Publications

Abstracts from The Credit and Financial Management Review

This quarterly publication, the only professional journal for credit professionals promotes a comprehensive understanding of credit, A/R and customer financial management in interesting articles written by educators and practitioner experts in their field.

Interested parties; business professionals, academics or graduate students are encouraged to submit material for review and publication in The Credit and Financial Management Review. Please click the Submit Articles in the left frame to contact the editor.

FREE Article Request Form

Volume 16, Number 1, First Quarter 2010

Claims Trading Meets EBay: Auction Sites for Bankruptcy Claims Trading - Friend or Foe to Credit Managers?
By: Schuyler G. Carroll, Karen M. Grivner
In the last fifteen years, the purchase and trading of bankruptcy claims has become big business, but is largely unregulated and often riddled with pitfalls for sellers. Recently, a new forum for claims trading, open internet auctions, was introduced to the market. A handful of websites have been established which purport to allow creditors of bankrupt companies to test the claims trading market by participating in non-binding auctions for the sale of their claims against debtors. Although the viability of these sites is unclear, indeed, at least one already failed, their introduction will likely refuel the long standing debate on claims trading. This article outlines the development of the claims trading market and the hidden risks for creditors choosing to sell bankruptcy claims. We will also discuss the newly formed claims trading auction sites and analyze whether this approach to claims trading may result in higher returns to creditors or provide greater protection.

Rethinking the Implications of Monetary Policy: How a Transactions Role for Money Transforms the Predictions of Our Leading Models
By: Julia K. Thomas, Ph.D.
Over the past several decades, economists have devoted an ever-growing effort to developing economic models to help us understand how changes in interest rates brought about by monetary policy actions affect the production and provision of goods and services in the economy. Although New Keynesian models have broad appeal in explaining how changes in the money stock can affect business activity, these models generate results that are inconsistent with what we know about how interest rates move with policy-induced changes in the money stock. In this article Julia Thomas argues that by extending the New Keynesian model to reintroduce money's liquidity role, we can resolve some of the remaining divorce between economic theory and the patterns observed in the workings of actual economies.

Leveraging Electronic Invoicing and Payment to Overcome Today's Challenges and Accelerate Business
By: Tammie Calys
In today's economy, businesses, more than ever before, are dealing with an enormous number of challenges. Many of those challenges, at least at first glance, appear to be at direct odds with each other relative to the approach for addressing them. Most companies are being driven through internal directives to reduce their operating cost, particularly as it relates to back office functions, accelerate the receipt of cash, determine methods for reducing days sales outstanding and improve the satisfaction levels of the customer base.External pressures are increasing as well. States and cities are starting to push "green" initiatives for certain industries. Customers have higher expectations relative to the number of flexible options and enhanced service offerings available to them, and competition for new business is intense. Yet at the same time, the ever progressing emphasis on cost containment has placed severe limitations on the amount of money that is available for new projects. Internal IT personnel have been reduced to skeletal levels and the resources required to obtain and to maintain compliance within business processes continue to soar. No industry seems to be immune, and while all will agree that current processes may not be as efficient as they would prefer, many do not realize the tremendous costs and risks these inefficiencies drive to their business and their bottom line.

The Economy of 2010
By: Dr. Joseph W. Duncan
Credit markets remain a crucial element in the economic outlook. While the financial crises of 2009 is somewhat behind us and stock markets have regained some of the loses of the 2008-09 recession, consumers and small businesses still face tight credit conditions and weak demand as unemployment remains high with a resulting drag on overall demand.

This review will focus on several of the challenges facing economic policy makers in 2010. It will begin with a very brief review of the factors behind the deep recession and will then consider what several basic economic indicators tell us about the path ahead.

Volume 16, Number 4, Fourth Quarter 2009

Selling Finance Charges to Overdue Buyers: A Method to Reduce Days Outstanding and Increase Revenues
By: Ben Ricci
As bank-to-business credit continues to remain elusive, recent research suggests that firms will be compelled to turn to trade credit as the main source of operational financing. As the rotation into trade credit increases, it brings with it an increasing risk of "slow-pay" accounts. However, sellers can find a potential source of extra revenue in overdue invoices. While many firms have a policy in place to charge interest on overdue invoices, the policy is rarely followed due to a concern that enforcing the provision will alienate customers.

This article describes a method of collecting interest on overdue invoices that does not interfere with the relationship with the customer, can add extra revenue to the top line, and speed up the collection process by reducing the days invoices remain outstanding.

The Application of Statistical-based Models to Credit and Collection Decisions
By:Albert Fensterstock
In general, there are two possible approaches you can take for implementing statistical-based decisioning. You can start from scratch and develop or have developed and implemented a custom model specific to your data and application or you can utilize a generic model specific to your industry and application that has been developed from data obtained from many companies in businesses with credit and collection applications similar to yours.

There are advantages and disadvantages to both approaches. A well designed custom model, developed from your data, will in most instances be more predictive. However, it may not be that much more predictive that it pays to spend significantly more dollars and a great deal more time developing and implementing the model.

In this article, we will take a look at both approaches and provide the reader with some information of just what the process is and the steps that need to be completed for evaluating the applicability of a generic model or for developing a custom statistical-based model. In order to keep this article to a reasonable length we will focus on the development of generic and custom models for "existing customers" for a credit and/or collection decision application. It should be noted that the process required is similar for other credit and collection applications; however, the data utilized for model development will be different.

Creating and Implementing Proactive Metrics Into Your Credit and Collection Operation
By:Michael D. Kelsay, MBA
With the responsibility of a Credit and Collection Operation, we have all faced the frustrating tasks of reviewing month end, quarter end, and year end reports for the purpose of either praising the good portions of the results, or striving to mitigate the not-so-good portions. Our reaction to the good results is to pass out "atta-boys/girls", and to encourage department personnel to increase their activity, chase the money harder, process credit submissions more quickly (while not loosening credit policies…), and to basically just work harder. We all breathe a sigh of relief when our sales results are at or above company targets, DSO is at or below company target, and when write-offs are within company tolerances. In the present economy, the reactions to our credit and collection department results will most likely be to work more hours as managers and leaders, and possibly to add more personnel (temps) to our teams, especially in collections.

Making Better Decisions
By:Bill Welter
What if every manager in your organization made decisions "just a little bit better?" Not perfect, but just a little bit better? How might that impact cost and revenue and time?

Business managers often treat decision making like it's an intuitive black art. Some people are allowed to practice the black art and others are only allowed to watch and "learn at the feet of the masters." Decisions that resulted in good results are lionized; those that resulted in poor results are hidden from view and never talked about.

I have some observations that might help you think about decision making in your organization and I have an approach that might help you and your team get "just a little bit better." Rather than treating decision making as an intuitive art we should treat it as a deliberative process that can be understood and practiced.

Volume 15, Number 3, Third Quarter 2009

Defending Your Company Against Bankruptcies
By: Richard S. Kulik, CCE
All Credit Managers will experience a customer going bankrupt. It is part of this profession to take risks with the idea of maximizing sales and profits. In these tough economic times this is more likely to happen then in recent history. Many companies have experienced increased amounts of losses due to customers filing for bankruptcy this year. Being prepared and organized can minimize the possibility of additional losses over the next two years from preferences. The idea of this article is to share my experience in managing customer bankruptcies with successful results for my employer and myself.

Over the past 25 years working for The Sherwin-Williams Company we have witnessed several dramatic shifts in the retail industry. In the late 90's and early part of this decade a whole segment of the retail industry went out of business because of two national competitors. I am referring to the regional home center chains. My company was a large supplier to these operations and in such a role was always one of the large creditors in bankruptcy. My goal in sharing my experiences is to help other credit mangers defend their company against bankruptcy.

The 20-Day Goods Priority Claim Under Bankruptcy Code Section 503(b) (9): The Complexities of a Seemingly Simple Statute
By: Bruce S. Nathan, Scott Cargill, & Eric H. Horn
Bankruptcy Code section 503(b)(9) was included as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") to provide additional protection to certain trade creditors by allowing suppliers of goods to assert an administrative expense claim for the value of goods sold and delivered to, and received by, a customer in the ordinary course of business within 20 days of the customer's bankruptcy filing (the "503(b)(9) Claim"). The 503(b)(9) Claim grants goods suppliers a step up in priority, thus increasing the likelihood of full payment on their claim. The 503(b)(9) Claim has also helped trade creditors avoid many problems associated with recovering on a bankruptcy reclamation claim.

