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Although more companies are collecting bills on time, a true strengthening of credit risk depends on an upsurge in consumer demand.
David M. Katz, CFO.com | US
December 14, 2009
As they have in other parts of their jobs, finance chiefs have reasons to be cautiously optimistic about their trade-credit relationships with customers. After an extraordinarily bleak 2009, which saw many suppliers forced to renegotiate terms with their customers or write off bad debt altogether, creditors have been buoyed for the past three months by increased sales, applications for new credit, and bill collection, according to a leading indicator of the nation's credit health among businesses.
At the same time, there have been fewer squabbles between debtors and creditors, fewer turndowns of credit applications, "and a marked reduction of accounts placed for collection," according to the most recent report on the monthly Credit Managers' Index issued by the National Association of Credit Management. As of December 1, the index, based on a survey of about 1,000 trade-credit managers during the last 10 days of the month, had risen to an annual high of 52.3. (A score of 50 means creditors think they've entered a growth mode. The index is based on credit managers' perceptions of growth, decline, or status quo conditions in various aspects of trade credit.)
To put that in context: the index hit 39.7 during December 2008, the all-time bottom in the index's seven-year history. Since then, it's risen steadily to its current annual high. That surge has been cause for an enthusiasm among creditors that's "not really champagne-cork-opening excitement, it's wine-box-opening excitement. We're getting there," says the NACM's economist, Chris Kuehl. Taking a break this week from collecting data for the January 1, 2010, survey, he told CFO he thought it would reveal "another incrementally up month."
Among other bright signs unearthed by the association in November was the perception that sales are on the upswing; they jumped to 55 from 51.1 in October. "Given that last year's number [for November] was at 34.4, this is pretty encouraging news heading into the depths of the holiday season," the report's authors say. In November the credit managers saw new applications for credit rise to 55.4 from 52.7 in the previous month — a huge jump from the 45.2 scored in November 2008. They also saw a steep rise in dollar collections at the end of 2009, recording scores of 53.4 in September, 54.7 in October, and 55.8 last month.
Those positive results reflect tenuous optimism about next year, according to the NACM. Based on the responses of credit managers who work for manufacturers — about half of the respondents, with the other half toiling in the services sector — there's a sense "that everything is based on future demand as opposed to reacting to the current situation," the authors of the report write. "Manufacturing remains fragile in the economy at the moment and much of the focus is now on next year."
With that in mind, suppliers are working to normalize relationships with their customers. Kuehl detects purchasers' emergence from a trough in the trade-credit cycle that coincided with the darkest months of the economic downturn. "When things are really, really bad, companies start to be very conservative in their payments, and they begin to put their creditors off a little bit, conserving cash flow as long as they can," he says. "But as they begin to think that things are going to turn around, they realize they have to start getting current and making sure their suppliers are not mad at them."
Still, there's a nagging notion that creditors' expectations of an economic recovery may be based on their own need to replenish their inventories, rather than a solid upturn in consumer demand. "Everyone is experiencing a demand increase [from business customers] because inventories are so low that they have to replace them," says Kuehl. "If it isn't matched with a real [consumer] demand by the second or third quarter next year, things could drop off."