In the News

Nov. 29, 2018

 

November CMI Improves, but Unfavorable Factors Draw ‘Consistent Concerns’

---

Automating Accounts Payable: Before Moving Forward, Take One Step Back

---

Arkansas Construction Lien Filings and Property Descriptions—Sometimes Less Is More

---

Slow Adoption of P-Cards, Several Causes for Rejection

---

Can Your Small Business Afford to Risk the Imminent Threat of a Cyber Incident?

---

November CMI Improves, but Unfavorable Factors Draw ‘Consistent Concerns’

The Credit Managers’ Index (CMI) from the National Association of Credit Management found the manufacturing and service sectors on the upside of a six-month rollercoaster ride in November, following the prior month’s steep drop to the third-lowest decline since November 2017. Favorable factors, notably dollar collections and sales, conveyed good news across both sectors; yet, NACM Economist Chris Kuehl, Ph.D., said he’s setting his sights on “some consistent concerns” in the index’s unfavorables.

The NACM combined CMI reading saw a slight increase to 55.8 in November 2018, about a point shy of the 56.6 reading this time last year. Combined favorables and unfavorables showed modest gains with readings at 63.2 and 50.9, respectively, the latter leaving contraction territory (anything below 50). Although holding the lowest reading among the favorables at 60.9, dollar collections was November’s most improved favorable with its 3.4-point climb. Sales weren’t too far behind, increasing by nearly two points, in addition to minimal gains in the amount of credit extended and new credit applications.

While the combined unfavorables entered expansion territory by 1.2 points, only one—accounts placed for collections—actually improved month-over-month (MoM). Dollar amount beyond terms was hit the hardest, rising 4.6 points to a 52.3 reading—the highest reading since November 2017. Disputes (50.1) also scored its highest reading all year.

“The reason for this split in performance [between combined favorables and unfavorables] is that some sectors are doing very well (automotive, health care, and oil and gas), but other sectors are consistently struggling (some retail, agriculture and aerospace),” Kuehl said.

On its own, the service sector displayed significant improvements over the past month, increasing 1.4 points to 56, compared to a 1.2-point gain in the manufacturing CMI reading (55.6). Dollar collections and sales kept the overall favorable factors score (63.2) strong, despite the divide seen in the sector’s unfavorables. Half of the service sector’s unfavorables turned around MoM, including credit application rejections, accounts placed for collection and dollar amount of customer deductions. Unfortunately, dollar amount beyond terms hurt the sector, increasing by eight points, as well as a rise in bankruptcy filings and disputes.

“The manufacturing sector continues to expect the other shoe to drop at any moment, but so far, the impact has been delayed,” Kuehl continued.

All of the manufacturing sector’s favorables improved, especially dollar collections and sales, followed by the amount of credit extended and new credit applications. Once again, however, unfavorables (50.5) stunted any further growth in manufacturing, as all six factors worsened. Bankruptcy filings increased the most by 1.3 points, with credit application rejections and dollar amount beyond terms not too far behind.

When comparing November 2018 to November 2017, Kuehl noted favorable factors considerably improved, but unfavorables were in a slump.

“It was not a big bounce back, but the good news is that the data certainly didn’t get any worse,” he said. “This is not an unusual pattern this year—comparisons have been made to a rollercoaster for months. It seems that a dip one month is followed by a recovery the next and, thus far, there have been few longer lasting trends.”

—Andrew Michaels, editorial associate

Automating Accounts Payable: Before Moving Forward, Take One Step Back

The beginning of something new is daunting for any credit department, especially with the evolution of payment processes through automation. Knowing how to take the first step in an unfamiliar direction may not come easily, but credit managers can better prepare by understanding the current payment management trends in today’s business credit climate, while opening their minds to other payment possibilities.

Before any decisions are made about potentially adopting a new payment process, the first and best action is to look around at similar companies and their payment management styles, whether it be a small- to medium-sized enterprise (SME), a middle market or an enterprise. Does their credit department use paper invoice receipts or do they send receipts via email or software portal? According to research and advisory firm PayStream Advisors and software development company Inspyrus, a survey of more than 400 North American back-office employees use paper and email invoice receipts the most at 36% and 34%, respectively. The smaller the company, the less likely it is to use new processes such as EDI/XML or web uploads/supplier portals. However, enterprises—defined as organizations with revenue greater than $2 billion—appeared open to automating these services.

The study, which utilized data gathered in the first quarter of 2018, also broke down invoice receipt types by industry, including manufacturing, finance and health care. Paper and email maintained their popularity among all three industries, while EDI/XML and web uploads/supplier portals were relatively low.

“The majority of organizations manually enter [unstructured] invoices into the accounting system,” the study states. “While centralized invoice receipt tends to be a sign of more efficient processes, an important factor influencing [accounts payable] efficiency is the level of automation used to input invoices into the current accounting systems.”