Although section 503(b)(9) has certainly proven to be a shot in the arm for trade creditors supplying goods, it has not come without issues. The courts have grappled with many questions left unanswered by this relatively short and apparently simple statutory provision. For instance, debtors have challenged what exactly constitutes "goods"; when payment must be made on account of an allowed 503(b)(9) Claim; the impact of a debtor's setoff rights and preference and other avoidance claims on the allowance of 503(b)(9) Claims; when goods are deemed "received" in calculating the 20 day reachback; and the manner in which 503(b)(9) Claims must be asserted and what deadlines apply for asserting such claims, all driven by the debtor's goal of reducing the size of the 503(b)(9) Claims pool. This article summarizes how the courts have interpreted section 503(b)(9) and how their rulings directly impact the ability of trade creditors to recover on their 503(b)(9) Claims.

Recent Innovations in A/R Finance: Implications for A/R Portfolio Management
By David A. Schmidt
Exciting things are happening in the area of receivables finance. Innovative new solutions are addressing the need for financing on individual transactions. Creating a mechanism that facilitates the extension of trade credit backed by third party investors has long been the holy grail of the financial services community.

Ever since the day Master Charge (now MasterCard) redefined retailing with the introduction of a universal credit card, the business finance community has been searching for an analogous solution for businesses extending trade credit. The resulting explosion in liquidity derived from the introduction of universal credit cards has been a key economic driver during the past four decades, and it is highly anticipated that the creation of a trade credit solution will likewise free up unprecedented amounts of working capital.

According to the Federal Reserve ("Flow of Funds Accounts of the United States", Table L.223, June 11, 2009), outstanding trade credit in the United States totaled over $3.2 trillion at the end of March, 2009. Just tapping into a fraction of that total will generate hundreds of billions of dollars of additional liquidity.

Transformation in Remittance & Auto-Cash Processing
By: C. J. Wimley
Today the processes many corporations rely on to obtain remittance data and apply incoming payments have lagged significantly behind the rate of technology-resulting in poor visibility and a lack of control over the accounts receivable (A/R) environment. Many credit professionals struggle with cash application or auto-cash processing systems that operate independent of the core credit and collections operation. This results in a high cost structure, misapplied payments and increased days sales outstanding (DSO).

Traditional approaches to the remittance function continue to include inefficient manual steps and costly lockbox remittance re-keying fees which serve to inflate the amount of time and expenditure truly required to receive and post a payment, research exceptions and correct possible data inaccuracies. By taking measures to automate and digitize the entire remittance data capture and cash application process, a number of organizations have seen drastically reduced cycle times, slashed operating expenses and created a more accurate, timely and effective revenue cycle.

Volume 15, Number 2, Second Quarter 2009

Managing Receivables in the Midst of Today's Economic Environment
By: Lyle P. Wallis, CCE
We are in the midst of a credit crisis and a resulting economic downturn. As credit professionals we need to gain a thorough understanding of this situation and how it could potentially impact our business. Strategies should be devised to anticipate and overcome the potential financial hazards that could become a by-product of the current economic state of affairs. This is the time for credit professionals to rise to the challenge.

In mid October, CRF at its forum in San Diego questioned credit professionals and service providers from businesses throughout the country on their views relative to the extent of the credit crisis, how it might be impacting their respective business and what methods they were adopting to counter the issues brought about by the credit crisis. CRF has also reached out to over 6,000 credit managers and B2B credit service providers via survey to attain their take on the situation.

This paper is reflective of CRF's findings. It offers an insight into the economic situation and how it might impact us, puts forward suggestions on what you may do to cope with the credit crisis and reveals what others are doing to meet the issues brought about by today's economic environment.

This Is Not Your Father's Recession ... or Is It?
By: Charles S. Gascon
Recessions are a common occurrence in any economy, part of the pattern of expansion and contraction known as the business cycle. For most Americans, the current recession is, by far, the worst recession in their adult lifetime. Not since 1981 has the economy contracted for more than a single year. Heightening economic insecurity, this particular recession is also associated with a financial crisis, as many news stories recall the turmoil of the Great Depression.

Although there is a strong correlation between financial crises and severe economic downturns, not all financial crises result in a depression or even a recession: The U.S. economy never slipped into recession after the 1987 financial crisis.

Strategies for Building Materials Suppliers for Escaping or Reducing Preference Liability
By: David M. Grogan
As the credit manager of a construction materials supply business, you have been dealing with a contractor customer that you have just heard is experiencing financial difficulty. You are concerned about (1) the shipment that just went out on one construction project, which was to be your last shipment for that project, (2) the shipment that just went on a different construction project, which is about 50-percent completed, and (3) the purchase order you just received on a new project that has not yet started. All of these projects are for solvent owners and are bonded.

Volume 15, Number 1, First Quarter 2009

Building Operational Focus and Accountability in Credit Risk Management
By: Mike Hourston
Operational success requires Focus, while holding both individuals and processes continually Accountable. In effect, constantly being aware of: What you're trying to achieve, How you're trying to achieve it, Who is responsible for achieving it, and Whether it is being achieved. Seems simple and basic enough, but as markets grow increasingly complex and volatile, keeping transparent the various resources, responsibilities and strategic initiatives you've assembled and knowing which of these are currently contributing to your success can be elusive. However, despite the potential difficulties, management must address this important and ongoing challenge. Over the years various methods and tools have been developed to improve operational clarity, one such tool is called the Grid.

Disclosure Level and Cost of Equity: Evidence from Consumer Goods and Services Industries
By: Hichem Khlif & Mohsen Souissi, Ph.D.Hichem Khlif & Mohsen Souissi, Ph.D.
In this study, we test the relation between the cost of equity and disclosure of annual reports for a sample of eighty firms listed on the NYSE for 2006 fiscal year end. The results provide evidence that the relationship between these variables is not necessarily significant. The absence of non-financial disclosure is not always conducive to higher cost of equity. The accounting policy choices do not have a significant impact on the association between disclosure and cost of equity. We consider some empirical biases related to disclosure index and accounting policy index to explain this finding. Besides, the lack of significant impact of disclosure on the cost of equity is reflective of the strict disclosure environment in which U.S. firms operate.

Labor Force Growth and Long-Term Trends
By: Damir Tokic, Ph.D.
U.S. labor force had 1.59% annual growth rate from 1947 to 2007. During the same period, GDP grew at 3.38% annually and the stock market grew at around 7.8% a year. Current predictions are that the labor force growth will slow to around 0.6% a year to 2050. Will that translate into around 1.25% a year growth in the GDP and around 3% a year growth in the stock market until 2050?
The U.S. GDP has been in a clear uptrend from 1947-2007 with an annual growth rate at about 3.38% (Exhibit 1). There were only 10 recessions during the same period during which GDP slightly contracted. How can one explain the consistency and resiliency of the U.S. economy during the last 60 years? Is this growth trend likely to continue for the next 50-plus years?
GDP consists of consumer spending, business investment, government spending, and the net exports. Intuitively, aggregate consumer spending depends on the size of the labor force, the ability of consumer to spend and the desire/need of consumer to spend. The function of business investment is to supply the end consumer with goods and services needed for consumption. Therefore, business investment heavily depends on consumer spending. Theoretically, as long as the labor force grows and as long as new jobs are created, consumer spending is likely to grow, and thereby, GDP is likely to continue to grow as well. Consequently, the labor force growth appears to be is a key variable for future economic growth.

