In the rapidly rising sea of information, someone got left at the dock.  It’s easy to find information on public companies.  Just go to Yahoo! Finance or do a Google search.  But go ahead and try to find information on private companies – especially the millions of smaller ones that we all interact with every day.  The limited information available about them is scattered across a multitude of hard-to-find sources and largely unstructured.

The landscape is changing.  This weekend, Cortera launched a new source of free information on small and medium sized privately held businesses (as well as large and public ones).  Cortera business profiles help businesses more easily find companies who can deliver what they need, gain insight into the stability and credibility of their existing trading partners, and identify new customers in need of their products.  Containing detailed information on business size, industry, real-world trade payment history, recent news and more, the business profiles enable companies to grow their businesses and manage risk.

Our initial launch is concentrated on the world of suppliers.  Cortera’s business profiles are designed for both suppliers and the companies that buy from them.  For buyers, Cortera profiles improve their ability to find suppliers and evaluate their health to avoid supply chain disruptions.  For suppliers, Cortera profiles assist in finding potential buyers and assessing both their capacity to spend and ability to pay.

There are millions of daily interactions between buyers and suppliers that are begging for better intelligence.  Our objective is to provide a new level of insight into private companies to support these interactions at either free or near-free price points.

We believe that greater transparency into businesses will lead to smarter commerce between them.

Today’s  question is courtesy of our eCredit software team.  The chart below is based on a review of over 10 million customer-initiated invoice disputes logged by users of the eCredit system in the last 12 months.  (total value of these cases is just under $21.7B)

While it is possible that the significant increase in dispute cases in Q3 and Q4 of 2008 is unrelated to the overall economic slowdown, the data raises some interesting questions:

• Did companies actively use disputes as a way to manage cash during a critical period? or

• As the economy tightened up, did firms raise the level of due diligence, thus discovering more disputable errors?

The flow of money through the supply chain is as crucial as the flow of goods. While the flow of goods is driven by sales, the flow of money is largely influenced by a company’s confidence that those sales will continue. Strong confidence in sales normally spurs companies to invest in growth initiatives. On the other hand, a lack of confidence in sales causes companies to conserve cash and slow payments to suppliers.

Cortera’s Supply Chain Index (SCI) is a measure of financial confidence. The most recent Cortera SCI figures indicate that, while there is clearly more accounts receivable stress than a year ago, confidence in sales may be starting to return. Two interesting trends are emerging in the latest analysis of accounts receivable data through April 2009:

• The amount of late A/R is decreasing. In April, the amount of A/R in the SCI more than 30 days past due fell to 11.0%, an improvement of nearly 16% from the December 2008 level. This represents the fourth straight month of improvement over that high water mark. Payments more than 30 days late are often the equivalent of missing a payment. That’s a marked change in financial behavior that can signal dramatic changes in a company’s financial situation. An improvement in this measure suggests a return to normalcy and financial stability in companies.
• The age of late A/R is decreasing but not as fast as the amount. April’s overall Days Beyond Terms (DBT) for the SCI also improved but to a somewhat lower degree (13.8%). So less A/R is more than 30 days past due but overall late debt continues to increase in age. This implies that companies are not missing payments as often but are guarding cash while they monitor inflows.

Even with these improvements, the current A/R performance profile is significantly below than that seen prior to 4Q08. On a year-over-year basis, DBT has worsened by nearly 34%. Will these signs of returning confidence prove to be the start of a recovery or just CFOs taking a breath after a hard fall?

When General Motors filed bankruptcy on Monday, June 1 in New York, much of the focus was on the continued loss of jobs, impact on the overall health of the US economy, and the Obama Administration’s plan for the US automotive industry going forward. In our last post we looked at the auto industry suppliers as a whole – here we dig into the suppliers most impacted by the collapse of GM.

Number one on the trade debt claim front (sixth largest creditor overall) was Starcom Mediavest Group which is owned by Publicis Groupe SA and their $121.54 million in exposure. With S&P now looking to potentially downgrade Publicis’ credit rating because of their exposure to GM, it is fair to question the impact on others listed by GM. Publicis makes the list twice with its own claim of $25.2 million, bringing their family exposure total to $146.8 million. Please find the complete list below.

GM’s Suppliers are Paying Their Suppliers Slower

A quick analysis using Cortera’s database of business payment experience shows that with an average payment risk score for this group of companies of 441, this group is already paying their suppliers slower. More than half the list fall into our “Consistently Higher Risk” Category and additional five suppliers fall into our “Higher Risk, Trending Down” category meaning that they are paying very slowly and in a downward trend over the last 3 months. Interestingly, based on the information reported to us, American Axle’s average Days Beyond Terms (DBT) is 7 days versus the industry average for auto parts suppliers of 9.16 days. Similarly, TRW Automotive is also below the industry average. On the other hand, other auto parts suppliers, including number two on the list below, Delphi, has an average DBT of 21 days–well above the industry average.

