The Art of Making Credit Decisions

Financial risk analysis involves a combination of art and science, attendees of the “How, What, When and Why of a Credit Review Without Financials” session at NACM’s 119th Credit Congress in St. Louis learned.

The science part, or the black and white of the credit review process, makes up the smallest part of the process, said presenter Ed Bell, Ph.D., CICP, ICCE. “The art part—or the gray part—makes up most of it,” Bell said. The senior manager of credit administration for W.W. Grainger, Inc. added that it involves “interpreting and making decisions based on gut feelings, what we’ve learned through experience.”

It’s critical to develop both parts, Bell noted. “That’s how you protect your company’s assets.” If credit professionals rely only on science to make credit decisions, they’re “going to limit sales potential.”

The art of making credit decisions is important “because you can’t assign a number or program a machine to properly evaluate the character of an individual,” Bell said. “The ultimate decision involves judgment on part of the credit manager.”

Bell explored the options and tools that are available to help credit professionals determine the appropriate risk and exposure to apply to a customer. Key points of the presentation included the credit review process, including what information they need, information sources and steps for completing the review.

-- Diana Mota, NACM associate editor




NACM Credit Congress: Preparing for Next Economic Downturn

Even though it has been six years since the great recession in the United States, history illustrates that economic downturns typically repeat themselves. Being proactive now can help better position credit managers and their companies to be prepared if a disaster strikes. A group of expert panelists discussed this very topic on Tuesday during NACM's 119th annual Credit Congress in St. Louis.

“Companies are becoming a lot more attuned to hiring specialists as they need them. That's a danger for professionals in a specialists position,” said NACM Economist Chris Kuehl, Ph.D., a panelist during the "Positioning You and Your Company for the Next Downturn" education session Wednesday. “Do I really want a credit manager full time?” is a real and dangerous questions businesses may ask themselves. 

The session  was moderated by Al Carmenini, of Al Carmenini, LLC, and its panelists included: Mark Filippini, CCE, credit manager for Akzo Nobel Chemicals Inc.-North America; Camillo Gomez, Ph.D., senior vice president of quantitative research for CreditRiskMonitor, Inc.; and Chris Kuehl, who is also managing director for Armada Corporate Intelligence.
The panel gave advice on the importance of credit professionals to advocate for themselves and their position, along with voicing the risks they see with customers. “You want to be crying wolf,” said Filippini. “You want to put yourself out there.”

- Jennifer Lehman, NACM marketing and communications associate

NACM Credit Congress: Internal Knowledge of Country's Culture Key to Success in Global Business

When considering expanding into the international market, it is essential for credit professionals to have a clear understanding of the values and cultures of a country's business environment. That was a key takeaway during Monday afternoon's breakout session, “Going Global,” at NACM's 119th annual Credit Congress in St. Louis.

“It's culture, communication, regulation and currency. It's very important that you understand how they do business within that country. They all do things differently,” said Gent Culver, ICCE, credit manager for International Game Technology. “You have to be aware of the culture you're dealing with and how they do business—it's the key to being successful and expanding globally.”

Culver was joined on the expert panel along with Joe McNamara, CCE, CICP, vice president of credit and political risk for Equinox Global Inc, and Lisa Spano, vice president of JPMorgan Chase & Co.

Common phrases in the United States may be taken negatively in other countries, and credit professionals need to be aware of these differences. “It's important to have someone on the inside—simple things can mean something totally different,” said McNamara, adding it is necessary to stay cognoscente of the varying time zones as well.

Credit professionals doing global interactions also need to stay on top of current events facing the country—whether the issues be social, economic or political. “I always stress to read as many articles as you can,” said Culver. “You really want to keep up with what's going on in the world.”

When it comes to getting paid, the panel agreed that developing a relationship with a bank, specifically, within the country is a huge asset for the credit manager. “Banks are there to help support clients as they grow,” said Spano. “How you collect your receipts or how you use your letter of credit … it's very important that you have a partner when you go into these financial markets.”

