While very few people anticipated the depth of our current financial crisis, a year ago most recognized that boom times were over and a tougher economic environment lies ahead. In the benchmarking survey we conducted the first quarter of 2008 on the subject of economic risk we asked, "Do you believe we are headed into, or already in, a recession?" At that time 51 percent indicated definitely yes and an additional 35 percent said probably. Of the remainder, only 7 percent did not see a recession on the horizon and another 7 percent were not sure.

Due to their foresight, most credit managers have had time to prepare for a hostile economic environment. "We saw this coming over a year ago and really tightened up credit as a whole. Currently, we are in pretty good shape but continue to be very diligent in monitoring and working all our accounts daily," says Dan Sproat, corporate credit manager at Wholesale Fuels, Inc.

Looking forward, the challenges facing Wholesale Fuels are a good example of the tough road ahead. "In California we always had one of the big three industries that would survive and carry the economy: construction, oil or agriculture. Now all three have fallen on hard times and there doesn't seem to be a savoir.

"Also, because of the current budget problems California, our downstream accounts--schools, cities and counties--are unable to pay due to no money flowing from the state or have had their budgets totally devastated. This will be a challenging year indeed."

There were 165 participants in this year's risk management survey, a ten percent increase in participation compared to the 2008 survey. The survey is thus able to provide insight into trends related to DSO, bad debts, corporate risk tolerance, and credit department challenges. It also examines the primary activities and initiatives credit executives are pursuing to address these challenges as well as when they expect the economy to begin its recovery.

Question: How has the recession affected your business?

Not surprisingly, credit executives overwhelmingly report that the recession is affecting their business. While only three percent report their businesses continue to grow, 80 percent report a moderate to significant negative impact from the recession.

Question: Over the past 6 months how has your DSO been trending?

We were surprised to find that many fewer participants reported sharply higher DSO. Last year, 40 percent indicated DSO had risen over 10 percent over the previous six months, compared to only 10 percent making the same claim this year.

However, 52 percent did report slightly higher DSO compared to 37 a year ago, and the number or respondents reporting lower DSO dropped off sharply.

Overall, 62 percent are projecting DSO to increase this year, while 77 percent anticipated an increase last year. In addition, nearly one third report DSO as stable, which means the vast majority, 84 percent, report DSO as being relatively stable or slightly higher.

On the surface, this is not as bleak a picture as we expected, or that credit pros were anticipating last year, despite their expectations of a recession. However, the data may also be reflecting the fact that DSO has already absorbed much of the weakening economic situation and so is no longer falling as rapidly as it did last year.

Question: Compared to last year, what do you expect your bad-debt write-offs to be in 2009?

Not surprisingly, credit executives are anticipating an increase in their firm's bad-debt write-offs. This year 88 percent are projecting higher write-offs compared to 63 percent last year, roughly a 40 percent increase. So, while DSO may already be reflecting the full impact of the recession, the fall-out in terms of doubtful accounts may still be ahead of us.

Question: How do you rate your firm's risk tolerance?

Corporate tolerance for risk has definitely trended downward over the past year. While the percentage of companies whose risk tolerance was low or moderately increased, those claiming to be highly tolerant dropped precipitously from 13 percent to 5 percent.

This translates into a contracting corporate credit environment that in turn makes recovery more difficult. Diana Tapelt, credit manager at Minvalco Inc. observes, "We've all gotten fat off the past economic boom and now it's time to give a little to get things moving again. Yes, our receivables may age out a bit further, and we may experience more bankruptcies and bad checks, but it's all part of a cycle that most of us have experienced before.

If our customers can't go to the bailed-out banks and get the money they need to continue business as usual, then who else do they have to turn to but their suppliers?"

As a result, she recommends that "the business community needs to work together to get things rolling again. This might mean giving extended terms on larger jobs or allowing your customer to use a credit card to pay off their account balance. These concessions all have a price tag but, remember, our customer becomes our success."

Question: What three items do you anticipate being your greatest challenges in 2009?

While dealing with slow payments and delinquencies remain the greatest challenge for credit executives, there has been some interesting movements in their priorities over the course of the past year.

For one thing, dealing with bankruptcies and other defaults was a top three issue for 67 percent this year compared to only 40 percent last year, and therefore it jumped from the fifth to the second position. Monitoring customer credit worthiness, which showed a slight increase, rounded out the top three challenges. Dropping out of the top three, was finding enough time to get everything done, which showed a slight drop, but still remained a major challenge for many credit executives. Meanwhile, typical credit challenges such as handling deductions and disputes, enforcing credit limits, and dealing with bad checks all saw very large drops in the number of respondents indicating they were a major challenge.