General Motors (GM) Suppliers with over $10 million in Trade Debt Claims

Are you a supplier to GM or one of their suppliers? How are you handling the bankruptcy?

Drop us a note.

I’m constantly amazed at the level of intellectual curiosity of my coworkers.  I like to think I am pretty well-read and up on the latest information, but hallway and conference table conversations around here are a learning experience about a wide variety of subjects.  It’s interesting to watch someone take a subject that lots of people are talking about and conduct some independent research, just because they want to know more.  Sometimes the research challenges your expectations.

Here’s an example: The news lately has been full of stories about the auto industry and the current difficulties the big 3 (or whatever we are supposed to call them now) and those who rely on them are experiencing.  Yesterday, one of my coworkers walked into my office with a really interesting blog post on the current reported sales figures for new cars.   (By the way- if you don’t read Barry Ritholz’s “Big Picture”, you should definitely add it to your list)   Anyway, my coworker told me that he wanted to understand how the automaker’s issues were reflecting themselves in the payment behavior of their suppliers.

So we pulled some numbers, and here is what we saw:

To say we were surprised was an understatement. We expected to see continual degradation of payment behavior and ballooning debt.  Could these numbers represent increasing confidence by these manufacturers?

Despite the progress shown above, the industry is still hurting; remember that on Tuesday, I posted that the benchmark past-due percentage across all industries is 12.95% .  A/R currency for these firms remains almost 1% below the overall manufacturing level of 81.05%.

We’re still working on the final numbers for April in other industries- stay tuned for additional snippets of data as we finish our analysis.

As you might imagine, we’re data geeks here at Cortera; and with over $250 billion a month of payment records to play with, we spend a fair amount of time trying to interpret and summarize what we see.  One of the statistics that we thought was striking was the percent of payments that were reported past-due in the most recent reporting cycle.  Overall, payment behavior continues to slow: across all industries; if you were owed a debt in March, our data shows you waited 12% longer to get paid than you did at the end of last year.

Given the contraction in consumer spending, none of us are particularly surprised at the retail figure below; however it’s pretty sobering to realize that $1.02 out of every $5.00 owed by a retailer is past due.  (BTW- this number represents about a 9% overall increase since December.)

What really jumps out at us are the manufacturing sector figures. 18% of trade debt owed by manufacturers is past due. That’s up from 16% just 3 months ago.  We typically see a cycle tied to how businesses; especially manufacturers, pay their debts.  It goes something like:

•    sales decline → payments slow down to preserve cash → hiring slows down (or layoffs occur)

So we’re expecting the cycle to work in reverse as the economy recovers:

•    sales increase → payments improve → hiring resumes

There are hints of improvement in the first phase of the cycle, such as last week’s announcement by the Commerce Department  of durable goods orders in April, but the continued slowing of manufacturing trade payments suggests that we still have some time before we see the effects of a recovery, if indeed that’s the direction we’re going.

Our May numbers will be out in about a week.  It will be interesting to see what the trend is doing.  We’ll post them here when available.

You might have noticed that we launched a new, satirical marketing campaign a couple of weeks ago to help bring attention to the important and increasingly difficult commercial accounts receivable management function. Now more than ever it is essential that organizations operate at peak performance across all levels of risk management, yet often times credit and collections functions are still viewed as back-office non-essential departments. Obviously this is not the case, especially in 2009.

In the world of “do more with less”, we hope that “Collectile Dysfunction” added some comic relief to your increasingly busy and often stressful day. Whether you love it or hate it, laughed out loud or think it is just another juvenile stunt to get attention, there is common ground among credit and collections pros that companies now more than ever need to keep pace with the current economic challenge. I’ve been on the road visiting customers throughout the spring and every company lists off a common set of stress points:

• Increased DSO and delinquencies
• Increasing internal reporting requirements for lenders, senior management and auditors
• Layoffs throughout the finance organization, especially analyst and collectors
• Reduced budgets
• More time in court because of customer bankruptcies
• Added work of analyzing partners and suppliers
• More analysis of private company financials
• Higher than usual friction with sales
• Collections challenges as entire portfolios are becoming more risky
• Surprises in the portfolio as good customers are going bad

We reported just this week that the national percent past due average now stands at 12.95% with 40 states worsening month over month. Clearly, despite some well publicized “signs of improvement” businesses are still struggling to pay their bills in timely manner stressing the entire cash conversion cycle. To make matters worse the aggregate amount of US commercial A/R debt over 90 days past due has grown 15.4% over the last four months. This is a concern given the fact that the later the payment, the more likely the supplier will not be able to collect.

