter to the IRS and the Treasury Department on July 23, offering recommendations they believe would better assist SMBs in complying with revised accounting methods.

Signed into law in December 2017, the legislation cut corporate taxes and lowered the majority of citizens’ taxes until 2026. Annette Nellen, chair of AICPA’s Tax Executive Committee, submitted the association’s letter of eight recommendations, the first of which was to “provide automatic and simplified accounting method change procedures for small business taxpayers.” According to the letter, SMBs are experiencing compliance issues with TCJA, and the U.S. government has the capability to correct and even provide some relief to the SMBs currently using “improper methods.”

Nellen explained that the law defines a small business taxpayer as one whose average gross receipts in the past three taxable years fall between $5 million and $25 million. These averages must be calculated each year to substantiate whether small businesses qualify for the TCJA’s accounting method provisions.

“Small business taxpayers … could find that their historical methods of accounting are not in compliance with the Code and regulations thereunder,” the letter states, suggesting the IRS “stand down” and provide audit protection for SMBs. “This approach is appropriate given the uncertainty as to whether audit protection would cover certain situations for which the new method of accounting is an exemption to certain methods of accounting required under previous law.”

The accounting details coalesce with previously stated expectations that the tax reform would increase SMB sales. Research conducted by the International Business Broker Association (IBBA), M&A Source and the Pepperdine Private Capital Markets Project in February found that 73% of business brokers and advisers anticipated more sales of SMBs in the next 12 months.

One month after IBBA’s report was released, financial institution TD Bank researchers said 58% of bank professionals, who participated in their survey, believe the legislation would benefit business, 37% indicating positive financial performance. Tom Gregory, TD Bank manager of Treasury Management Sales, said in a statement the tax reform could give extra capital to businesses as well as more cash to spend.

In his analysis, NACM Economist Chris Kuehl, Ph.D., said the tax cuts and U.S.-favoring trade policies were behind the 4.1% GDP growth in the business community. However, the overall sales activity will “not be repeated this year,” he added, and will instead head for a decline.

“GDP numbers are at best a blunt instrument and say very little about how this wealth is distributed or who benefits or even what the ultimate cost of that growth might be,” said Kuehl. “A good GDP number doesn’t address anything other than the amount of goods and services produced in a given period—it doesn’t say anything about poverty levels or whether these are the ‘right’ things to produce. This is a far tougher and more complex argument to make, as most people will simply assert that growth is good and leave it at that.”

—Andrew Michaels, editorial associate


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UK Association Shows Construction Transparency

Payment issues in the United Kingdom came to a head earlier this year when construction giant Carillion collapsed. That debacle is still felt to this day, after more than 300 construction apprentices were told they will stop being paid at the end of this month, according to the BBC. Carillion was nearly $2 billion in debt, and the government would not bail the firm out, resulting in the loss of jobs, project delays and much more.

Meanwhile, construction advocate Build UK, which represents more than 40% of the U.K. construction industry, is holding businesses accountable. Published this week, Build UK benchmarked members on their payment performance via data submitted through the Duty to Report on Payment Practices and Performance.

Association members agreed to be benchmarked by Build UK on the average time it takes them to pay invoices and the percentage of invoices paid beyond the agreed terms. Starting April 2017, large U.K. businesses, based on certain requirements, began reporting information on payment policies, practices and performance to the government. “All public sector organisations are required to pay undisputed invoices in 30 days and ensure this payment term is passed down the supply chain,” said Oliver Dowden CBE MP, minister for implementation, in the release.

The member benchmarking initiative featured many global construction leaders including, AECOM, Skanska, Balfour Beatty and Vinci. Over the six-month reporting period from January 1 to June 30, Willmott Dixon had the best average timetable to pay invoices at 33 days, and only 8% of their invoices were not paid within terms. The firm also paid nearly all of its invoices within 60 days.

Murphy Group took the longest to pay invoices at 66 days, and two-thirds of their invoices were not paid within the agreed upon timeframe. Just over 10% of their invoices were paid within 30 days. AECOM and Skanska paid invoices at roughly the same pace, yet only about half of AECOM invoices were paid within terms; 11% of Skanska’s were paid on time or better. Vinci and Balfour Beatty were also near the bottom of the pack, both taking more than 50 days on average to pay invoices.

This feature, established by the government, has given Build UK a platform to help increase business transparency. “Transparency is essential to changing the industry culture around payment and the Duty to Report has provided a consistent means of comparing performance,” said Build UK CEO Suzannah Nichol MBE.

“Not only will this enable the supply chain to make more informed decisions, it demonstrates a real commitment to addressing this long-standing issue and will help to drive good practice,” stated Build UK in the release.

—Michael Miller, managing editor



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