Understanding Customer Derivative Risk: A Case Analysis
By: Steven C. Isberg, Ph.D.
The recent chaotic collapse in the financial markets has in large part been attributed to derivative trading activity on the part of both financial and non-financial companies. Creditors are exposed to derivative risks to the degree that their customers are involved in that type of trading. While hedge trading can serve to reduce cash flow risk and therefore credit risk, speculative investing on the part of customers will lead to substantial increases in risk faced by unsecured creditors. This case analysis is designed to assist credit managers in understanding the nature and source of derivative trading risks and enable identification by analysis of customer operating and financial activity. In the short run, the presence of derivative risk presents a threat to customer and creditor corporate liquidity. In the long run, such risk may affect the viability of customer relationships and long-term sales prospects.

Volume 14, Number 4, Fourth Quarter 2008

Managing Receivables in the Digital Economy
By: Pete Lambert
Technology continues to revolutionize and diversify the ways in which we conduct business. Transactions are no longer limited to person-to-person exchanges, and we now have a multitude of options for the payment of goods or services. Technology has accelerated the evolution of the business cycle in a remarkable way, and as a result, the exchange of goods and services is faster and far more efficient.
This article will look at the way in which the business cycle has been transformed through technology, how the Internet has expanded business opportunities and how electronic bill presentment and payment technology has increased the efficiency of business transactions.

Upward Trending Days Payable Outstanding: A Cause for Pause?
By: Cecilia Wagner Ricci, Ph.D.
Financial theory states that an upward trending Days Payable Outstanding ratio is an indication of effective cash management because it means that a firm is holding on to its cash as long as possible. Yet some practitioners argue that an upward trend is evidence of cash flow difficulties. Utilizing the S&P 500 as the sample and the cash conversion efficiency ratio as a measure of cash flow, this research attempts to determine whether an upward trending Days Payable Outstanding ratio is an encouraging sign or a warning sign.

Economic Freedom and Equity Prices Among U.S. States
By: Robert A. Lawson, Ph.D. & Saurav Roychoudhury, Ph.D.
This paper examines stock market returns of firms located in various states of the United States in relation to the Economic Freedom of North America (EFNA) index. Using two different estimation methods, we find evidence that firms located primarily in states with increasing economic freedom experience higher stock market returns. However, consistent with the efficient markets hypothesis, we do not find evidence that this is useful as an investment strategy.

Hidden Debt: The Significance of Operating Leasing Over Time and its Effects on Perceived Debt to the Major U.S. Air Carriers
By: Richard Gritta, Ph.D., Ellen Lippman, Ph.D., Sveinn Gudmundsson, Ph.D.
Leasing has always been an important source of finance to the U.S. airline industry. In the 1960-1970s, many carriers employed a type of lease called a financial lease as an alternative source of funds to acquire aircraft. It had a major advantage. It was "off-the-balance sheet financing" since the obligations under this type of lease appeared only in the footnotes to carrier balance sheets. Little use was made of short-term lease agreement during this period. The situation has changed radically over the past three decades. In 1976, the AICPA issued FASB #13 defining specific criteria for financial leases and then required that this "off-the-balance sheet financing" be present directly as both a leasehold asset and a long-term liability to be recorded under the long-term debt section of the balance sheet of each airline. In response, the characteristics of leasing in this industry changed substantially in two ways. Carriers began to lease more and more of their aircraft, but they did so by utilizing a short term lease agreement called an operating lease. By strategically violating the criteria for a financing leases, they, once again pushed the leases off the balance sheet. The purpose of this research is to demonstrate the effect of leasing by quantifying the effects of such leases on air carrier debt burdens. In the process it will be argued that "debt is debt" no matter how it is structured. The paper updates two research studies by the authors (Gritta, 1974, Gritta and Lippman, 1994).

Volume 14, Number 3, Third Quarter 2008

Benefits of B2B E-Payments: (Finally) Leaving the Paper Check Behind
By: C. J. Wimley
Today, approximately 10 billion B2B transactions are processed in the US annually, at costs ranging from a high of $58.09 per transaction for inefficient organizations tied to paper checks, to a low of $1.50 per transaction for highly efficient organizations leveraging electronic payment processing, according to a 2007 report by the Aberdeen Group. With the average corporation processing 500,000 payments annually, the cost savings and efficiencies can have a dramatic impact to the bottom line.

Working Capital Management, Growth and Performance of New Public Companies
By: Nancy Beneda, Ph.D., C.P.A. & Yilei Zhang, Ph.D.
The current study contributes to the literature by examining impact of working capital management on the operating performance and growth of new public companies. The study also sheds light on the relationship of working capital with debt level, firm risk, and industry. Using a sample of initial public offerings (IPO's), the study finds a significant positive association between higher levels of accounts receivable and operating performance. The study further finds that maintaining control (i.e. lower amounts) over levels of cash and securities, inventory, fixed assets, and accounts payables appears to be associated with higher operating performance, as well. We find that IPO firms which are experiencing unusually high growth tend not to perform as well as those with low to moderate growth. Further firms which are experiencing high growth tend to hold higher levels of cash and securities, inventory, fixed assets, and accounts payables. These findings tend to suggest that firms are willing to sacrifice performance (accept low or negative operating returns) to increase their growth levels. The higher level of growth is also associated with higher operating and financial risk. The findings of this study suggest that perhaps IPO firms should stay more focused on their operating performance than on maintaining high growth levels.

Recent Issues in Trade Credit Practices: A European Overview
By: Ydriss Ziane, Ph.D.
This article addresses the practice of particularly long payment periods in European enterprises, as well as the importance of accounts receivable and accounts payable in their balance sheet. We propose to analyse the main characteristics of trade credit financing in order to understand the risks incurred and appreciate the validity of the means undertaken to fight against late payments.

GAAP/IFRS Hybrid on the Horizon
By: Tom Diana
The Securities and Exchange Commission recently announced a roadmap for the conversion of accounting principles used by public companies. Currently, public companies submit SEC filings under the accounting rules of GAAP, or Generally Accepted Accounting Principles. Under a proposed rule issued by the SEC on August 27, 2008, some large multinational companies would be allowed to report earnings according to international accounting standards beginning in 2010. This accounting change, if adopted, would initially affect, in 2010, about 110 companies based on their market capitalizations.

The international accounting standards are known as International Financial Reporting Standards or IFRS. In this CRF article entitled, "GAAP/IFRS Hybrid on the Horizon" just exactly what is IFRS and how it differs from GAAP is outlined along with, among other issues, the advantages and challenges in switching accounting systems from GAAP to IFRS. The article also offers some good advice on what companies should do to prepare for the transition from GAAP to IFRS.

Volume 14, Number 2, Second Quarter 2008

A Credit and Collection Newsletter
By: Mike Hourston
Creating an organizational newsletter is not a unique exercise, and by now very few individuals look forward to receiving another piece of unsolicited electronic mail. But, written and targeted correctly a Credit and Collection Newsletter can be a very effective and productive tool for a credit department.
A newsletter can benefit the credit department in the following areas:

Allows the credit department to play a more active and direct role in shaping its message throughout the organization.

Helps improve working relationships with and support from those individuals, both inside and outside the credit department, who have been targeted to receive the newsletter.

Promotes greater focus in those critical areas chosen for discussion within the newsletter.

Routine delivery of a well-polished newsletter will convey a greater sense of professionalism, which will improve the credit department's image and credibility.

All of the above combine to help produce improved financial results in your key metric areas (DSO, Days Past Due, etc.)
There is little downside cost other than the small amount of time invested in preparing the newsletter. Overall, a price well worth paying when weighed against the potential benefits.

If your credit and collection department is willing to explore the idea of introducing a C & C Newsletter within your organization, then begin by detailing What should be in the Newsletter and Who should be included in its targeted audience. After these questions have been carefully explored and answered, the next steps will be administrative in nature, basically deciding How and When the Newsletter should be distributed.

Liquidity, Monetary Policy, and Financial Cycles
By: Tobias Adrian and Hyun Song Shin
A close look at how financial intermediaries manage their balance sheets suggests that these institutions raise their leverage during asset price booms and lower it during downturns-pro-cyclical actions that tend to exaggerate the fluctuations of the financial cycle. The authors of this study argue that the growth rate of aggregate balance sheets may be the most fitting measure of liquidity in a market-based financial system. Moreover, the authors show a strong correlation between balance sheet growth and the easing and tightening of monetary policy.

