September 29, 2022

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September CMI Edges Slightly Upward, Tone Worsens

Kendall Payton, editorial associate

The September NACM Credit Managers’ Index rose slightly from its two-year low from a reading of 55.0 to 55.6. While the small improvement is encouraging, many respondents have a more urgent tone when describing business conditions, said NACM Economist Amy Crews Cutts, Ph.D., CBE.

“The data and the commentary seem to be in opposition, but they are in alignment,” Cutts said. “For example, sales, which are measured in dollars, are rising in value due to higher prices, while the number of units sold is steady or falling for most of our respondents. Similarly, collections are up this month, but it is taking much more effort on the part of credit managers to get payments.”

The combined index of favorable factors improved 1.7 points (63.8); a level that is 1.0 points lower than a year ago. Three of the four categories in the favorable factors list increased, reversing their trends from the August survey. The dollar collections index led the rise with a sharp 5.6-point gain to 63.3—its best reading since May 2022. Sales improved for the first time in six months by 1.2 points (64.2). Amount of credit extended gained 1.0 points (66.3). The index for new credit applications deteriorated by 1.0 points to 61.4.

Remaining unchanged month over month at 50.2, the index of unfavorable factors is 1.7 points lower than a year ago. All but two of the unfavorable factor indexes declined. The index for dollar amount beyond terms improved 2.3 points (48.7); and rejections of credit applications gained 2.8 points (52.2). Filings for bankruptcies fell 4.1 points (53.5); disputes, 1.0 points (48.2); accounts placed for collections, 0.2 points (49.4); and dollar amount of customer deductions, 0.1 points (49.1).

“There is significant volatility in the CMI sector indexes at the moment, with the longer-term trend being toward a weaker economy in both sectors,” Cutts said. “Neither is suggesting that we are in or near recession at the moment. However, over the past month interest rates have shot up … Fed Chairman Powell indicated that we will be seeing increases in the Fed funds target rate for as long as it takes to bring inflation down to the target range,” Cutts said. “The tone of this statement was sobering and a bit surprising, as it was a direct indication that they, the FOMC, valued fighting inflation over avoiding a recession.”

What CMI respondents are saying:

  • “From a manufacturing perspective we are running at full capacity. The only challenge we continue to have pertains to supply chain complications.”
  • “The postal slowdown is starting to have a greater impact on our cash flow. I can see this starting to be reflected in our numbers.”
  • “I'm seeing more instances of accounts which aren't responding to collection efforts. Some that are responding have advised of financial distress—especially cash flow issues.”
  • “With inflation driving prices higher and higher, I grow increasingly concerned that customers without sufficient cash flow will keep digging themselves into bigger and bigger holes.”
  • “Orders are still relatively strong considering the new home construction trends and we expect sales and new orders to taper off in the next 3-4 months. Production is down primarily due to employee shortages and turnover.”
  • “Our container deliveries were delayed so invoices are being paid late. Not credit issues, but shipment/logistics issues.”

Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the September 2022 report. CMI archives also may be viewed on NACM’s website.

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Adjusting Collector Portfolios in a Tight Economy

Jamilex Gotay, editorial associate

The need for talented collectors has never been greater as economic challenges weigh on the cashflow of businesses. In order for your collections team to get the best results, they need to be assigned workload in a way that makes the most sense for your company. That way one collector does not become overwhelmed and unable to complete their daily tasks.

When Charles Edwards, Jr., CCE, director of credit operations at SRS Distribution Inc. (McKinney, TX) sees invoice balances are too high, he creates a detailed collection plan. “With larger teams, I build a credit collections strategy, map out the amount of time it would take to execute and depending on how the staff responds, we change it,” Edwards explained. “But with smaller teams, I take a more personal approach and try to customize it to what that collector is facing.”