While the Collectile Dysfunction or the CD Campaign is a tongue and cheek approach, the message is clear and well known by credit and collection professionals-many organizations need help and need help now to regain control over their portfolio. This is not a criticism, but simply the current reality and result of long-term company cultural norms that tend to focus on near-term sales goals with little attention to the risk of being ultimately paid for their products and services. As result the upfront risk assessment and ongoing management of the A/R portfolio tends to be underfunded and under staffed.

Do any of the following sound like your company?

• Sales & senior management overriding credit line decisions
• Orders being released off credit hold to make a shipping deadline or quarterly number
• Auto setup of “courtesy credit lines” without credit providing guidance or input
• Credit decisions based on “personal” relationships or history rather than factual analysis
• Requests for modern software and information falling to the bottom of the IT & budget priority list

Perhaps one of the positive outcomes of the credit crunch and recession is that senior management is now increasingly listening to their A/R leadership while in boom times perhaps they did not-hopefully in an effort to eliminate their “CD” for good.
We are passionate about bringing attention to the often overlooked trade receivables side of the struggling US economy. If the CD campaign helps draw attention to the issue and gets you the support and tools you need most, we’ve succeeded.

Tell us what you think.

My last post, posed the question: are predictive models still relevant in today’s economic climate? As expected it generated a fair amount of discussion both on and off the blog. Thank you for all of your comments. Let’s continue the dialogue.

A Quick Poll…

Scoring isn’t dead, but the type matters

In this market, it’s fair to be skeptical, but abandoning all forms of scoring completely would likely do more harm than good. Having some method of consistently evaluating and rank ordering customers remains the best, most efficient way to manage these relationships for both upfront credit decisioning and ongoing portfolio monitoring and collections activities. However, carefully choosing the type of model and conducting some near-term validation is certainly warranted. Based on discussions with a variety of credit and collections professionals, this market appears to be leaning toward a more point-in-time view of their prospects and current customers such as:

• financial statement-based scoring (for both public and private companies). Many reported more sharing of private financial statements than prior to the economic crisis.
• more judgmental, short-term payment history scores that focus on the current state of the business rather than trying to predict future payment behavior using models that may no longer be valid. Some of the comments from the last post landed on both sides of the debate on whether predictive models are experiencing “model drift” and under or over predicting risk or are these models holding up and still predicting accurately? (we welcome your continued comments on this debate)
• finding methods to compare internal payment behavior (how they pay me) with external data (how they pay others)

Get a complete view of your portfolio

We also heard from credit pros that they are increasing turning to a variety of information sources to get a better picture of how they are getting paid vs. their peers and then reporting this information back to senior management. This “better/worse” than the benchmark analysis can prove quite enlightening for those outside of the day-to-day credit and collections function. This can take many forms:

• comparing your own payment experience against an industry benchmark
• comparing your own payment experience against your credit group benchmark
• comparing your own payment experience against the broader market

Resources to help you guide your use of scoring into today’s economic climate

Trying to rate and analyze large volumes of both prospective and existing customers, scoring is still a must, especially as many companies have cut staff. Below are some helpful resources* that you can use to guide your assessment of the various options on the market today:

• Credit Today: Their Credit Scoring Central is probably one of the largest libraries on this topic in a user-friendly, “plain English” format that often includes case studies from credit professionals in many industries.
• Credit Research Foundation: An early leader and educator on the topic that offers a wealth of research papers and industry studies. The CRF also publishes a variety of publications as well as hosts industry events, seminars and best practice workshops that often cover various forms of scoring.
• NACM: Business Credit Magazine offers a Resource Library with past coverage of commercial credit scoring articles.
• Financial Insights: Dana Wiklund and an analyst with advisory firm, IDC recently published this video presentation: “Why Now Is The Time To Validate Your Models“

*Please note that some of these are available for a fee or subscription service.

Let’s keep the dialogue going

What are your thoughts on how scoring should be applied and what types of scoring you are using today?

This week I was in Manhattan Beach, California attending a Credit Research Foundation (CRF) Credit and Accounts Receivable Open Forum and an interesting debate broke out during the first day’s agenda: does predictive credit scoring still work? Can it be relied on given the current crisis?