In recent years, financial commentators have linked stock market bubbles and housing price booms to excess liquidity in the financial system and an expansive monetary policy. However, in making these connections, the commentators often rely heavily on metaphors: "Holding interest rates too low for too long creates excess liquidity, which is now more likely to spill into the prices of homes, shares, or other assets." Or "the flood of global liquidity . . . has inflated a series of asset-price bubbles." While figurative statements of this kind may be rhetorically effective, they tend to be quite imprecise, providing little insight into the economic mechanisms underlying the linkages they describe.

In this article, we seek to clarify the economic relationships that exist between financial market liquidity, monetary policy, and credit cycles. Our approach is to examine how financial intermediaries react to the changes in their balance sheets that result either from market price fluctuations or from the decisions of others to increase or curtail lending and borrowing. We focus in particular on how banks adjust their leverage-defined here as the ratio of total assets to equity (net worth)-in response to a rise or fall in the value of their balance sheet assets. Our empirical evidence suggests that banks are very aware of changes in asset value and the attendant effects on their overall leverage, and that they manage their leverage actively. More specifically, we find that institutions increase their leverage during booms and reduce it during downturns. Thus, contrary to common assumptions, financial institution leverage is pro-cyclical; the expansion and contraction of balance sheets amplifies, rather than counteracts, the credit cycle. A closer look at the fluctuations in balance sheets reveals that the chief tool used by institutions to adjust their leverage is collateralized borrowing and lending-in particular, repurchase agreements (repos) and reverse repurchase agreements (reverse repos), transactions in which the borrower of funds provides securities as collateral.

In line with our focus on balance sheet management, we present a new definition of liquidity as the growth rate of financial intermediaries' balance sheets. We then document how monetary policy affects overall liquidity conditions. When monetary policy is "loose" relative to macroeconomic fundamentals, financial institutions expand their balance sheets through collateralized borrowing; as a consequence, the supply of liquidity increases. Conversely, when monetary policy is "tight," institutions shrink their balance sheets, reducing the stock of repos and the overall supply of liquidity.

Our findings suggest a need to rehabilitate balance sheet quantities as a relevant measure in the conduct of monetary policy, but with one twist. Rather than reaffirming the conventional monetarist identification of the money stock as an indicator of liquidity, our analysis assigns this role to the stock of collateralized borrowing.

Debt Level of New Public Companies: The Prediction of Firm Distress
By: Nancy Beneda, Ph.D., C.P.A.
A wide range of literature has found that new debt is often associated with increased firm value due to its tax benefits and signaling effect, At the same time, however, the literature also finds that unusually high debt level is associated with a higher incidence of firm distress and bankruptcy. The current study contributes to this literature by examining the impact of debt level and other accounting measures of firm distress on the performance of new public companies, Using a sample of initial public offerings (IPOs), the study finds that for the first two years after going public, debt level for these firms is positively associated with a lower incidence of firm distress, lower volatility of stock returns, and higher subsequent growth, However, in the third and fourth years after going public, debt level is associated with lower a higher incidence of firm distress and higher return volatility, These findings suggest that bank debt acts as a positive signal of firm quality in the presence of asymmetric information among new public companies, and is associated with lower return volatility, As firms become more mature, with increasing analysts' followings long-term bonds may be issued in place of debt. At this time debt level may no longer serve as a validation or an indicator of higher performance, Firm distress in this study is defined as a point in time when the firm's stock loses ninety percent or more of its initial after-market value, after going public, without subsequent recovery. The findings of this study would be interesting to investors and creditors of new public companies.

On the Application of Predictive Models to Risk-Based Collections
By: Albert Fensterstock
The subject of risk-based collections is for the credit industry a relatively hot topic. Reduction of personnel and the need to do more with less has credit and collection managers scratching their heads as to how to become more productive with fewer resources. Essentially, they need to answer the question, how do I allocate the personnel management has left me with in such a manner that I meet their expectations (even if I think they may be unrealistic) in light of today's credit crunch and the propensity of debtors to pay slower and not necessarily all they owe?

An article in The Credit and Financial Management Review - First Quarter 2008 by Robin Walker titled Risk Based Collections: Using Credit Information in the Collection Process approached the problem through the use of both internal and external (commercial bureau) data and essentially judgment/rules-based models to drive the allocation process. This is a very good way to begin if you don't have now and have no intention in the future of using statistical-based predictive models to assess credit risk.

However, if you are open to using predictive models to assess credit risk you may be able to save the cost of external data and get better results. We make this statement based on having found that using statistical-based predictive models, developed from a company's own internal data, for evaluating exiting customers will produce a superior measure of risk when compared to judgmental models infused with commercial bureau data.

One operation that saw he light early on is the IRS. The collection strategy of using statistical-based predictive models was implemented in January 2003 for the following Small Business/Self-Employed tax returns: 1040 Individual Income Tax; 1120 Corporate Income Tax; 941 Employer's Employment Return and 940 Employer's FUTA Return.

Volume 14, Number 1, First Quarter 2008

How Collections Outsourcing Can Help Credit Managers Improve Overall Business Performance and Increase Their Value to the Organization: Partial Sourcing Alternative Offers Benefits and Mitigates Risks
By: Loral Narayanan
It's no longer business as usual for credit managers. While many credit professionals struggle under the weight of increased scrutiny, expanded responsibilities, and static resources, increased emphasis is being placed on their ability to contribute to the success of their organizations. Once responsible primarily for credit decisions and collections, the credit manager's role has expanded to include functions such as contract compliance and customer service. Corporate emphasis on cash and working capital management has also resulted in the need for credit departments to become more proactive and focused on cost containment.

The changing landscape of the credit management function offers tremendous opportunities for personal growth in terms of increased influence and respect within the organization. But as the paradigm shifts, and the role of credit managers expands, those that continue to rely on doings things "the way they've always been done" are setting themselves up for failure.

Bogged down with daily operations and growing responsibilities, how can credit professionals make the changes necessary to improve overall business performance, contribute to their firm's bottom line, and ensure their value to the organization? And can it be done short of a complete overhaul of the entire revenue cycle management system?

According to a survey by the Credit Research Foundation, making ongoing, incremental process improvements may hold the answer:

For the majority of companies, receivable portfolio [credit] managers are saddled with the responsibility of managing the firm's single largest asset. The opportunity to add worth through continuous incremental improvement to the receivable management process has the potential of becoming a key factor in contributing to enhancement of the firm's economic value.

The premise of this paper is that receivables collection outsourcing makes available incremental improvements in systems and processes that can have significant impact throughout the revenue cycle and on an organization's bottom line. And, that many of the risks associated with outsourcing can be mitigated by implementing a partial outsourcing versus a full-blown BPO (business process outsourcing) initiative.

Calculating the ROI for the Implementation of a Statistical-Based Credit Scoring Model
By Albert Fensterstock
Statistical-based credit scoring (SBCS) has been proven time and again to be one of the better methods for evaluating the credit carrying capability of existing customers. It can be shown that by implementing such models and then utilizing the information produced, a company can significantly improve the productivity of its credit and collection operations through more efficient use of personnel in these areas. A critical difference between judgmental/rules-based credit scoring and SBCS is the ability of SBCS systems to quantify risk and provide a probability measure of the risk inherent in an account and, thereby, an estimate of the likelihood that the account will not pay on a timely basis. For those interested in a detailed presentation on this subject, we recommend: Thomas, Edelman, and Crook, Credit Scoring and Its Applications, SIAM, 2002.

SBCS systems are widely accepted in both the business to business (B2B) and business to consumer (B2C) financial industries where you would be hard pressed to find any serious lender that does not use this technology to evaluate the bulk of their loan and leasing business. This technology, however, has not been widely implemented in the commercial B2B world. As such, in these companies, SBCS implementations must be cost justified to financial personnel prior to a company being willing to implement this technology. One approach used to evaluate this type of investment is a Return on Investment (ROI) Analysis where certain operational factors that need to be understood and considered are quantified as part of the analysis to justify the implementation of a SBCS system.

