Obviously in this economy, as I have reported in the past, there continues to be a large and growing group of companies well beyond their terms. Collectors are turning to the Exchange to report their deadbeats and notify the debtor that they have been publicly reported online. It seems simple, but in a world where everyone is online and reputations are everything, this technique could be just the approach that will get your money in the door. Here is a sample of some of the more colorful ones we’ve seen over the last few weeks:

• “Pays a fraction of balance. Watch this company they must bounce from provider to provider.”
• “This company does not pay subcontractors on commercial projects. They have numerous lien and foreclosure actions in the state of Colorado.”
• “Still working with Owner to settle this account. I am hopeful since we started at $70,000 and are down to $13,500.00. Will not do business with them again.”
• “The A/P dept and Office Mgr. refuse to talk to me or return emails and Voice mails. The owner/Pres. also refuses to reply to emails and voice mail.”
• “Sitting in a receivership right now. These clowns do not pay anyone promptly. Have successfully fought off a mechanics lien against the company in July 09. Currently 91 days past due, and an active litigation, every single payment has required collections activity to get paid.”

Have a few deadbeats in your customer portfolio? Report them here – it will feel good (trust me).

Troubling Statement #1: “Never Pay Your Vendors On Time”

This is an unfortunate headline in an advice column. Instead of focusing on the true problem (“…but payment on outgoing invoices isn’t getting collected for months. One large organic foods chain owes six figures on an order it placed six months ago”) of the invoices that they are owed to this small business, Mr. Cloutier is focusing on spreading cash flow problems to other businesses. Shouldn’t they work with their customers to speed payment and/or perhaps consider putting these customers on cash only plans until the payment pattern improves? The true issue here is a collections problem. There is definitely a cash crunch for many small businesses, and I feel their pain, but this is not the way to solve their problems—ultimately it will only make things worse.

Troubling Statement #2: “Wendy is balking at the idea because she is under the false impression that paying on time will help her maintain a good credit rating. She also wants to keep her good relationship with vendors. But this has nothing to do with her credit score.”

This is totally incorrect. Wendy is right to challenge Mr. Cloutier because her instinct is right on the mark. If you slow or stop your payments to your suppliers it will most definitely impact your business credit rating. Payment behavior is how these scores are generated at all of the major bureaus. That fact is, suppliers will cut you off and will put you on cash terms if you drag your payments too far out.

Troubling Statement #3: “Same goes for your landlord. Pay him late, too. He’ll scream his mortgage is due, but that’s not your problem. He won’t evict you because he needs the rental income, especially in these times. Send him a check at the end of the month, not the beginning. He’ll soon get used to it.”

Again, bad advice. If you start paying all of your core bills late, this is a major signal that you are struggling and close to failing. Trade credit for small businesses is especially hard to earn and establish. If you slow payments across the board this could be extremely damaging in the long run. The pass-the-buck tone by Mr. Cloutier is just appalling. If every company in America started doing this, the whole US economy would grind to halt.

George Cloutier’s Advice: “Over the years, my turnaround firm has found millions of dollars in extra cash for companies by delaying payments this way. In good times and bad, it’s simply good business practice to stretch out payables…All the big retail chains do it, so why shouldn’t you?”

He is right. Big companies do use their market weight to force unreasonable terms on their suppliers, but is this really the message that we want to send? Let’s tell every business owner in the country to just ignore the terms of their invoice and pay late. While we are at it, let’s just stop paying our mortgages and credit card bills, too. The banks are hurting. I’m sure they’ll understand.

The fact is there is a huge difference between a big company and small company when it comes to credit and credit evaluation. Many business credit reports on big companies do in fact reflect poor payment behavior. But when it comes to credit analysis, a large public company benefits from public financials, large bank credit lines, public debt and public ratings that ultimately prove their credit worthiness. A small business does not have this luxury – they will be judged on their payment history, their trade references and other public records. If you stop paying your suppliers in timely manner, your credit report and trade references suffer, and you may find that your well earned trade credit has dried up. Keep up the pattern and you may even end up with a lien or two filed by a supplier.

Small businesses have enough to worry about and getting bad advice from a supposed expert, shouldn’t be contributing to their worries.

What do you think? Does his column bug you as much as it does me?