Questions: What steps will you take over the next 6 months to improve receivables performance?

Last year, credit executives were focused on activities designed to increase productivity, in other words strategic activities. They had already tightened up their policies and procedures to some extent and so were focused on becoming more effective in anticipation of the tougher times ahead. Now that the economy has tanked, credit executives are resorting to proven tactics to get the job done: increased account monitoring and collection activities, tightening credit, and accelerating the placement of collection claims, though this last slipped from the top position to fourth place.

This trend is supported by data collected from the software side of Cortera's business (Cortera offers their eCredit software products in hosted environments and is thus able to capture usage data). "We are seeing that both the amount of effort to collect and the number of disputes customers are seeing have risen dramatically over the last year. Collections activities are up about 85 percent in the last year and disputes jumped dramatically in the fourth quarter of 2008. In general, it is taking more effort to collect the same amount of dollars," observes Alex Cote, Product Development.

There was a notable decrease in interest in terms of staff performance incentives and the option of adding staff, even if only temporary. It would appear that budgetary constraints are another challenge. Even so, there was increased interest in all types of outsourcing, buying credit insurance, buying high-risk credit protection and increasing the use of credit reporting services, all requiring additional expenditures. At the same time, interest in automation has remained relatively stable from 2008 to 2009, except in regard to customer self-service tools, which showed a large drop.

Question: When do you expect the recession to end and economic activity to begin expanding in the USA

Only 10 percent of our survey participants expect the recession to end this year compared to 76 percent who anticipate it to end in 2010. On average, credit executives do not expect the economy to begin expanding until the early summer of 2010. If they are correct, it is likely that the situation will get worse before it gets better.

"The trucking and transportation industry is the leading indicator of the economy," states Douglas Swafford, the credit and collections manager with U.S. Xpress, Inc. "When we start to see improvements in the economy, trucks start hauling more goods because companies are manufacturing more products. Our data show the economy is worsening some in the first quarter of 2009 and won't bottom out until the second quarter," he adds.

The Industry Context

As with other recent recessions, all industries are not affected in the same ways. Some industries, such as those associated with real estate, have already been in a three-year slump. Others, such as the automotive industry, did not collapse until the second half of last year. Still others are only starting to slow down.

Similarly, recovery will be staggered as well. Unfortunately, our survey sample is not big enough to provide much delineation in terms of industry trends. However, Cortera collects trending data from both their credit bureau and software operations, and therefore has been able to fill in this gap. The following chart shows the relative impact of seriously delinquent receivables on nine different industries. Finance & Insurance is faring the worst, and the impact is twice that for agriculture, the best performing sector. (To see the chart, go to http://www.credittoday.net/members/2437.cfm)

The next question concerned the frequency of 'qualifiers' which are negative events such as bankruptcies, liens, judgments and collections activities that have been recorded in a businesses credit report. Not surprisingly there are more qualifiers in the industries that have been most impacted by the economic crisis.

Finance & Insurance, Construction and Transportation are the three industries reporting the most negative activity. Likewise, Public Administration, Agriculture and Services are the three industries experiencing the least impact.

There is considerable consistency across these three measures of industry distress. It is also noteworthy that the percentages reflected for Over 60 Past Dues, Negative Events, and Collection Placements are all still in the manageable range. As bad as things are, credit executives are clearly still in the game.

A Call to Arms

While it is easy to want to batten down the hatches until the economic outlook improves, credit executives need to keep in mind that job number one is facilitating profitable sales. As Diana Tapelt has already noted, in the absence of other sources of credit, trade receivables become the financial vehicle of last resort. This fact puts credit pros front and center in the recovery effort.

Of course the job will be difficult and it will require innovation, hard work and above all good skills. In the end, the credit executives that find the means to effectively support the needs of their sales organization and their customers despite the tough times, will have provided an invaluable service to their organizations. As Carsten Schmitz, the Corporate Director Credit & Collections with the Freeman Company, admonishes, "This is the opportunity for the credit and collection department to shine and to show its worth and contribution to the company's success and financial well being. Embrace that opportunity. Communicate to all levels of the organization. Put your armor on and go to battle. A lot of enemies - a lot of honor!"

Essay Responses: 2009 Economic Risk Survey

Question: Please share any economic or risk related issues that are specific to your industry. How are you dealing with these issues in your credit department?