Risk Based Collections Using Credit Information in the Collections Process
By: Robin Walker
ERP software is now predominant in most medium and large businesses. Until relatively recently, this type of software has predominantly existed to manage core processes where efficiencies can be gained by standardization, and decisions can easily be made based on data existing in the system. Due to the diversity of processes required to manage a business, and the need to make rapid decisions in all areas of the enterprise, software has become available to cater to many of the processes unavailable in the ERP Systems.

However, with the maturity of core processes within ERP applications, vendors have started to focus on more complex processes, especially with the advent of better technology, both in hardware and software. Credit and collections processes, traditionally handled manually, or with the use of products bolted on to ERP applications are now being incorporated in, with the result of attaining best practices including risk based collections.

Trade Credit Insurance: Multi-purpose Solution for Capturing Opportunity and Transferring Risk
By: Brett Halsey
Trade credit insurance is growing at a rapid pace as U.S. credit executives are becoming more knowledgeable about using this highly specialized coverage to reduce risks associated with domestic, export and international sales growth. Over the course of the last several years, the use of credit insurance has grown to about 18% of U.S. exports while the use of less-efficient credit methods, specifically letters of credit, has diminished to about 7 percent. The trade credit insurance market has grown to approximately $550 million in annual premiums, and the cost of this protection in the U.S. has gone down measurably compared to just a few years ago.

The coverage serves as a strategic management tool by protecting policyholders from commercial accounts receivable losses following a customer's bankruptcy or payment default, or events in overseas markets such as political turmoil or import and trade restrictions. Policies can be designed to cover domestic receivables, export receivables or both.

Businesses are now making use of trade credit insurance to reduce debt concentration risk, obtain better financing terms and strengthen global credit management procedures. Trade credit insurance also helps policyholders compete more effectively. Credit terms offered to customers have become an important component of competitive strategy. Credit insurance allows policyholders to gain competitive advantages through extended open terms, aggressive credit limit values and expansion into emerging markets.

Volume 13, Number 4, Fourth Quarter 2007

The Economic Outlook for 2008 - Driven by Credit Conditions
By: Dr. Joseph W. Duncan
This review of the U.S. economic outlook is written in November 2007 - an unusual period due to the sub-prime mortgage crisis and the ongoing evolution of proposed changes in housing policy and regulation by the banking system, the Federal Reserve Board, the President and the Congress. The outcomes of these deliberations will certainly be key factors in shaping the economic conditions for 2008. The purpose of this article is to put that important policy process in context and to consider the elements that will be important in the months ahead.

In the next few pages I will review the history of the housing bubble, review some basic features of the current housing market, examine the role of housing in the overall financial and economic environment, and then present a likely pattern for economic events we forecast for 2008.

Are State Preference Laws Preempted by the United States Bankruptcy Code? Not Necessarily!
By: Bruce S. Nathan & Scott Cargill
For decades, there has been scant legal discussion about the coexistence of the federal bankruptcy and state insolvency systems as independent options for a financially distressed debtor to liquidate its assets. Chapter 7 of the Bankruptcy Code provides a very developed framework for the liquidation of a debtor's assets, the priority rules governing the payment of creditors' claims, and a bankruptcy trustee's right to recover avoidable transfers, such as preferences. However, for most of this country's history, long before passage of the Bankruptcy Code nearly 30 years ago, the states have recognized the common law right of a debtor to make an assignment for the benefit of creditors (an "ABC"). States have varying laws that govern the operation of abcs, including the right of an ABC fiduciary to recover preferential transfers.

Until January 2005, the prevailing view was that, with limited exceptions, the state law ABC process and the Bankruptcy Code existed without conflict. That is why the decision of the United States Court of Appeals for the Ninth Circuit, in Sherwood Partners Inc. V. Lycos Inc., caught many by surprise. The Ninth Circuit held that the Bankruptcy Code preempted the provisions of the California ABC law relating to preference claims. The implications of the Sherwood Partners decision are wide ranging, putting into question the long standing assumption about the coexistence of the preference provisions of ABC laws and the Bankruptcy Code. Further exploring these preemption issues, in June 2007, the United States District Court for the Western District of Wisconsin, in Ready Fixtures Co. V. Stevens Cabinets, denied the creditor's motion to dismiss a preference action under Wisconsin's ABC statute. The court declined to follow the Ninth Circuit's decision in Sherwood Partners and held that the Bankruptcy Code does not preempt the preference provisions of Wisconsin's ABC statute. These, and other conflicting opinions, have the potential for causing confusion in the area of ABC law and the defenses an ABC preference defendant can assert in different jurisdictions.

A Bankruptcy Preference Action: The Ultimate Slap in the Face for a Job Well Done
By: H.A. (Hal) Schaeffer Jr., C.C.E., C.E.W
On October 17, 2005 after much chest beating and soul searching Congress passed and the President signed into law the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" (BAPCPA). With this law's passing, changes have occurred that directly impact many aspects of how a vendor deals with a bankrupt customer. I will only cover the aspects related to preferences in this article but I highly recommend contacting your favorite counsel to determine the full effects this law will have on the way that your firm does business in a bankruptcy situation.

Conquering the Challenge of Overridden Credit Decisions
By: Susan M. Archibeque, CCE
1st Place - 2007 CRF Writing Works Competition
The following article was submitted as an entrant to the 2007 CRF Writing Works competition. After reviewing a number of submissions this article was selected by the editorial review board as this year's winner. CRF would like to congratulate Susan Archibeque for her winning submission and thank all of those who participated in this program.

Abstract:
Throughout my 30 years in credit management one of the common complaints I hear from fellow credit executives is the frustration with higher level management overriding their credit decisions. The questionable account may be a friend of the boss, or an account that the company has targeted to sell, and the decision to extend terms, against the advice of the credit professional, puts the company in jeopardy of high debt write-off. When this happens it leaves the credit executive feeling under valued, and once the decision is made without their buy-in the blame game starts. In addition, it reflects on the credit professional's performance and may jeopardize possible bonus compensation.

This article reflects on how the author dealt with this common scenario.

Volume 13, Number 3, Third Quarter 2007

Emerging Trends in Receivables and Collection Management Automation
By: David Schmidt
The emphasis on corporate cost containment and productivity enhancement during the past decade has prompted credit and collection professionals to seek new ways to automate traditionally paper-based, labor-intensive receivable management processes. Increasing interest by C-level executives in working capital optimization through the automation of financial supply chain management (FSCM) has added fuel to the fire. The need to document and secure the intrinsic risks associated with the extension of trade credit within the protocols set forth by the Sarbanes-Oxley Act of 2002 (SOX) has provided additional impetus.

Paystream research indicates that businesses are turning to Receivables and Collections Management (RCM) solutions that streamline the order-to-cash cycle to meet these new requirements for efficiency and control. Consider the results of our Financial Automation Survey of Fortune 1000 finance, treasury and accounting professionals:

More than half (55 percent) of respondents indicated that compliance tools would be critical to their financial supply chain automation strategies over the ensuing 18 months.
More than one third (34 percent) of respondents were already using collections management solution, while another 24 percent were either deploying or planning to implement one during the coming year.

Using All of Your "Tricks" to be Paid Now, and In Full, When Your Customer Files Bankruptcy
By: Scott Blakeley & Robert Meza
We hate delay. As the credit department continues to go electronic resulting in instant access to evaluate credit risk, as the pressure from customers and the sales force to make prompt credit decisions continues to accelerate with constant emails (all about customer service), and as the credit professional repeatedly prompt customers to honor payment terms, the credit professional is tested daily with the fast pace in the credit department in the Internet era. However, if a customer files Chapter 11 Bankruptcy, the fast pace of prolonged, uncertain payment setting when a customer files, and find a way of attempting to collect the account must be abandoned because of the automatic stay.