It’s also important to recognize when it’s time to hire new collectors for your credit department. Senior management can help if collection workload becomes too much. “When it comes to headcount adds or adding new positions, we try to get that up to the director, VP-level,” Edwards said. “Partly because we want to make sure we’re hiring and letting go of the right people in the team.”

Tami Behner, CCE, credit manager at Barnsco, Inc. (Dallas, TX) will balance collector workload by readjusting accounts by sales representative if needed. “Sometimes the relationship isn’t clicking between the sales rep and the collector and we’ll try it out with a new collector because we want everybody to be happy,” Behner explained.

One way to adjust collector workload when the economy changes is by having a specialized collector. Wendy Mode, CCE, CICP, division credit manager at Delta Steel, Inc. (Cedar Hill, TX), has three collectors but assigns one to accounts that require special payment portals, like Ariba. At first, the other collectors thought they’d lose accounts by not working on special accounts but later found that it helped tremendously. “Now, they’re able to handle their accounts better by dedicating their time and resources,” Mode said. Luckily, the special accounts collector has sufficient experience to back up the other accounts if needed.

Frank Beahm, CBA, CICP, credit manager at Ping, Inc. (Phoenix) has four collectors who handle two regions each and a supervisor that handles the overflow. Collectors who have knowledge of all the regions are able to substitute other collectors if needed. “It is an easy and fair method because everybody gets a region, or multiple regions of the country, and also different levels of accounts, both nickel-and-dime and large dollar-value,” Beahm explained. He has a couple of national accounts overseen by a supervisor because of just how high-profile they are, which in turn makes the client feel at ease.

Higher invoice value does not necessarily mean more work for the collector, said Kenny Wine, CCE, director of credit - South/East, Joseph T Ryerson & Son, Inc. (Little Rock, AR). “Assigning workload by invoice amount would not really work for us because it is just as difficult to collect a $10 invoice as it is a $10 million invoice and the collection effort to collect any invoice typically takes the same effort no matter the amount in a B2B relationship.”

Automation is an option to relieve a collector’s heavy workload, Edwards added. “I remember when I first started in credit, 20 years ago, you needed to do everything from setting up accounts, posting checks, updating addresses, etc. Now we have a cash application team and a credit support admin team.”

Marlene Groh, CCE, ICCE, regional credit manager at Carrier Enterprise LLC (Salisbury, NC) has a small accounts team send automatic past-due notices twice a month, alleviating collectors from having to contact all those customers. The automation results in faster payments and allows the collectors to work on more difficult accounts.

Groh checks how many accounts each collector has on a weekly basis to make sure workload is spread evenly. “I really watch the numbers and make sure that they stay in line. The biggest thing is encouraging your team to be honest. Try to ask, what is overwhelming you?”

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The Catalyst Behind Highly Effective Development Conversations

Julie Winkle Giulioni, co-author of Help Them Grow or Watch Them Go: Career Conversations Organizations Need and Employees Want

Over the past year, development has finally gotten the attention it deserves. As it turns out, development is both a driver of attrition and incentive for recruitment. So, whether they’re coming or going, employees prioritize opportunities for growth—and leaders committed to cultivating robust and stable staffs must prioritize it too.

But prioritizing development doesn’t mean engaging in check-the-box processes, annual planning or even carving out five minutes from each one-on-one to talk about anything but performance. It means weaving growth conversations into the fabric of daily life. It means taking the communication skills leaders already have to the next level by using them with the intention to catalyze development.

These three meta communication strategies—or conversation catalysts—allow highly effective leaders to mine all the ownership, confidence and clarity development conversations have to offer.

1. Draw it out

At the core of effective development dialogue is facilitating the insights, wisdom and energy that exist within each individual. Development is steadfast when personal and self-driven. And the good news is that employees have plenty of thoughts and ideas on the subject. Too frequently, though, these ideas are left unspoken as well-meaning leaders suggest goals, strategies and actions for others to follow. When employees are encouraged to play an active role and volunteer their best thinking, they feel more capable, experience greater ownership for their development and demonstrate greater commitment to action.