We received responses to this question from a broad range of industries, and have therefore listed them by industry groupings. As you read through the responses, it becomes apparent that nobody is immune from the effects of this recession. The past several economic dips were more like a wave that rolled across the economic landscape. One geographical region might have been hit hard but others only mildly and some not at all - likewise with the different industry groups.

This time around is different. While certain industries (e.g. construction and real estate) and geographic regions (e.g. the sunbelt) have been hit first and hardest, everyone is now feeling the effects. This is more like a tsunami than a typical wave. The problems in real estate are affecting retail store leasing. The construction and automotive industries are affecting steel which in turn is affecting manufacturing and transportation. Then there is the 800 pound gorilla that is affecting everybody, the banking industry.

As a result, credit executives in nearly every industry are being forced to become the lender of last resort. Read on to learn how our survey participants are handling that responsibility:

Apparel

[The] athletic shoe business is generally tied to leased stores, which has created problems for many of our dealers because lease holders are losing at an alarming rate and in most cases have become inflexible at a time when retailers need them to be more flexible."

- Jim Hester, Director of Credit, New Balance Athletic Shoes, Inc.

"Our industry is Apparel and Sporting Goods. Consumer's are not purchasing as much with our customers - so sales are down. Those customers who were just treading water are now folding. Fairly good customers are stretching their payments. Sporting Goods is holding constant because families will find money for their kids to play sports."

- Stephanie Grohs, Credit Manager, Stahls ID Direct

Automotive

"Our company is 90% related to the Automotive Industry. Our sales have significantly declined in the past couple of months and we have already been subject to downsizing. Although sales are down, the credit department is working harder at collections and contacting customers earlier to secure payment dates. We are tasked with updating credit history files more frequently in order to identify potential problems quicker and reduce exposure. This will be a very uncertain year as several different scenarios could cause a customer to default. Keep your seatbelts on - this will be a very bumpy ride."

- Linda Neuman, Credit Manager, NTN Bearing Corp of America

"Automotive industry -- [We] sell both first tier and second tier companies in the industry. Second tier are not getting bailout money. If the Big 3 file it would put huge pressure on second tier companies to survive. This would greatly affect our cash flow."

- Howard Nista, Director Corporate Credit, Clarion Corporation of America

Petroleum & Chemicals

"Part of our business is the production of synthetic rubber. Approximately 85 percent of the sales are automotive-related. We do not sell to the auto manufacturers and the tier 1 or 2 suppliers, but further down the chain. However, if the automotive companies are allowed to fail, there will be massive repercussions. This is also a significant issue with our industrial chemicals business."

- Gordon Miller, General Credit Manager, ISP Technologies

"Petrochemical Industry - worldwide markets - difficult getting letters of credit or advance payments to secure shipments/services to overseas clients."

- Terry Baglieri, Credit and Collections Manager, Scientific Design Company, Inc.

"Risks we may have taken six months to a year ago won't fly now. We have entered a very low risk environment. In the Wholesale & Retail fuel and lubricant market there is no room for even minor risk now. Margins are too small and costs are way too high."

- Dan Sproat, Corporate Credit Manager, Wholesale Fuels, Inc.

Construction

"We are in the building materials industry…tightening of our credit policies; collection calls begin early. Just try to stay on top of accounts."

- Melody C. Hogston, Credit and Collections Manager, Royal Mouldings

"[We are facing] cancellation of projects due to owner/developer financial constraints."

- Jerry A. Drake, CCE, Director of Credit and Collections, Apogee Services, Inc.

"With the construction industry slowing down, all employees are being requested to be more focused on their job duties and tasked to reduce expenses wherever possible."

- Ken Zanolini, F Rodgers Insulation

"Core customers are unable to promptly collect for the jobs they have from a General Contractor or Owner reportedly, because the GC or Owner cannot get funds released from the financial institutions and/or the financial institution has added additional requirements to protect their security interests. As an integrated Concrete/Cement supplier and manufacturer my company is in fact acting as the financing entity for customers."

- Burton E. Kidd, Credit Manager, Alamo Cement Co. & Alamo Concrete Products Ltd.

"One of our biggest challenges is determining our customers' ability to secure construction loans, and once secured, then the concern is whether the banks are pulling/canceling the loans.  Additionally, we need to have a very good understanding of private bonding, and the security this offers, if any."

- Laura Frankos, VP, Legal & Credit, TDIndustries, Inc.