One of the noted effects of a Chapter 11 is that vendors suffer long delays before receiving payment on their prepetition unsecured claims, and often receive but a fraction of what they are owed. Indeed, it is common for vendors to be paid with the reorganized debtor's stock for those debtors that exist as a going concern. Does a vendor have any "tricks" that may get them out of this attempting paid today, and in full. CCI, a trade vendor, that commonly sells on credit terms, was recently hit with two significant customers that filed Chapter 11 within days of one another. In this article, we share "tricks" that resulted in being promptly paid in full in both bankruptcies

The Limits of Banking Performance
By: Peter L. Lohrey, Ph.D., John macdonald, Ph.D., David G. Meyer, Ph.D., Bradley A. Stevenson, Ph.D.
An earlier study of banking performance (Meyer and Lohrey, 2006) showed that improved explanation of performance occurred when net interest margin was transformed and the log of leverage were used, along with non-performing loan percentages, when compared with the linear forms. There were two concerns expressed in that study: The data were more than 10 years old, and the data were drawn from a self-reported sample, which may have been biased. The present study addresses these concerns. Data from 2004-2006 for all of the top 1000 banks in the US are used. The results, as anticipated, show that banks adjusted their operations in the intervening time to improve their performance: non-performing loan percentages were reduced and are closer to zero, net interest margins have tightened considerably, and movement to one standard deviation above the mean is now not associated with improved performance, and though volatile liabilities (leverage) are at about the same level, using a log transformation is not associated with improved explanatory power when compared with the linear form.

Driving Internal Collection Results with Statistical-Based Credit Scoring
By: Sam Fensterstock
How Using Statistical-Based Credit Scoring for the Development of Risk-Based Collection Strategies Can Improve DSO, Reduce Write-offs and Drive Profits

During the past decade, credit scoring has become one of the most powerful tools available for automating the risk analysis necessary for evaluating the collectability of a company's accounts receivable portfolio. One of the reasons for this is rapid technological advancement and the tremendous amount of downsizing that has occurred in corporate America, thereby requiring Credit & Collections departments to do more with less, to do it quicker and make better decisions in the process.

The largest asset on most companies' balance sheets is their accounts receivable and the goal of the Credit & Collections department is to manage this asset through the proper evaluation of customer risk and the timely collection of outstanding invoices.

Efficient collections ensure ongoing cash flow streams that meet a company's financial objectives including reduction of Days Sales Outstanding (DSO), Bad Debts and Write-Off's. To achieve these goals, many companies have implemented strategic plans that combine workflow automation technology with statistical-based credit scoring using the company's internal AR data as the critical risk evaluation factor, thereby allowing departmental labor to more efficiently manage inherent customer risk, internal resources and improve the performance of the receivables portfolio. We call this the Methodology of Statistical Risk Based Collections.

Volume 13, Number 2, Second Quarter 2007

Controlling Your Destiny--Protecting Your Interests from Demanding Debtors
By: Schuyler G. Carroll & Jeffrey N. Rothleder
It has become common for chapter 11 debtors to demand that creditors continue to supply them with goods on agreed upon credit terms after the filing of their bankruptcy cases. This demand places a creditor in a precarious position because the debtor can usually provide no significant assurance that it will be able to pay for the goods. Indeed, creditors are often left with substantial administrative claims that are either not satisfied or are satisfied only upon the effectuation of a plan of reorganization, which can be months if not years after the goods are shipped. Congress attempted to rectify this troubling situation in the 2005 amendments to the Bankruptcy Code; however, courts interpreting the added section 503(b)(9) have decided that creditors must still wait for payment through a plan of reorganization because Congress did not provide a deadline by which a debtor must satisfy this allowed administrative claim. Thus, creditors face the dilemma - do they succumb to the debtor's demand and risk receiving no payment or significantly delayed payment or do they sever the relationship. Of course, severing the relationship may not be so simple either as debtors may threaten to sue for breach of contract or for violation of the automatic stay. This article, through the hypothetical situation below, provides the credit professional with an understanding of the issues involved and potential strategies for dealing with demanding debtors.

A Method for Optimal Collection Strategies
By: Albert Fensterstock
Collection managers have an ongoing problem with their company's customers, namely collecting the money due as efficiently as possible. With the majority of their customers this is not a problem. Most pay on a reasonably timely basis, and if they are having a cash flow problem they let you know and work out an acceptable way of getting you your money. Then there are your other customers, the ones that make a collection manager's job interesting.

In a previous article, Game Theory and the Credit Manager's Dilemma published by The Credit and Financial Management Review - Fourth Quarter 1998, we stated the following:

Consider the fact that when a debtor is short of the funds necessary to pay its bills, on a timely basis, it must implement some type of strategy that holds its creditors at bay, and yet manage to get these creditors to continue to provide the goods and services the debtor needs to stay in business. If the debtor receives merchandise and does not pay for the shipment, its gain is the creditor's loss, essentially a zero-sum game. As the credit manager, you become aware of the debtor's predicament and must decide how to deal with the situation. In real life, there are probably many customers you are doing business with in this situation right now, and based on von Neumann's findings, we can state that it is possible for you to determine an optimal strategy for dealing with this class of customer that will produce the best possible results for your company, regardless of what they do. The question is - how does one develop such a strategy? The approach is straightforward, but requires some research. And, remember to take into consideration one of our findings when you try to work out your best strategy. Specifically, exploit your opponent's (the debtor) weakness, but do not behave predictably yourself. The necessary process to be followed will be described in our next article on this subject.

Cheaper, Smarter, Faster : Benefits to Analysts from XBRL
By: Christian Dreyer, CFA & Mike Willis
XBRL (extensible Business Reporting Language), like other fancy tech-acronyms, tends to remind some of the great expectations that bubble-era internet technologies used to instill without actually delivering. In this article Christian Dreyer, CFA and Mike Willis explain the benefits of a new system for handling company information. They provide an overview of XBRL and discuss real economic benefits from XBRL adoption accruing to the investment community as well as to their invested companies.

The Correlation of Credit Standards to Profits as Measured by Four Balance Sheet Ratios and One Cash Flow Ratio
By: John Bassford
Businesses have long understood the importance of effective asset management in achieving profits, indeed, profits are derived from assets. Less clear, however, is the role of credit management and, most importantly, credit standards in strengthening the asset management capabilities, growth potential and overall profitability of a business. This article will define and discuss credit standards and then reveal the results of research conducted in 2004 on 1,375 publicly-traded companies with a market capitalization of $100 million or more for the purpose of gauging credit standards, ascertaining key benchmarks and assessing the relationship with profitability. The research shows a compelling connection between credit standards and profits

Volume 13, Number 1, First Quarter 2007

Credit Management and Cash Collections and Disbursements
By: William B. Joyce, Ph.D.
Many purchases are still paid for by check. Checks create float, and float needs to be managed. Credit managers seek to speed up collections while also controlling the disbursements of their own firms. Credit managers need to understand electronic funds transfers and international cash management. While electronic funds transfers are still relatively few in number, but they are increasingly substantially in terms of value transferred. Finally, international cash management may play an increasingly important role for credit managers as more firms compete on an international basis.

CRF Bad Debt Recovery Survey Analysis
By: Al Carmenini
Ultimate collection and the charging off of an account to bad debts are the two ways in which a customer may be liquidated from a company's receivables. The percentage of sales eventually charged off to bad debts has been a misunderstood and often misused measure of the effectiveness of credit and collection. A record of bad debt losses should be maintained by every business, but it is dangerous to let this become the sole criterion of how good a job has been done.

The Impact of Business Process Reengineering on Staff and Management Positions: Is Credit Getting Its Due?
By: Steven C. Isberg, Ph.D.
Business process reengineering over the past decade has been led by a transformation from manual methods to the use of automated systems to process transactions and make basic decisions within the credit and A/R management functions. This has had an impact on the market for human resources in the field. Evidence indicates that compensation of credit and A/R employees may not have kept pace with the overall national averages over that same period of time. Part of this may be due to the fact that the increasing use of automation has reduced the value, and hence the compensation, of employees engaged in manual processing. Compensation in credit and A/R management is, however, related to the size of the employer. Larger companies, who have led the transformation to the use of automated systems, generally require higher degree qualifications and offer greater compensation to their employees. Smaller companies, who are more likely to use manual systems, tend to require fewer degree qualifications and offer lower compensation to their employees.