Managing the invoice is a whole other task. For those using manual processes, the study explains, companies generally seek approval through email rather than an invoice workflow automation (IWA) solution. IWA is both fast and efficient, as it completes the verification, validation and approval workflows that lead to the supplier getting paid. More than half of respondents said they use an IWA tool as their invoice routing and approval method, while a quarter scan the invoice and attach it to an email.

Even fewer respondents (17%) said they physically walk the invoice to someone who approves it, followed by 2% who do a combination of the three and 1% who don’t have an approval process. So why use automation for invoicing? The study states that lengthy approval cycles, i.e., manual processes, is the top reason why payments are late and discounts are missed.

“This means that when invoices are not managed efficiently and processed in a timely manner, organizations could be missing out on significant amounts in potential early payment discounts,” the study notes. “Manual invoice management also leads to issues that can harm supplier relationships and compromise cash flow.”

Couple this information with the additional finding that only a mere 2% of respondents said their processes became worse after automating their accounts payable. On the other hand, 82% saw noticeable improvement, with 16% saying processes remained the same.

A separate report by Corcentric and Ardent Partners anticipates full automation in accounts payable by 2020.

—Andrew Michaels, editorial associate

Arkansas Construction Lien Filings and Property Descriptions—Sometimes Less Is More

Though Arkansas materialmen’s and mechanic’s lien law rarely appears in appellate court opinions, within the last 12 months, there was an exception. On Dec. 6, 2017, the Arkansas Court of Appeals held that, pursuant to Ark. Code Ann. § 18-44-101, one cannot have a materialmen’s lien against a property that it did not improve. JMAC Farms, LLC v. G & C Generator, LLC, 537 S.W. 3d 274 (Ark. Ct. App. 2017). Ark. Code. Ann. § 18-44-101(a) provides that a material supplier of an improvement to real estate, to secure payment, will have a lien on the improvement plus up to one acre of land upon which the improvement is situated. Section 115(b) requires that a material supplier must notify the owner of the real estate in writing that the supplier is entitled to payment but has not been paid in order to secure the lien. Section 117 also outlines the filing procedures necessary for a supplier to secure its lien.

The court in JMAC Farms, echoing the Arkansas Supreme Court, held that “the materialmen’s lien statutes … are strictly construed, thus requiring strict compliance.” The plaintiff supplier in JMAC Farms moved to foreclose on a lien it filed against the defendant’s property for generators it provided for the defendant’s poultry houses. However, the detailed legal description on the lien documentation filed with the county clerk described real property on which only a house and a barn sat—the legal description did not describe the remainder of the property where the new poultry house construction was located. Thus, because the plaintiff filed a lien against specific real property on which it made no improvements, the lien was invalid for lack of strict compliance—even though the property described may have been owned by the defendant.

What is the takeaway for Arkansas construction attorneys, suppliers, subcontractors and contractors who may pursue materialmen’s or mechanic’s liens on a construction project property to secure payment? First, strict compliance with Arkansas’ lien statute does not mean you need a deed-level legal description of each specific property. Second, if you provide a detailed real property description, make sure it describes the construction site where the materials or labor were provided (especially for multiple sites). Remember that for describing property for lien filing purposes, general may be better than specific, and, sometimes, less is more.

Larry Watkins, an attorney at Mitchell Williams, focuses his practice on construction law and represents clients such as owners, contractors and suppliers on matters of construction contracts, project finance, licensing and business regulation, and design and construction litigation, mediation and arbitration. As one of the only construction attorneys in Arkansas with public-private partnership transaction, project development and financing experience, he offers clients administrative and transactional guidance for public-private partnership projects. He is an American Arbitration Association Panel Construction Industry Arbitrator and Mediator and a Professor of Construction Law (ADJ) at the William H. Bowen School of Law at the University of Arkansas Little Rock.

Slow Adoption of P-Cards, Several Causes for Rejection

Beyond paper checks, creditors in the business-to-business (B2B) field have several options for accepting payments from customers. ACH payments, bank wire transfers and even blockchain are a handful of options for corporations to adopt. Purchasing cards (p-cards), another form of digital payment often overlooked, act similarly to consumer credit cards: “[A p-card] allows organizations to take advantage of the existing credit card infrastructure to make electronic payments for a variety of business expenses (e.g., goods and services),” according to NAPCP (Professional Association for the Commercial Card and Payment Industry). While p-cards seem like an easy transition for companies looking to move from paper checks to e-payments, checks are still predominantly used in B2B transactions.

In total, more than $350 billion a year in corporate funds are exchanged using a p-card, according to a recent report from Treasury & Risk. On the surface, $350 billion is a large sum of money, and would presumably account for many businesses. But when the report said 80% of all p-card transactions are carried out by just 20% of p-card users, the $350 billion figure appears to be a reflection of a few outliers carrying p-cards.

A 1990 study by Harvard Business Review resurfaced in Treasury & Risk, which predicted a major shift in corporate payment options in the upcoming decades—by means of commercial cards. In 1990, there were little to no p-card payments made, and when compared to the $350 billion figure across 20% of businesses with p-cards, the study’s conclusion did correctly predict the future, but with an asterisk.