"We are a building material manufacturer. What can you say that hasn't been said? Our dealers are hanging on by a thread: no support from their banks, no business, builders closing daily. We are very conservative: cutting limits, regular info updates, checking trades frequently, no shipments if past due, calling pro-actively for payment. (Do you have all your invoices? Can we expect a discount check this month?)"

- Tom Gregory, Credit Manager -- North America, CertainTeed Gypsum, Inc.

"As we are in building material distribution, our business has suffered greatly by the downturn in residential and commercial construction. The riskier, slow paying, under capitalized customers were gone last year, either of their own choice or not...The good paying, solid customers are struggling greatly. Not only are they not selling homes, but for those that are funded, banks are tightening credit, not granting credit at all, or being seized by the government. This indeed is a scary time for those in construction."

- Dan Oneill, Corporate Director of Credit, Stock Building Supply

Consumer Electronics

"As a manufacturer of consumer electronics products, the industry is challenged by the reduction of the consumers available disposable income. Accordingly, it is critical to increase any monitoring processes of your existing customer base."

- Paul Setteducati, Corporate Credit Manager, Dual Electronics Corp.

"The availability of credit insurance and/or put options is drying up on retailers. My concern is that if vendors can't get affordable insurance, they will reduce terms and credit lines on retailers. As retailers have to start paying sooner or putting up LC's in order to get product, this will in turn squeeze their cash flow even if it was originally adequate and increase the number of failures."

- Sandy Maxey, Director, Treasury Operations, Cobra Electronics Corporation

Consumer Goods

[Our biggest challenge is the] "ability for small, independent retailers to compete and survive."

- Cheryl Ranalletta, Accounts Receivable Manager, Tree of Life, Inc.

"My company is one of the call centers here in the Philippines. Our target market are Filipinos in Japan. With the current recession in Japan, our churn rate is getting higher because our products (Filipino channel, beauty collection products and re-loadable [charge] cards) are considered luxuries. Strict implementation of credit and collection policies is what I believe will help us combat the present crisis we are facing."

- Ruby L. Rosales, Manager -- Billing, Collection and Confirmation, Philipinas International Marketing, Inc.

"Being in the musical instrument industry, [and] with Textron pulling their [floor planning], we will finance more inventory in house."

- Betty VanDenBosch, Credit Manager, Yorkville Sound

"I am reviewing current accounts to determine if they still qualify for the credit limits we have given them. I am ordering more D&B reports on customers that are just starting to slip with payments, in order to stop problems in advance. We are tightening our credit limits and are no longer offering Net Terms (except for very high volume accounts)."

- Colleen U. Jones, Credit Manager, Kretek International / Phillips & King International

"Softening retail sales will result in greater defaults of bank agreements with highly leveraged customers. Many LBO's have bank lines maturing in 2010. The state of credit markets in late '09 will determine if those firms can renew financing and at what cost."

- Credit Director of a major consumer package goods manufacturer

Food & Beverage
"Restaurant business is hurting and causing a huge increase in slow payments from our food service customers."

- Laura de Prato, Credit Manager, Cabot Creamery Cooperative

"An area just now coming to light is that of supply risk. We have partnered with our procurement team to financially analyze our suppliers to minimize supply risks."

- Head of Credit and A/R Administration

"In the foodservice industry few of our customers share financial information which makes monitoring difficult, especially on our larger customers who are rumored to be higher risk. At this time we are keeping a close eye, as best we can, on our rumor patrol resources and our payment history of those accounts."

- Alicia Burns, Credit Analyst, Schwan's Food Service

"The international customers are increasing in risk."

- Kimberly Pierce, Credit and Treasury Manager, Barton Inc.

Healthcare
"Identifying customers in higher risk industries [is critical]. We sell to distributors in various industrial markets. We are monitoring closely and refining credit lines."

- James Albetta CCE, Director of Credit, Ansell Healthcare Products

Manufacturing
"We are a national fence manufacturer. The hard winter in the north, the building slowdown along with the economic issue, are creating significant challenges. We will recover slower than many of the other industries in my opinion."

- James H. Clem, National Credit Manager, Merchants Metals

"Steel price volatility."

- Christine Stanbrough, Credit Manager, Guntert Sales Div., Inc.

Paper & Packaging
"Being in the Paper Trades & Packaging industry, the market has gone flat. We also deal in the Food Industry and the Health Care industries which is keeping our company steady at the moment. My credit department is handling all past due customers with greater care than before to make sure the customer pays what's past due and continues to buy our products."