“This guy is part of the problem we have with our economy. Wendy and Ted need to stick to their business ethics and demand others do the same. If I slow pay my suppliers, they stop selling to me and send me down the street to the higher priced vendor to slow pay them. If you want good prices, you have to pay your bills.”

“Yeah no wonder the country is in a s#@t storm.”

“This is the worst business advice I have ever read. Period. You want to know the number one problem our business has in this recession? Getting paid in a timely basis for work performed. Want to know why? Because of fine, upstanding people like “Wendy and Ted” who don’t pay their bills on time. I honestly can’t believe Business Week considers this to be great advice.”

“I really couldn’t believe what I was reading…Pay promptly is the best way..and I agree with all the ones who have written opposing the practice of delaying payment..I have been in business a long time …if start off doing it right ..it will work..I disagree with delaying payment unless it is absolutely necessary.”

“Congratulations on writing a column that illustrates one of the many reasons this country is going down the toilet.”

“I agree with everyone else here. This is an atrocious way to conduct business. This will eventually lead to mass layoffs of people. I pay all my bills on time. And if my customers don’t pay in time then I cut them off credit as well. No wonder the banks have cut so many businesses off of credit.”

There is certainly some passion there. As I have blogged about in the past, there is a rough “dual credit crunch” that is squeezing small businesses and hurting their cash flow.

What do you think? Is slowing payments as form of a short-term loan a valid technique? Or is it one of the primary reasons that we are still in a recession?

Having access to the A/R activities of millions of businesses provides us with a unique view into the nation’s cash flow. And since the beginning of the year, we’ve been seeing a steadily improving trend in the amount of corporate accounts receivable debt that is current (see chart 1 below). In fact the vast majority of debt tends to be current – most companies simply pay their bills on time. Even at its worst in February of this year, on a national basis 81% of debt was current. Today that number stands at approximately 83%.

However, companies still must deal with the other 17% of businesses that fail to pay on time. While this number is not dramatically out of line, we’re seeing unsettling growth in the amount of debt over 90 days past due (see chart 2 below). This is not surprising given the well reported growth in amount accounts sent to collections agencies since the recession started, but it is causing finance staff and business owners to be more diligent and get more creative when it comes to dealing with a deadbeat drag.

Have you seen your 90+ days aging bucket growing? Please share a story or two on how you are dealing with this growing problem.

Chart 1: Percent of Current Commercial Account Receivable (US National Average)

Chart 2: Percent of Over 90 Days Past Due (US National Average)

The analysis by REL Consultancy, a division of the Hackett Group showed that “Companies with more than $5 billion in annual revenue took an average 55.8 days to pay suppliers and trade creditors in the second quarter, up 5% from 53.2 days a year earlier, according to REL. They also collected faster on their bills, taking an average 41 days versus 41.9 days a year earlier. Businesses with less than $500 million in sales paid vendors in an average 40.1 days, down 6.5% from 42.9 days, REL found. They took roughly 8% longer to collect payments, or an average 58.9 days, versus 54.4 days a year earlier.”

Has this practice started to impact your business? Are you getting squeezed by your biggest partners? Seeing shortened cash cycles? Have best practice tips for dealing with such practices? We’d love to hear from you.

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?

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.

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.

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.

With this tough environment in mind, we are pleased to announce the launch of Cortera’s Collections Priority Rating – CPR℠ to help you prioritize your collections efforts. These days it is essential for businesses to focus their collections activities on their increasing challenging customer portfolios. Cortera Collections Priority Rating – CPR is designed to assist collections departments do just that.

Cortera CPR assists collections departments of all sizes in evaluating customer portfolios for signs of delinquency, highlights changes in payment behavior and provides indications of internal and external events that could impact future payment behavior. Cortera CPR also provides a unique segmentation feature that groups accounts based on overall payment risk. This can assist customers in prioritizing, assigning and ultimately the treatment of past due accounts.

Like all Cortera products, Cortera CPR is offered in a variety of flexible delivery methods:

• Online via our DIG web portal in report form for individual company analysis at $2.00 (discounts are available for data contributors)
• Batch via our BOOST product for rapid analysis and segmentation of all or part of your customer portfolio at $0.60 per account scored (discounts are available for data contributors)
• Web Service via our CONNECT XML for access to all Cortera CPR data elements and easy integration to your existing accounting and collections software.

If you are interested in learning more please call 877-LOWR-DSO (877-569-7376) or complete a short form for a free trial.