Want to get better at drawing insights out from others? Try these success practices:

  • Replace telling with asking.
  • Listen for feelings as well as content.
  • Use prompts like, “What do you think?”, “How might that work?”, and “Say more.”
  • Befriend silence and apply it generously.
  • Save your ideas for later (if ever).

2. Lift them up

Development is only possible when others feel seen, heard and valued. Growth means stepping outside of one’s comfort zone, challenging what’s known, experimenting and likely failing before getting it right. Some may feel safer (at least in the short-term) sitting on the sidelines. But employees who enjoy a genuine connection are willing to take a risk. Those who feel appreciated as human beings and not just workers, respected and honored have the confidence to venture into something new, knowing they have the internal resources and external support to be successful.

Want to get better at lifting others up? Try these success practices:

  • Invest in relationships and getting to know the whole person.
  • Celebrate strengths and talents.
  • Recognize effort, struggles and results.
  • Demonstrate respect and maintain self-esteem.
  • Invite feedback about what’s working and could work better.

3. Nail it down

Each development conversation is an opportunity to create the clarity that keeps others moving forward over time. Sometimes this means clarifying interests, aspirations or actions. Other times, it’s translating development experiences into concrete learning. And still other times, it’s jointly determining next steps to help others remain engaged and growing. But each and every time, employees will benefit from your efforts to crystalize understanding and inspire action.

Want to get better at nailing it down? Try these success practices:

  • Summarize highlights, key points and agreements.
  • Clarify confusion or open issues.
  • Co-create at least one small step forward.
  • Determine what others need to succeed.
  • Check in on emotions (since feelings drive action).

Development isn’t an event but rather a spirit leaders bring to their relationships with others. And that spirit manifests itself in the way leaders deploy the range of communication skills they’ve accumulated through the years. Intentionally facilitating and drawing the wisdom out of others, lifting them up and ensuring clarity and action by nailing things down creates the environment where there will be a lot less employee coming and going—and a lot more growing.

Reprinted with permission; SmartBrief

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How to Analyze Repayment Ability of Construction Contractors

Kendall Payton, editorial associate

When lending to construction contractors, credit professionals should carefully review financial performance and cash flow. The main concerns of bankers are within areas related to how contracts are managed and how contractors expand their businesses. If suppliers who sell to construction companies are unable to receive the materials needed, it can delay projects and bolster costs. But with major shifts in the economy, such as high inflation rates, the delays in the supply chain have caused gross profits of contractors to decline 12%, said Dev Strischek, principal of Devon Risk Advisory Group, LLC, during NACM's webinar on Analyzing, Underwriting and Lending to Construction Contractors.

Bankers also can become concerned with contractors that take on multiple projects in different states because this requires more project managers. If contractors expand their scope of work—i.e., hotel projects, highway projects, stadium projects, municipal water treatment facilities—contractors will need to increase hiring. The increase in demand that comes from expansion can also cause supply chain issues due to multiple projects that need materials to be shipped.

In unplanned circumstances, construction companies can use different accounting approaches when operating on long-term contracts called completed contracts or percentage of completion. Under a completed contract, no revenue, expenses or profit are recognized until the job is completed—which is standard to use in an event such as a natural disaster, where uncertainty and credit risks are higher.

Percentage of completion is an incremental sale, as buyers will accept portions of the project. When a credit analysis is completed, professionals should consider their primary repayment source to come from cash flow, followed by collateral and guarantees as their secondary source.

When repayment is required by banks, agreed structure deals are put in place with different conditions and covenants. For example, Strischek mentioned that covenants can require or restrict actions of borrowers. Borrowers required to take action must meet a minimum criterion, or borrowers can be prohibited with maximum criteria put in place. “We typically want to make sure that we have rules put in place among bonding capacity and making sure that we’re up to date on information,” he said. “We want to make sure that if there is a covenant violation, we are quickly on it.”

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