Capital Markets

It’s Getting Much Harder to Receive

Finance departments are feeling a sharp credit pinch as more customers put off paying their bills.
Sarah JohnsonApril 1, 2008

Last month, former IBM and Chrysler Corp. finance chief Jerry York warned CFOs to watch their receivables “like a hawk.”

His advice at this year’s CFO Rising conference accentuated his dire prediction that the U.S. economy is entering a long and dark recession. “In a contracting economy, receivables become a concern,” he said.

York’s warning, however, may have come too late for some finance departments. The latest measure of credit collection managers’ barometer shows that companies are hitting roadblocks when it comes to reconciling their outstanding accounts. The March Credit Managers Index, which fell to its lowest level since 2002, demonstrates the credit crisis has not abated and frustration is rampant for the employees making collecting calls.

Indeed, accounts receivable departments have been feeling a major crunch. Credit managers told The National Association of Credit Management (NACM), which conducts the monthly survey, that they’ve had to send out more late-notice letters to clients, while others report customers are asking for more time to pay. “Collecting receivables is becoming more and more difficult,” a furniture vendor said. Added a grocer supplier, “Customers just don’t want to pay current bills.”

Companies could have avoided some of their newfound credit problems if they had taken a closer look at their risk portfolios, according to Pam Krank, president of Credit Department Inc., a credit-management company. Companies need to do a better job of regularly monitoring their customers’ creditworthiness, she told CFO.com: “They should be able to lay out their customers from low risk to high risk and to get a snapshot of that risk at any one time.”

Without undertaking due diligence up front and keeping a constant eye on customers — whether through periodic reviews of their financial statements or bank references — companies will “get caught” with unpaid bills, according to Krank, because they will continue to issue credit to customers they could have predicted would one day not be able to pay off their debt.

Released on Tuesday, NACM’s report suggests that the economy has already entered a downward slope. The majority of its measures for the manufacturing and service centers fell below 50 percent. The index’s lowest level since it began six years ago indicates “the economy is almost certainly in a recession,” according to Dan North, chief economist with Euler Hermes ACI, a trade credit insurance provider.

The survey asks credit managers to rate favorable and unfavorable factors in their business cycle — unfavorable factors include rejections of credit applications, dollar collections, and amount of credit extended. All of the factors have declined in the past year, bringing the index down 4.6 percent compared to March 2007.