- Jennifer Lehman, NACM marketing and communications associate

NACM Credit Congress: Taking a Look at Insourcing and Outsourcing

In recent years, outsourcing credit, collections and cash application functions to third-party agencies or overseas entities has become increasingly popular. Generally, this practice is part of a company’s cost saving strategies, said seasoned credit and collections professionals, Susan Turner, CCE, and Steve Renschen, CCE, both with Olympus Corporation, during the “Reversing the Trend: In is the New Out” education session at NACM’s 119th Credit Congress & Expo in St. Louis.

Other trends seen in accounts receivable departments include pressure from merger or acquisition activity. The departments must learn to do more with less, the duo said.Some companies, however, are recognizing that insourcing has benefits over outsourcing, Turner said. Oftentimes, “the level of service is just not there,” she said.

Among other elements Turner and Renschen covered was the benefits and potential pitfalls of acquiring a portfolio or insourcing accounts receivable management. Considerations therein include understanding the “new” portfolio, who the customers are and what the risks are; past practices, such as contact, escalation and dispute resolution; system needs, including EDI or IT resources; and the real cost of outsourcing, such as salary increases versus contract renewals. The duo also discussed intangible factors, including customer experience and the KPI trap.

- Diana Mota, NACM associate editor

NACM’s Credit Congress Opens with Talk of Improving Business Culture, Past Chairman Clark Winning Top Industry Award

The National Association of Credit Management (NACM) kicked off the first full day of its 119th annual Credit Congress Monday in St. Louis. The opening, General Session focused a lot on changes within the organization and improvement to its member resources, including the National Trade Credit Report, eNews and its ongoing lobbying work regarding federal bankruptcy reform through the organization’s Government Affairs Committee.

Keynote speaker Jim Knight, author of the book Cultures That Rock, told the session comprised of more than 1,000 trade credit and financial professional that the people within a company or a credit department and how much they buy into a positive culture that shape so much of performance. One of his ending points was to say managers had to work hard to create an atmosphere that makes people never want to go on another job interview or, as he put it, makes the employee want to get a tattoo of the company logo. Though Knight was unaware of the inside joke, that statement fed well into a session later in the day to present credit’s top professional in NACM’s 2015 Honors & Awards Program —and the winner of the most prestigious award (the Alice H.K. McGregor Achievement of Excellence), Jack Clark, CCE, proudly has the NACM logo tattooed on his arm…literally. Clark is well known in credit circles not just for serving as a past NACM-National Chairman and on many boards or committees, but for fighting to expand and highlight the role of credit throughout the greater business world.

Other NACM members highlighted during NACM’s Honors & Awards Ceremony for this year include: Jay Snyder, CCE, ICCE (O.D. Glaus Credit Executive of Distinction and 2014 Graduate School of Credit and Financial Management Student Leadership Award), Kurt Sorensen, CCE, CICP (CCE Designation of Excellence), Scott Woitas, CBF (CBF Designation of Excellence), Robert Verhage, CBA (CBA Designation of Excellence), Marilyn Rea, CCE (Mentor of the Year), Cheryl Ann Pinson, CCE, CICP (Instructor of the Year) and Anne Scarcella, CBF, CCRA (Student of the Year).

- Brian Shappell, CBA, CICP, NACM managing editor

Check back throughout this week at NACM’s Credit Real-Time blog and follow the NACM_National Twitter feed for Credit Congress updates throughout the week.







Small Businesses Optimistic Despite Concerns about Economy

Although the Wells Fargo Small Business Index fell seven points in the second quarter, most businesses say they’re doing well financially, according to the firm. Similarly, April’s Small Business Optimism Survey by the National Federation of Independent Business (NFIB) reflects a rise in optimism.

With a 13-point gain during the first quarter, the Wells Fargo index remains at a relatively high level, but it reveals that concerns about the overall economy have grown. And although nine out of 10 components in NFIB’s survey increased month-over-month, it remains below its historical average. As the survey moved up 1.7 points to 96.9, real sales expectations was the lone wolf with a 3-point decline. It has fallen to a net 10% of owners expecting gains, which continues the trend of the 5-point decline in January and February and a 2-point decline in March.