Reclamation Rights in Bankruptcy What Every Credit Manager Needs to Know
By: Schuyler G. Carroll, Esq. & George Angelich, Esq.
Vendors of goods regularly extend business credit to customers. However, when a customer becomes a chapter 11 debtor, it is up to the credit manager to assess options, reduce risk and improve the chances of getting paid. One of the tools available to credit managers is the right to "reclaim" goods shipped to a customer in financial distress.

Chapter 11 debtors present credit managers with a unique problem: how do you receive payment for pre-petition claims without violating the Bankruptcy Code? Reclamation is an important tool to assist vendors in getting their pre-petition claims paid. The commonly understood definition of reclamation is that it is a way for vendors to retrieve their goods or otherwise stop delivery. Its benefit is limited, however, as we will discuss in this article.

For bankruptcy cases filed after October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "2005 Amendments") changed the law of reclamation and strengthened creditors' rights. Vendors now have greater tools available than ever before with fewer hoops to jump through.

State law provides vendors a right of reclamation, but once a customer files for bankruptcy, vendors must look to their rights under the United States Bankruptcy Code. The Bankruptcy Code grants vendors the right to reclaim products that are delivered to a chapter 11 debtor within a specified timeframe. Trade creditors may be entitled to reclaim the actual goods or the value of those goods.

This article provides an overview of an evolving area of bankruptcy law in order to equip credit managers with the tools for maximizing the opportunity to get paid from a chapter 11 debtor.

Volume 12, Number 4, Fourth Quarter 2006

Job Analysis and Compensation Modeling for Credit Staff and Mid-level Management: A Pilot Study
By: Steven C. Isberg, Ph.D.
Who works for me? What do they do? How should I decide how much to pay them? These are questions that credit executives increasingly struggle with as they deal with operational changes driven by the development and implementation of automated systems for data management, transaction processing and the application of sophisticated credit management tools such as credit scoring models. In addition, pressure to reduce operating expenses and improve profitability in an increasingly competitive global environment has led to the regular practice of reducing headcount, especially at corporate operating levels. This has led to greater centralization and the development of shared service centers designed to perform transactions and functions that tend to be common across different divisions within a larger business entity.

Industry Ratio Analysis and the Commercial Loan Review Process
By: Nancy Beneda, Ph.D., C.P.A.
This paper examines the use of financial statement industry ratio analysis by businesses from the perspective of commercial lenders. The findings of this paper suggest that commercial lenders consider industry ratio analysis an important component of cash flow projections and of the commercial loan application package. The study also indicates that commercial lenders often consider the use of industry ratio analysis to be critical with regard to the potential success of the business. Twenty-five individual commercial lenders were interviewed and asked questions regarding the importance of industry ratio analysis as part of the commercial loan application for expansion and start-up businesses. These commercial lenders were selected on the basis of their association with eighteen banking institutions with business loan portfolios in excess of $100 million and all were located in various cities in the state of North Dakota.

The Determinants of Delinquency Rate on Commercial Banks Mortgage and Credit Card Debts Outstanding: Empirical Evidence from 1991-2004 Quarterly Data
By: Macki Sissoko, Ph.D.
Commercial banks contribute significantly to the growth of the U.S. economy by responding to the demand for capital investment, mortgage loans, and credit card expenditures on durables and non durable goods and services. Their financial viability is, in part, influenced by the delinquencies on mortgage debt and credit card debt payments associated with the rising level of indebtedness facing the household and the business sectors. This paper examines the determinants of delinquency rate on credit card debt and mortgage debt payments the commercial banking industry experienced during the 1991-2004 period. Ordinary least square methods and cointegration tests were used to analyze the relationship between the delinquency rate on mortgage payments, on the one hand, and the delinquency rate on credit card payments, on the other, and their respective independent variables. Results showed that the unemployment rate is positively related to delinquency rate on credit card payments and negatively related to delinquency rate on mortgage payment. The gross domestic investment used as a proxy for capital is negatively and significantly associated with mortgage delinquency rate. The delinquency rates on mortgage and credit card payments were both positively and significantly related to the interest rates. Home ownership rate was positively and significantly correlated to the delinquency rate on mortgage payment; and credit card supply rate was positively, but not significantly related to the delinquency rate on credit card payments. Other determining factors with positive and statistically significant coefficients include: debt as a percentage of disposable personal income and the delinquency rate lagged one period. These findings have some macroeconomic policy as well as financial management strategy decisions implications.

Setoff and Recoupment in Bankruptcy A Primer for Credit Managers
By: Schuyler G. Carroll and Jeffrey D. Vanacore
Today's credit manager is under more pressure than ever. Accounting wants to know why bad debt expense is so high, while sales is calling to find out why their largest prospective customer in years was turned down for financing. Sometimes it feels like no one is happy with the news coming out of your department.

Add to a credit manager's woes a customer's bankruptcy filing and it may seem time to rethink your career choice. Unfortunately, in today's economic climate, bankruptcies are a part of doing business. And although a customer's bankruptcy filing generally means a credit grantor will suffer some loss, often there are ways to mitigate those losses, both prior and subsequent to the filing of a bankruptcy petition.

In this article we explore two tools that can assist with minimizing losses, the legal doctrine of setoff and the equitable remedy of recoupment. Our goal in this article is to provide you with the tools and legal framework to minimize your company's losses by strategically evaluating a customer's bankruptcy filing and identifying potential sources of recovery using setoff and recoupment.

Collection Software Build, Buy or Borrow?
By: Mark Vengroff
Most would agree that automating manual processes via collections software is a prudent business decision. In fact, according to a recent survey conducted by Aceva Technologies, the use of an effective collection software tool will reduce manual processes by an average of 11%, lowering overall collection recovery costs by 23%.

With the need to use collection software to increase efficiency and lower costs, the question now remains, which model is right for your company - build, buy or borrow? The following will explore the advantages and disadvantages of each option:

Build - In-house development and designed collection software applications

Buy - Lease or purchase a collection software tool from a software vendor

Borrow - Use the collection software tools provided by an outsourcing vendor

Volume 12, Number 3, Third Quarter 2006

Immunizing Payments from Payment Risk: The Credit Card Defense?
By: Scott Blakeley, Esq.
The credit executive is well aware of the skill needed to collect on a delinquent account, yet maintain the trade credit relationship, if management is concerned about possibly losing the customer to a competitor. With new orders, the credit executive's job is to ensure that the debtor pays close to the invoice due date. However, should the customer face a cash crisis, they likely do not have sufficient liquid assets to pay the vendor's invoice. Given this, the credit executive may look to alternative payment methods. The credit executive, in implementing a strategy to collect the delinquent account, may need to balance ways to minimize the risk of a bankruptcy preference suit (or strengthen defenses) should the customer later file bankruptcy within 90 days of receiving payment. Payment by credit card may be the answer. But what of the preference risk, should the vendor receive payment by credit card during the preference period?

A Review of Air Carrier Bankruptcy Forecasting Methodologies and Directions for Future Research
By: Richard D. Gritta, Ph.D., Bahram Adrangi, Ph.D., Sergio Davalos, Ph.D. & Don Bright
Airline bankruptcy has become an everyday event in the year 2006. Braniff was the first major carrier to fail way back in 1982. It was followed shortly by the receivership of Continental the next year. It seems to have reached its peak the past several years with UAL, US Airways, Delta and Northwest seeking court protection. Obviously, methods that could predict insolvency, or at least gauge relative financial condition, are important.

This paper will present many models that have been employed in this task. Some are discriminant models, some are neural networks, and some take the form of logit regressions. Covered are such models are the Altman Z Score (and one of its derivatives, the Z"), the Altman Zeta model, the Airscore Model, several NNs built on air carrier data, the Pilarski P-Score, genetic algorithms, the Gudmundsson model (which incorporates some management variables in the analysis), and a "fuzzy logic" model. Finally, directions for future research will be discussed briefly.

A Review of Air Carrier Bankruptcy Forecasting Methodologies and Directions for Future Research
By: Damir Tokic, Ph.D.
This article presents arguments over whether China is an opportunity or a threat to the U.S. economy. The discussion leads to the conclusion that China can be both, a strong opportunity and a serious threat. Therefore, it is important to implement a China policy that would maximize the opportunities in China and minimize threats coming from China.