“[A p-card] streamlines payments and ease of paying by card,” Cardknox Chief Technology Officer Yanky Weiss told PYMNTS in an interview. “The tokenization of that payment really streamlines payments in general—it becomes much more fluid. … The use of commercial cards is expensive—but, if done right, they’re actually cheaper.”

Expenses, cybersecurity and lack of vendor acceptance remain some of the reasons for businesses to reject p-cards. Like consumer credit cards, p-cards come with annual fees and other costs, but they will save businesses money in the long term—p-cards lower the costs to the supplier by using higher-level processing. The money from each payment appears in the business’ bank account sooner and customer satisfaction improves, which will help retain new customers. Cybersecurity causes anxiety around e-payments and p-cards, despite physical payments showing the most risk of fraud, according to a recent survey by TROY Group.

Each of these fears for adoption became tangled with one of the biggest reasons for rejecting p-cards: Many suppliers will not accept p-cards until worries are assuaged.

While p-cards have been predicted as the future of B2B payments, like many other forms of e-payments, adoption has been slow as lingering fears and tradition remain. Several companies continue to fight back against these anxieties, including Plastiq, which just announced a $27 million venture capital funding round that will allow businesses and consumers to make payments with p-cards, even if cards are not accepted.

Since 1990, businesses have made considerable strides in using p-cards, but the challenge to adopt them continues.

—Christie Citranglo, editorial associate

Can Your Small Business Afford to Risk the Imminent Threat of a Cyber Incident?

Cybersecurity incidents are occurring on a daily basis and at an increasingly growing rate. Yet, many small businesses still have not obtained adequate (or any) cyber insurance to address these risks and the costly impacts to the business that will result. In a recent study completed by the Insurance Information Institute[1], only about a third of all small businesses polled responded that they have cyber insurance in place, with 70% of respondents replying they have no plans to purchase a cyber insurance policy in the next 12 months. Most of the businesses indicated they do not believe they have any need for cyber insurance, yet almost half of those same companies stated they are unprepared to handle cyber threats. A main reason for not purchasing cyber insurance was a lack of understanding about this type of insurance and coverages available.

The Risks for Small Businesses

These statistics are alarming considering that the average cost of a cyber-related loss for a small business has increased 250% in the past two years, and now totals $188,400. In determining whether insurance coverage should be purchased, companies typically assess the perceived risks to the company, the likelihood of such risks occurring, as well as any costs or expenses that may result. For example, most companies regularly obtain a property policy to cover a fire or other casualty that may damage its business location even though such an event is unlikely or unexpected. Yet, cyber incidents are just as likely, if not more likely to occur, and the impacts to a company in the event of an incident are far worse. Many incidents result in a complete suspension of the daily operations of the company for several days or longer.

In addition to financial loss, companies may face the following as a result of a cyber incident:

• Theft, breach or loss of information and data;
• Damage to the company’s reputation, brand or image; and
• Regulatory, governance and legal issues.

According to Dun & Bradstreet’s Global Risk Matrix for the second quarter of 2018, cyber risk reached its highest mark since the fourth quarter of 2016. With a long-term average of 246.5 out of 1,000, 2018’s second quarter rose from 219 in quarter one to 246.

“… The rapidly growing problem of cyber dependence and connectivity will lead to more frequent and more damaging cybersecurity issues, with ramifications for doing business; this risk was increasingly evident in 2017,” D&B states. “Cybersecurity risk is related to the accelerated integration of bitcoin and other cryptocurrencies into mainstream global financial transactions and markets, posing new regulatory challenges and risks to investors’ portfolios.”

How Cyber Insurance Can Help

Cyber insurance policies can be obtained to address the losses related to a data breach and may include costs for investigating a breach, notifying people affected by a breach of personally identifiable information, managing the potential damage to reputation and other crisis-management expenses, recovering lost or corrupted data, and related legal expenses. More importantly, well-drafted policies can afford coverage for business interruption losses: i.e., those expenses and lost revenue resulting from a breached system and a company’s inability to continue its usual operations. Coverage may also be obtained for “cyber extortion,” which covers costs resulting from an extortion event such as ransomware or fraudulent wire transfers.

It is important to keep in mind that cyber insurance is only one component to consider when developing and implementing an overall risk management strategy to prevent cyber incidents. However, taking into account the exposure to a company if and when a cyber incident occurs, it is highly advisable to have this coverage in place.

Reprinted with permission.

Jeff Dennis is the head of Newmeyer & Dillion LLP’s Privacy & Data Security practice. Jeff works with the firm’s clients on cyber-related issues, including contractual and insurance opportunities to lessen their risk.

Heather Whitehead is a partner in Newmeyer & Dillion LLP’s Privacy & Data Security practice. Heather also practices insurance coverage matters for commercial, retail, industrial, mixed-use, multi-family and residential projects.

NACM-National Editorial Associate Andrew Michaels contributed to this article.

[1] Insurance Information Institute, “Small business, big risk: Lack of cyber insurance is serious threat,” October 2018.