“Optimism may have seen a slight jump from last month’s weak numbers, but there was not an especially large gain in any area except for an improvement in profit trends,” said Bill Dunkelberg, NFIB chief economist. “Overall, the index remains steady, but it is still a few points below the average and is showing no tendency to break out into a stronger pattern of economic growth. Solid economic growth would require good performance from both big and small firms and that will likely be elusive this year.”

According to Wells Fargo’s index, business owners reported less difficulty obtaining credit and an increasing demand for it. Those that expect credit conditions to ease further rose two points to 38%, and those that anticipated applying for new credit held at 18%, still well ahead of the level a year ago. A combination of leaner operations and opportunities to lower interest rates led to more business owners reporting cash flow improvement over the past year, Wells Fargo said. “The proportion of firms rating their cash flow as very good or somewhat good rose four percentage points in the second quarter to 58%, which is the highest reading in seven years. The proportion rating cash flow as somewhat poor or very poor fell one point to 20%, which is the lowest this series has been since the fourth quarter of 2007.”

In NFIB’s survey, 4% of owners reported their borrowing needs were not met, down one point and historically low. However, 31% were satisfied, and 53% reported not requiring a loan. “Only 2% reported that financing was their top business problem (down one point) compared with 22% citing taxes, 23% citing regulations and red tape and 11% citing weak sales,” NFIB said. Owners who borrow on a regular basis fell two points to 31%, and the average rate paid on short maturity loans fell 70 basis points to 5%.

“Loan demand remained historically weak,” the organization said. “The net percent of owners expecting credit conditions to ease in the coming months was a negative 4%, a two-point improvement. Interest rates are low, but prospects for putting borrowed money profitably to work have not improved enough to induce owners to step up their borrowing and spending.”

- Diana Mota, NACM associate editor


Thriving and Surviving at Credit Congress: Advice for First-Timers

Many people attending a Credit Congress for the first time have an acquaintance or someone from their NACM Affiliate to help guide them through the registration process or have some hot-button topics/subjects in mind to help them decide on classes to attend. Whether these apply or not, if I were advising an associate of mine or fellow credit professional attending Credit Congress for the first time, my suggestion in selecting education sessions throughout the week would be to take a balanced approach: pick a couple of enjoyable classes but do not forget to select some of the most functional ones. By functional, I am suggesting those focusing on tools or traits that credit professionals use or need in every day. A good foundation in these will allow a credit manager to add specialized topics and depth later on.

For instance, a new credit professional may not have to confront a bankruptcy issue every day, nor an unclaimed property issue every day. However, such an attendee would stand to pick up many ideas or skills as possible on everyday items such as Credit Policies & Procedures or Using Risk Mitigation Tools. Most of all, and even more fundamental, I would suggest attending classes like Credit and Sales – on the Same Team or Creating Enduring Connections.

Establishing and developing lines of good communications inside and outside of one’s business will pay dividends day-in and day-out. Credit managers who actively work on these skills will typically know more personal details about their customers than. Ab objective should be to learn more about how to build relationships and trust, especially with sales staff. It’s always good to have someone acting as a second set of eyes and ears for the credit department and the greater company.

- Allen Vickers, CCE, corporate credit manager at A&K Railroad Materials Inc. and member of NACM's 2015 Editorial Committee

One Sector Continues to Look Healthy Despite Low Confidence, Attempts at Distortion

For the automotive sector, the beat goes on. New car and light truck sales numbers are as good as they have been in more than a year, even if they are off a little from the high reached last month. This is certainly good news for parts and services suppliers as well as the general economy, itself. What’s all the more amazing is that this comes after a tough winter and a time when consumers have generally been in a pretty morose mood.

General retail numbers have not been at all impressive. Each month, the growth in sales data has been overwhelmingly carried by the continued demand for vehicles. Automakers have been encouraged by the return of demand for the larger vehicles, as these are generally more profitable. The consumer seems pretty confident in the low price of fuel going forward, which has allowed people to focus on something other than fuel efficiency.

If one follows the various “stories” on the Internet featuring “car graveyards,” one might expect to learn that the automakers are churning out millions of cars that are going unsold. These pictures of hundreds of cars lined up on some airfield are very often misleading. Some of these are staging areas and, as fast as the cars arrive, they are shipped out again. Others serve as lots devoted to fleet purchases from rental car companies and the like.

