eNews August 1, 2019
In the News
August 1, 2019
The latest Credit Managers’ Index (CMI) from NACM has cooled off during the summer after back-to-back gains in April and May. The CMI has now seen two straight months of declines for the first time since December and January. The July index slipped 1.6 points to 53.4, the lowest mark since January (also 53.4).
“Here we are at the mid-point of the year and the data still points to a decent growth rate for the U.S. economy,” said NACM Economist Chris Kuehl, Ph.D. “The worrisome part is that some of the more reliable future indicators, including the CMI, are starting to falter.”
Much of the despair for credit managers was in dollar collections, which dropped 3.7 points to 56.6, and it was paired with the sharp slide in accounts placed for collection on the unfavorable side. Sales, new credit applications and amount of credit extended also fell, with new credit applications the only score to remain in the 60s. Overall, the combined favorables dipped from 61.4 in June to 58.6 in July, its lowest score since October 2016. “There is simply not as much credit on offer these days,” Kuehl said, referring to amount of credit extended.
While not optimistic, several of the combined unfavorables showed promise in July. Rejections of credit applications, disputes and dollar amount of customer deductions each improved this month, with disputes jumping back into expansion territory (score over 50) for the first time since November 2018. Accounts placed for collection fell into the contraction zone, which has been the norm for the past 12 months. On the whole, combined unfavorables dropped to a score of 50 for the second time in four months.
The manufacturing sector was haunted by two large drop offs in dollar collections and amount of credit extended. Sales and new credit applications also tumbled this month, albeit at a slower pace, to have the favorable factors settle at 56.7. Accounts placed for collection and dollar amount beyond terms both returned to contraction territory, while disputes and dollar amount of customer deductions both leaped into expansion territory, the latter for the first time since September 2016.
The index was much of the same in the service sector—favorables dragging the scores down, and unfavorables trying to balance out the losses. Despite the declines in each of the four favorable factors, the overall index for favorables remained above 60 for the fourth straight month. Rejections of credit applications and disputes both improved, with disputes back at a score of 50. Accounts placed for collection and dollar amount beyond terms both fell further into contraction territory, while dollar amount of customer deductions entered the contraction zone. Overall, unfavorables returned to the contraction zone after back-to-back months in expansion territory.
“This was most definitely a down month and one that was led into these doldrums by the manufacturing sector,” Kuehl concluded. “The service side was more mixed, but retail doesn’t appear to be as healthy as preferred as it prepares to enter the all-important holiday period.”
—Michael Miller, managing editor
Last Chance to Save: Early Bird Rate Ends Friday!
Give your job performance and prospects a boost with continuing online education. Sign up now and take advantage of Early Bird savings!
Choose from the many upcoming educational courses we offer:
Fall CBA, CBF & CCRA Courses:
Sep. 3 - Dec. 13, 2019
Sep. 9 - Dec. 6, 2019
Sep. 9 - Dec. 6, 2019
International Credit & Risk Management Online Course
Sep. 3 - Dec. 6, 2019
Visit www.nacm.org to learn more and register for classes. Early bird rate ends August 2, 2019.
“Lost time is never found again,” wrote Benjamin Franklin as Poor Richard in his “The Way to Wealth.” “One today is worth two tomorrows … never leave that till tomorrow, which you can do today.” While procrastination is often rampant in all aspects of life, the construction industry should not be one of them. Strict rules and guidelines adhered to during the construction project will help construction creditors, material suppliers and others in the supply chain get paid.
Time is of the essence in the construction industry with many states having vital timeframes that must be followed. Florida is part of the rule rather than the exception when it comes to documentation that must be completed within a certain timeframe. While the number of days, or the timeframe, is not changing in Florida, there are changes going into effect that bond claimants need to take notice of soon.
Approved by Gov. Ron DeSantis in June, House Bill 1247 will take effect on Oct. 1, 2019. The new law amends several sections of the Florida statutes relating to construction bonds and actions by claimants. “The change really isn’t all that drastic,” said Timothy R. Moorhead, Esq., with Wright, Fulford, Moorhead & Brown, which is just north of Orlando.
Surety bonds are another way for those working on a construction project to have some sort of security when providing material, services or labor to a construction project. “Some private owners require payment bonds from their contractors, thereby insulating their property from liens of subcontractors and suppliers because you cannot lien public property, and public projects over a certain dollar value are required to be bonded. These bonds are a substitute security for those who would otherwise look to obtain a construction lien,” said Moorhead. The new law aims to make bond requirements similar to those for a construction lien. “There are certain provisions related to fraudulent construction liens that previously had no parallel provision where you were dealing with a bonded job. What this law does is more closely align the laws relating to the notice of nonpayment with provisions relating to construction liens.”