- Ed Roth, General Credit Manager, Elkay Plastics Co Inc.

"The biggest issue is the slow down (stretching) of terms and customers asking for extended terms on new sales. The stretching has gone from prompt pays to 15 days slow as an example."

- Scott Wade, Credit Manager, Exopack LLC

Service Sector

"Our business crosses most industries. [We are facing] risk related issues specific to commercial real estate and facility occupancy. [We are] researching and implementing credit and collection risk tools. Staffing is key."

- Donna Brooks, Regional Collection Manager, ABM Janitorial Services Mid-Atlantic Inc.

Steel

"We are steel traders. One 'risk' issue is pricing: since it dropped so dramatically in such a short time, many customers 'are underwater.' Steel ordered not yet delivered costs more than what it can currently be purchased for on the open market. This is causing 'market claims'....very difficult to resolve to everyone's liking. Slow pay or 'no pay' is becoming very common. Attempting to work with customers...again very difficult...order holds is our only leverage. New credit applications seem to be increasing...many do not provide financial statements. We limit potential exposure with lower credit lines than requested. Once orders are billed, follow-up is scheduled sooner (invoice is one day past due) rather than later. We have always had a 'watch list' which was reviewed quarterly...it is now updated monthly, weekly in some cases. Credit is working very closely with sales to identify, analyze and react to any sign of potential problems."

-Thom Beaupre, CCE, Corporate Credit Manager, Metal One America

"We manufacture steel, so the slow housing market affects us, as does the auto industry and any industry that buys steel (though this location is too far west to be much affected by the auto industry.)"

- Credit Supervisor

"We are a structural steel distributor....unless infrastructure funding increases [and] unless the construction industry in general begins to move upward wee could find ourselves in a very long, slow, un-profitable position."

- Judy Bennett, Vice President -- Credit, CCC Steel, Inc

Transportation

"In the railroad industry, there is a noticeable trend of postponing or cutting the size of rail projects on a state basis as well as on a private company basis."

- Allen Vickers, Corporate Credit Manager, A & K Railroad Materials, Inc.

Question: Please feel free to share any general observations regarding the economic outlook and how your credit department is dealing with it.

Although this was an open ended question, the responses elicited several clear themes. There appears to be a general consensus that things will probably get tougher before they get better. Realizing that, a number of survey participants are looking beyond their individual customers to get a clear view of how each customer is being affected by financial and physical supply chain disruptions. It is also apparent that the credit profession understands that we are dealing with a new playing field and they are making adjustments accordingly. Nearly everyone is battening down the hatches in order to better weather the storm. Others have already had some deck hands washed overboard in the storm, and so are struggling to sail on with a smaller crew. In light of these challenges, it seems fitting that more than a few participants addressed the issue of professionalism, and the opportunity this economy offers to credit professionals who are willing to lead.

Prepare for Things to Get Worse

"Because our dealers are slow to react to change I therefore feel we have not yet felt the depth of the recession. We won't feel the effects of these past two quarters for quite some time."

- Betty VanDenBosch, Credit Manager, Yorkville Sound

"Since the economy essentially fell off of a cliff beginning in September 2008, 2007 Y/E financials probably don't tell the real story. While we are still interested in full financials, we are more interested in debt: who it is with, when it is due, and what the covenants are attached to the debt."

- Head of Credit and A/R Administration, Consumer Products Company in the Food Industry

"There has been a sea change in the way we are monitoring our customers' payment trends and creditworthiness. I have dedicated some credit analysts to do nothing but monitor trends in credit scores. In addition they are requesting financial data from customers where that information (financial statements, bank references, etc.) was considered in our credit decision. We already see changes in some customers' financial condition and availability in lines of credit at their banks is disappearing. My collections staff is closely monitoring the payment habits of their customers to spot adverse trends possibly indicating financial distress. We are seeing a lot of this happening."

-- Douglas Swafford, Credit and Collections Manager, U.S. Xpress, Inc.

"I am not optimistic. The same politicians that caused the problem by interfering in the economy are now vilifying business and claiming they, the politicians, are going to 'fix things.' They will only prolong the agony; there should be NO stimulus package. They claim the free market has failed, but we haven't had anything close to a free market since the 19th century - we are seeing a failure of government regulation of the economy. Repeal SOX, get rid of anti-trust, get rid of most of the alphabet soup agencies and see how fast the economy turns around."

- Credit Supervisor, Steel Industry

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