The fact is carmakers are not all that interested in providing excess inventory—dealers and others in the habit of buying lots of vehicles have spoken for the majority of the cars and trucks coming off the line.

- Chris Kuehl, Ph.D., NACM economist

PMI Roundup: Global Manufacturing Sector Decelerates in April

The global manufacturing sector is expanding, but at a slower rate, and sits at a 21-month low of 51 in April, according to the latest results from the J.P. Morgan Global Manufacturing Purchase Managers’ Index (PMI).

Joseph Lupton, senior economist at J.P. Morgan, explained that the April PMI shows loss of momentum in global factory output, with slowing in both production and new orders. “Combined with a pickup in the finished goods inventory PMI, the April readings suggest the headwinds to global industry will continue further into this quarter,” he said. “Our forecast looks for goods demand to bounce in the coming months, aiding in the apparent need for some inventory adjustment. Assuming this stronger demand picture is sustained, the weak performance of global manufacturing so far this year should hopefully improve toward mid-year.”

The manufacturing sector in the United States saw a slowdown as well, with its PMI registering at 54.1 in April—falling from 55.7 in March. The growth of production slowed to the weakest it’s been so far this year, but is still strong; while new export business and input prices fell. “The survey results raise worries that the dollar’s appreciation is hurting the economy,” said Chris Williamson, chief economist at Markit. “The slowing in the economy is accompanied by a renewed weakening of price pressures, linked to the exchange rate bringing down the cost of imports.”

The Markit Eurozone Manufacturing PMI did not change significantly this month, registering at 52 in April, down from 52.2 in March. Nations reporting growth included Ireland, Italy, Germany and Spain. France and Greece fell below the neutral mark, at 48 and 46.5, respectively. “Warning lights are flashing particularly brightly over France and Greece, both of which saw accelerating rates of decline at the start of the second quarter,” Williamson added.

Brazil’s manufacturing economy fell to a 43-month low of 46 in April, according to HSBC Brazil PMI. The results indicate that production and new orders dropped sharply and quickly, while inflationary pressures intensified. “The Brazilian manufacturing economy appears to be diving into recession,” commented Pollyanna De Lima, economist at Markit. “Falling domestic and external demand led to further reductions in output during April, while the weak real pushed up input cost inflation by raising the cost of imported raw materials.”

China’s manufacturing PMI remained below the neutral 50 mark as well, falling from 49.6 in March to 48.9 in April. According to the report, total new business, and input and output prices declined at quick rates, while new work from abroad slightly improved. However, in Mexico, the PMI survey remained unchanged at 53.8 and above the neutral mark for the 19th consecutive month. In response to the Mexico Manufacturing PMI, Markit Senior Economist Tim Moore said: “The latest upturn in new work from abroad was the fastest for three years, suggesting that exchange rate depreciation and strong flows of capital investment are delivering an appreciable boost to export sales across the manufacturing sector.”

- Jennifer Lehman, NACM marketing and communications associate

The Unexpected: Small Town USA Producing So Many Global Companies

I spoke to the global sales team for the Bradbury Group yesterday in Wichita, KS. The Bradbury Group, headquartered in Moundridge, KS, a town of fewer than 2,000 people, is a company many would assume would have a sales force encompassing its home state, Oklahoma and maybe Nebraska. The reality is far different, as the meeting included people from Italy, China, Australia, New Zealand, United Kingdom and Russia.

This company is an example of a growingly large number of companies in small towns that operate all over the world. Bradbury produces machines used in almost every sector one can think of: automotive, agriculture, energy, etc.

But how does a company in a tiny Kansas town develop a global footprint? It comes from growth and acquisition and partnering strategies, among all the usual techniques also employed by big name companies in metropolitan cities. It is fascinating that thousands of such companies exist all over the U.S. landscape. Just in that small region of south central Kansas, there are companies like Hesston, a major agriculture equipment maker. Not far away in Newton, KS, there are 26 fabrication and custom manufacturers. The point is that the heart of the U.S. manufacturing community exists not only in the nation’s largest cities, but also in its small towns.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence