Survey Results: Majority of Credit Pros Believe We're DEFINITELY in a Recession - Coping Strategies Detailed
With the sub-prime crisis, along with predictions of recession, dominating the news, we thought that you'd like to know how other credit pros were reacting. Since much of the general press is seemingly punctuated by broad sweeping statements and sound bites that too often are not necessarily well substantiated, we also wanted to document the specific challenges that trade creditors are up against. In other words, just how bad are things and what are credit pros doing about it?
The answer turns out to be for the most part "not too bad." Rather than simply relying on a defensive posture to deal with the current economic turmoil, many of you are taking steps that will ratchet up productivity and performance for both the near and long term. A good example is the actions taken by Ken Sayers, director of credit & collections, at the Southwire Company, Carrollton, Georgia. "We are a manufacturer of electrical wiring used primarily in the residential housing market, so we have seen our risk significantly increase over the past two years. We have been preparing for the downturn in our industry for some time now. We have done more frequent credit reviews and reduced lines for customers experiencing financial difficulties.
We have hired more staff, added a collections software package and have significantly increased our focus on collections, both proactive and reactive, by adding an AR Escalation Lead position to focus on root causes of issues that age beyond 60 days," he says.A large majority of the 150 respondents to our survey believe we are headed into recession (86 percent), although only 51 percent think it is a sure thing. Only 7 percent do not believe a recession is imminent, the remainder (7 percent) being unsure.
Despite this pessimism about the economy, the credit pros taking this survey generally do not see their firms being affected to the same extent as other companies. On average, DSO has so far deteriorated only marginally, bad-debt increases are predicted to be modest, and corporate risk tolerance is anchored in a moderate mind set. While 37 percent have seen DSO increase slightly over the last six months, 44 percent claim it has remained about the same and 15 percent actually realized a decrease. While the overall trend is slightly upward, these figures do not portray a rapidly deteriorating situation. Consistent with these DSO trends, the survey participants, for the most part, are factoring in an increase in bad debts, but are not predicting wholesale delinquencies. Half expect to log a slight increase in bad debts in 2008 relative to 2007, against 29 percent who do not anticipate significant change. Even so, there is a significant segment, 13 percent, who expect bad-debt write-offs to increase sharply.
With 78 percent indicating a moderate or high tolerance of credit risk, it would appear corporations remain focused on expansion, albeit with a heightened degree of caution, rather than protectionism and consolidation, which would be reflected by a tightening of credit. These attitudes are reflected in the top challenges identified by the survey participants. Not surprisingly, the problem of slow payments and delinquency was cited by 78 percent as one of their three top challenges. Portfolio monitoring (51 percent) and time management (44 percent) rounded out the top three challenges. Bankruptcies and defaults only came in fourth, and were considered a top three challenge by just four out of ten credit pros. It is very interesting that staying on top of things (portfolio monitoring and time management) were both considered a bigger challenge then that posed by customers in financial distress. In light of these challenges, what then are the prescriptions recommended by the survey participants? The clear cut favorite involves accelerating the placement of claims with a collection agency or attorney (46 percent). (See chart on page11.) In the face of rising slow payments, this is a proven method to minimize your losses. By accelerating your internal collection strategies and then turning over, without delay, any unresponsive debtors, you not only will increase your recovery rates in regard to severely delinquent accounts, but will also free up staff time to better manage your paying customers.
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Interestingly, after accelerating the placement of collection claims, the next five most favored action plans involved steps to increase credit department productivity. Providing incentives to improve staff performance (24 percent), reorganizing the credit department staff (23 percent), Adding either permanent or temporary staff (16%), implementing imaging and document management tools (15 percent) and implementing online customer self service tools (15 percent) all are proven methods to increase output. Except for adding staff, all these activities help you work smarter and more efficiently. It is also worth noting that credit and collection automation, because of the far greater processing efficiencies it brings to receivables management, has the potential to dramatically improve results, and thereby greatly mitigate the effects on cash flow of an economic downturn.
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As with the last several economic downturns, our current turmoil is not evenly distributed across the economy. While the construction and automotive sectors are certainly hurting, exporters and international firms appear to be holding their own. Then again, several respondents report dealing with the double whammy of economic weakness and rising commodity prices. It goes without saying that you need to not only understand your markets but also the other dynamics that can affect your business. Perhaps we will all feel a lot better six months from now. In the meantime, prudent credit pros are clearly gearing up to battle their way through the current economic turmoil. For additional comments on how our survey participants are handling problems in this challenging economy, click here: http://www.credittoday.net/members/2054.cfm
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