The first change relates to the form the notice of nonpayment itself must take: Currently, a claim of lien is a sworn document whereas a notice of nonpayment is an unsworn document. The notice of nonpayment is currently nothing more than a letter. The change that House Bill 1247 provides is to the form that must be substantially followed for notices of nonpayment served under Florida Statutes Chapter 255 (public work) and Florida Statutes Chapter 713 (private work). In each instance, the form of the notice is provided within the bill and the document is now to be executed “under oath” and “served” rather than “delivered.”
The new notice of nonpayment form requires more detail about what you are owed, what you have been paid and what you are expecting to be paid in the future on the job. The notice of nonpayment also extends to rental equipment that was on the job site and available for use. If the notice of nonpayment includes sums for retainage, it must specify the portion of the amount claimed for retainage.
Now that the notice of nonpayment will be required to be made under oath, there are certain penalties that may attach for errors, said Moorhead. While minor “negligent” errors that do not prejudice the contractor or surety will not defeat an otherwise valid bond claim, a fraudulent notice of nonpayment will be unenforceable. Claimants who serve fraudulent notices of nonpayment will forfeit their rights under the bond, states the new law, which continues with a list of items that constitute a fraudulent notice.
Examples of fraudulent information include a claim for work not performed or gross negligence as to the amount; a willful exaggeration will be considered as fraudulent, resulting in a loss of bond rights. This helps even the playing field for lien and bond claimants.
What most of the changes are about is to more closely align the concept of a fraudulent notice of nonpayment with the existing statutes dealing with fraudulent claims of lien. “Now the notice of nonpayment has to be sworn, so it takes the form of an affidavit. If it is erroneous or fraudulent, then there are consequences. There were also a couple of other cleanup things with vocabulary throughout the bill,” said Moorhead.
The amendment also substitutes the term “serve” for terms such as “deliver” and “furnish” when dealing with notices relating to bonded jobs. This again helps align those provisions with the existing provisions relating to service of the notice to owner found in Florida’s Construction Lien Law. How “service” is accomplished is defined in Chapter 713 of the Florida Statutes and should end arguments of the applicability of the “mailbox rule” for these notices, said Moorhead. The effect of these changes essentially shortens the time in which a claimant must act to assure proper compliance with the new statute. “This will effectively shorten timeframes – actually getting the notice of nonpayment delivered within the timeframe rather than just sending it within the timeframe is required,” said Moorhead. This is all while the 45-day and 90-day timeframes will not change.
“Instead of lawyers being able to sign a notice of nonpayment for their clients, an attorney will have to send it to the claimant so the claimant can sign it under oath. It just adds time to handling the claim.” said Moorhead.
The moral of the story here is to heed Benjamin Franklin and do these notices earlier rather than later.To learn more about these Florida statutory changes impacting construction bond claims, join Timothy Moorhead, Esq., as he leads the Florida Statutory Changes Impacting Construction Bond Claims webinar on Aug. 21 at 3 pm EDT.
—Michael Miller, managing editor
International Growth and Development—Be a Part of It
FCIB’s International Credit & Risk Management Summit in Hamburg, Germany provides an opportunity to learn and grow with like-minded people and industry peers. Get out there and connect with someone who could impact your career. Hear from the presenters about new techniques and technology and take advantage of the many opportunities to speak one-on-one to ask questions and build on discussions. In the expo, learn about products and services that support your profession by speaking with exhibitors and asking questions about industry trends and today’s business climate.
Strengthen your career and your company by attending this year’s International Credit & Risk Management Summit in Hamburg.
Learn more and register at www.fcibglobal.com/summit-home.html.
No matter the industry, there’s no better feeling for a credit manager than receiving payment on time. However, the speed with which a payment is received is no longer the only factor credit managers will consider in the midst of a business transaction. In today’s technological landscape, how payments are conducted has become just as important as when.
Countless studies have indicated the construction sector is among the slowest industries to join the latest wave in payment automation. Rather than taking a chance on electronic payments (e-payments), some construction creditors prefer the paper trails of cash and checks, which have proven effective for so long. What is less known is how automated payment technology, such as e-payments, can benefit the construction industry.
According to Construction Dive’s article, “The case for payment innovation in construction,” automating accounts payable will have significant impacts on two crucial elements in the industry: vendor relationships and job progress.
“You want to maintain good relations with all your subcontractors and suppliers, and all your vendors want to get paid in a more timely and efficient fashion,” the article states. “Electronic payments can improve both in a more secure, cost-effective manner. But if you are drowning in all manual, paper-based back-office processes, it will be difficult to reach that higher ground.”
With slow payments come lasting consequences. For example, in the “2018 Construction Payments Report,” finance platform Contract Simply found that days payable outstanding for invoices average between 52 and 54 days—a finding that concurs with those of PricewaterhouseCoopers. Falling behind resulted in a loss of $40 billion among the 1,300 contractors who participated in the survey, 83% of whom had to file a lien against the property.
The report provided the following recommendations to speed up payments:
- Implement digital solutions to track and expedite payments to cut days from invoice processing
- Offer additional payments options like wires, ACH and push-to-debit
- Collect lien releases digitally with payments to eliminate friction
- Automate invoice approval workflows with daily reminders
But just because the technology is available doesn’t mean everyone will jump at the chance to use it. Danita Ward, credit manager at Kewaunee Scientific Corporation in Statesville, North Carolina, said the company typically collects payment through checks, wire transfers and ACH, only accepting online billings with larger customers.
“We don’t have an online payment program. We don’t do online ordering,” Ward said. “The only time we really see demand for online payments are from smaller woodshop businesses, but it really hasn’t been worth it for us to invest the time to set that up.”
When credit cards are used for payment, Ward added, the company doesn’t make any charges until the payment is shipped.
—Andrew Michaels, editorial associate
New Module! Ed Altman—The Z-Score
The Altman Z-Score is a widely used and accurate predictor for corporate bankruptcies. Learn from the creator himself as bankruptcy guru Ed Altman, Ph.D., takes a look at the Altman Z-Score models after 50 years, credit scoring systems, the credit cycle outlook and major risks going forward.
- Different equations to predict bankruptcy
- A company in the “safe zone”
- External analytics
- The different variables in the Z-model
- Recommendations for the downturn
The Federal Reserve dropped interest rates by a quarter-point July 31, the first time the Fed has dropped interest rates since 2008. This has begun stirring up new analyses of the state of the U.S. and global economies and how creditors have been reacting to recent changes in the market. Economists predicted the interest rates would drop a quarter of a point, with the Fed looking to stimulate the economy—which has begun to show early signs of recession.
The U.S. failed to show major signs of economic distress recently, meaning the economy does not need any extra “jolts,” said NACM Economist Chris Kuehl, Ph.D. There have been some early indicators of a possible downturn on a global scale, but Kuehl said nothing as of yet warrants panic.
“You’re getting a few of these early indicators that there’s a recession: Transportation is down, the PMI [Purchasing Managers’ Index] isn’t doing well and the CMI [Credit Managers’ Index] wasn’t very strong last month,” Kuehl said. “All of this is sending out minor alarms, not that it’s some kind of huge downturn, but it may signal to the Fed that we should do something.”
Creditors continue to be cautious when making decisions, Kuehl said, given recent uncertainty in the global and domestic markets. Threats of tariffs and trade wars from the U.S. instill a sense of anxiety in customers, causing them to over-buy products, making the process of paying the creditor back much more difficult. Uncertainty in the future has also left customers without a sense of stability in their business choices, which trickles down to the credit managers.
Evidenced in the CMI, customers have been vigilant lately, with dollar collections slipping and slow payers increasing. Customers taking longer to remit payments worries creditors, leading them to take less chances while being less likely to give out long payment terms.
With the Fed making the quarter-point drop, Kuehl said it may not do much for the economy. While it will make more money accessible for businesses to pay back creditors, he said it will not provide any significant changes to the current market. The Fed may change the rates, but that does not guarantee banks will react to the change and make cash more readily available.
When Congress reacts to the Fed’s rate changes—or if the rates continue to dip lower than economists planned for—creditors may begin to worry.
“If they wanted to really startle the markets—and there’s been no evidence the Fed wants to do that— then [the rates] would drop by half a point,” Kuehl said. “… If it dropped by half a point, it would send a different signal—that the Fed is worried about recession and is beginning to be aggressive.”
—Christie Citranglo, editorial associate
Network and Learn With Credit Professionals in Your Region
NACM's fall conferences are a wonderful opportunity for members to network and share news, information and tips with fellow credit professionals from their respective geographic regions.
Central Credit Conference
September 11-12, 2019
Orlando's Banquet & Event Center
Maryland Heights, MO
Hosted by: NACM Connect - Gateway Region
All South Credit Conference
September 22-24, 2019
Hyatt Regency San Antonio Riverwalk
San Antonio, TX
Hosted by: NACM Southwest
Western Credit Conference and CFDD National Conference
October 23-25, 2019
Sheraton Portland Airport Hotel
Hosted by: NACM Commercial Services in partnership with CFDD National
For more information and to register, contact the local Affiliate or visit nacm.org/regional-conferences.