In some ways, this was a surprising debate given that CRF members have been strong proponents of the use of scoring for commercial accounts. On the other hand it shouldn’t be that surprising given that we’ve seen serious debate and blame for some of the current mortgage mess on the use of consumer scoring models and that as leaders in the industry, the CRF members have been quick to recognize changes and adapt. A wide variety of vendors offer credit reports with predictive scores as well as custom models-these products have been a staple of our industry for years. The first two presentations of the conference focused on the state of the global credit crunch and set the stage for a group discussion with the two highly qualified guest speakers. With roughly 200 credit professionals in the conference room representing predominantly larger US organizations the group was eager to share. Both speakers did an excellent job of covering how we arrived in the current crises, what to expect going forward and offered opinions on whether the various stimulus efforts and bailouts would turn around the recession (and when). The host of the open forum then turned to the audience for questions and posed a simple question to get things started: how are you as commercial credit and collections professionals handling the credit crunch?

The first credit manager answered (roughly paraphrasing): “we are scoring every account to make sure we understand their risk going forward”. That’s when the panelists jumped in on scoring. Both heavily questioned the validity of the large debt rating agencies, the consumer FICO score and other predictive models (business or consumer) given the current economic cycle. The debate continued as various practitioners from the audience offered their opinions, as every vendor of the above-mentioned scoring solutions began to squirm in their seat. The group was split and many landed on both sides of the debate.

The debate: do commercial credit scores still predict the future?

It’s a fair question – given the rapid changes in our economy over the past year, can a statistically validated credit or collections score truly predict the future? Can a model based on the last 18 or more months of payment history still predict what is going to happen in the next 6 to 12 months or has the economy moved past the tolerances of the model? This is 2009; nothing seems to be predictable as even the best customers are turning delinquent and current models are suspect at best. Some may argue that by continuing to rely on these models that you are only digging a bigger hole for yourself with a false sense of security.

So, should we stop using scoring? Simply put, no. But there is no “one-sized, fit-all” answer here and I expect a heavy amount of debate in the coming months.

We look forward to your comments below.

Over the last few weeks I have had the opportunity to participate in an industry credit group meeting both in the United States and in Europe. In both cases, the importance of these meetings was clear given the challenging economic environment. While attendance is down at some these meetings because of the well publicized cuts or complete freezes in corporate travel, I was still impressed at the level of continued participation and attendance. It is refreshing to see that senior management is still supportive of these meetings.

Are you getting pressure to cut back on these meetings? Is upper management questioning the value, given budget cuts in other areas? Here are some tips and benefits to help you justify attendance.

Key Benefits of Participation in a Credit Group

Transfer knowledge, new strategies, tips and best practices

• With collections activities up significantly and disputes on the rise credit groups provide the perfect setting for sharing best practices and successful credit, collections and risk management techniques (both new and old)
• Outside experts can also provide unique insights and additional support that are often more expensive to obtain for a single company (many experts will participate at no cost to promote their company or credentials to potential customers in the group). In my case I was invited last week to run a workshop and presented on Collecting in an Economic Downturn
• Attendees often learn from their peers about the latest technology, information, and scoring products

Trade experiences

• Providing your company’s monthly trade experience information to your industry credit group (and all commercial credit bureaus) provides better transparency and has been shown to improve payment behavior
• Submitters often receive additional services such as credit scores, delinquency predictor scores or unique identifier information at no cost in return for providing their A/R experience
• In a live and confidential setting, sharing past facts on your experiences with customers provides unique commentary not found on a generic credit report
• Members benefit from the collective credit investigation capabilities of the entire group and their respective departments
• Benchmarking and industry trends, like those provided by Cortera, help members understand their performance versus their peers

Relationship building

• Long-term support of these groups builds invaluable relationships with your peers that helps protect the entire industry against fraud and frequent late payers
• Member sharing also helps build better information and technology solutions that are specific to the trade group

Member alerting

• The peer-driven, member alerting services provided by most credit groups are essential for communicating between meetings and ensuring the immediate flow of potential industry or customer risk. These services are only available to group members and cannot be purchased if you are not an active member
• Meeting hosts further expand this communication through delivering timely industry news, best-practices, and company-level insights to ensure regular knowledge transfer back to the credit group

Lowering Travel Costs

• Attend local regional meetings. These are often off-shoots of the national meetings and provide helpful member experience both locally and nationally
• Encourage members of the credit team to attend in their region and communicate to the national or global team
• Host meetings at your facilities to avoid hotel expenses
• Participate via conference call if you cannot attend in person

Have a tip or comment? Add it below to keep the sharing going.