In an effort to forecast the future course of the U.S. economy we constructed a simple SWOT matrix (see Appendix at the end of the article), matching the U.S. economy's internal strengths and weaknesses with its' external opportunities and threats. As expected, the majority of external entries (opportunities and threats) were either directly or indirectly related to emerging economies of China and India. This paper discusses these opportunities and threats and analyses their relative importance to the U.S. economy.

Exploring Banking Performance: Where are the Limits?
By: David G. Meyer, Ph.D & Peter L. Lohrey, Ph.D.
The relationships between non-performing loan percentage, net interest margin, leverage and the ROE and ROA of 284 banks are explored. Using ten-year averages (1983 - 1992), the non-linear complex performance relationships are explored and specified, resulting in higher explanatory power than using linear estimations. Resulting R2's are .497 for ROE and .644 for ROA. For these data, during this time, in order to maximize performance, non-performing loans should be reduced to the lowest limit and net interest margin should be targeted at one standard deviation higher than the mean of all banks.

Volume 12, Number 2, Second Quarter 2006

Trade Credit Insurance:
Multi-purpose Solution for Capturing Opportunity and Transferring Risk
By: Scott Pales
Trade credit insurance is growing at a rapid pace as U.S. credit executives are becoming more knowledgeable about using this highly specialized coverage to reduce risks associated with domestic, export and international sales growth. During the last several years, spending on credit insurance by U.S.-based companies has increased between 10 to 15 percent per year. The market has grown to approximately $550 million in annual premiums, and the cost of this protection in the U.S. has declined measurably compared to just a few years ago.

The coverage serves as a strategic management tool by protecting policyholders from commercial accounts receivable losses following a customer's bankruptcy or payment default, or events in overseas markets such as political turmoil or import and trade restrictions. Policies can be designed to cover domestic receivables, export receivables, or both.

Accounting and Regulatory Issues of Trade Deductions
By: Richard D. Hastings, CCE
Trade is imperfect. Trade deductions define some of the imperfection, and they are, to a degree, inevitable. However, recent developments suggest that the long period of problematic trade deduction resolution and accounting breakdowns that characterized the period of approximately 1985 to 2004 is nearing some form of conclusion.

This does not indicate that trade deductions will no longer occur, as data and execution errors will persist. Yet recent evidence suggests that the severity of operational, accounting, and compliance issues faced when trying to identify and resolve trade deductions, have contributed to a body of knowledge regarding practices and patterns of behavior in mercantile trade that today allow regulators and practitioners to prevent many of the negative outcomes that previously plagued mercantile trade.

At the heart of this discussion is the thesis that the rise of intangibles-of marketing related expenses-and the concurrent decline in the value of goods (tangibles), may have led to the critical breakdown in deduction accounting practices seen in the years prior to approximately 2003-2004. Sine that time, evidence suggests that a conclusion of sorts has been obtained resulting from: 1) advances in software capability to retain and share documents in a transorganizational basis; 2) substantially instructive examples of improperly and/or poorly managed trade situations in major public company scandals; and 3), better efforts at the FASB to provide better guidance to practitioners.

Including major litigation events, there have occurred approximately 18 major regulatory events in the five years between 1999 and 2005. These represent a sufficient level of awareness and of regulatory guidance that should significantly reduce future outbreaks of business failures and investor-creditor losses resulting from irregular trade deduction issues.

Leaders of the Pack: Practices That Streamline Financial Processes
By: Lisa Higgins
Consultants talk perpetually about best practices. For managers listening to them, the obvious response is to ask, "But what is the business value of these practices?" It's not logical to undertake a major software upgrade or process reengineering project if you're not confident that you'll achieve tangible returns from your investment. So the APQC, an independent nonprofit dedicated to corporate performance benchmarking, conducted a survey with the help of IBM and Business Finance to find out whether today's most popular business performance management (BPM) "best practices" are yielding results.

Utilizing Dashboards for Performance Management
By: Jennifer Cannell
Many companies have set up Key Performance Indicators but face challenges including tracking performance, poor visibility to deduction causes, inaccurate cash forecasting capabilities, lack of visibility to credit risk exposure, and have disseminating information delays. That's where Dashboard technology (also known as Scorecards or Corporate Performance Management Portals) comes into play. It is a simple reporting mechanism that enables companies to focus on defining the processes, measuring the processes, and analyzing the processes (the first three steps in the Six Sigma DMAIC methodology.)

Data Mining for Dollars with Predictive Scoring
By: Albert Fensterstock
We noted in a previous article (On the Advantages of Statistical-Based Models for Credit Risk Analysis - The Credit and Financial Management Review - Third Quarter 2005) that "the major characteristic that separates statistical-based models from judgmental models is their ability to quantify risk. This capability, more than any other, is what makes statistical-based models such a powerful tool for the credit and collection function. Specifically, by knowing, validating and using the probability and odds of the occurrence of specific credit and collection events, it is possible to optimize the allocation of the resources available, in a given credit and collection environment, thereby developing strategies that mitigate the possibility of negative results, while simultaneously increasing the credit lines of low risk accounts and providing the opportunity for additional revenues."

As a follow up, this article discusses data mining, one of the tools that can be used to help optimize the generally sparse resources available to credit and collection departments and, thereby, increase the cash flow, reduce the DSO and control the inherent risk in an accounts receivable portfolio.

Volume 12, Number 1, First Quarter 2006

Commercial Fraud: the Tip of the Iceberg
By: Carolyn Hardin-Levine
Nationwide, business-to-business fraud losses are mounting. Even as consumer fraud is declining in many sectors, commercial fraud is on the rise. Small to medium-sized businesses in particular pose a dilemma in the credit industry. They represent the greatest fraud risk because these smaller entities may have thin or no credit histories, so verifying fact from fiction can be hard. At the same time, it's difficult to get information on such businesses in a cost-effective and efficient manner.

Moreover, "soft" fraud losses make the toll worse than can be accurately measured. Industry experts say approximately 30 percent of all commercial credit losses can be attributed to some type of misleading or fraudulent information. Some experts put the number as high as 40 percent or even 50 percent. That means a significant portion of bad debt is actually fraud and could be mitigated with a tool to identify false information in the application process.

Lessons Learned from the Recent Business Cycle
By: Anthony M Santomero, Ph.D.
The U.S. economy enjoyed a remarkable run in the 1990's. As it moved into the new century, however, the economy underwent various fits and starts before entering its current expansion phase. In this article Anthony M Santomero, President of the Philadelphia Federal Reserve Bank, shares his views on the U.S. economy and outlines some of the lessons learned from the most recent business cycle.

As most readers will appreciate, it is important that we learn from the experiences of the past. As the saying goes: "Those who cannot remember the past are condemned to repeat it." Hopefully, some of the lessons we learned from our recent past will be incorporated into the policy decisions we make in the future. Nonetheless, before we start, I must remind you that every business cycle is different. Each is the unique product of (1) a relentlessly evolving economic structure, (2) some surprising new developments, and (3) a sequence of policy actions attempting to stabilize the situation. This most recent experience is no exception.

Techniques in Monitoring the Collection of Receivables
By: William B. Joyce, Ph.D., CPA
Several different approaches have been developed or refined recently to better monitor (and forecast) collections. Although each method helps to uncover changes in the collection experience, none tells why the change occurred. Knowing whether to take corrective action certainly depends on the permanence of and reason(s) for the change.

Remote Deposit Capture: Revolutionizing the Check
By: John Leekley
Checks are, and will remain, a significant part of cash management for US banks and corporations. Check 21 legislation, however, has introduced the possibility of check truncation and electronic clearing. Remote deposit capture is one technology that is helping the electronic revolution of the paper check.

RDC, in its most simple terms, is a service that allows a user to scan checks and transmit the scanned images and/or ACH data to a bank for posting and clearing. The basic requirements for a RDC service currently include a PC, an Internet connection, a check scanner and a service provider, such as a company's current bank. Checks received at the corporate or bank location can be scanned to create a digital deposit. This digital deposit is then transmitted (usually over an encrypted internet connection) to the RDC bank service provider who then accepts the deposit, posts the deposit to the company account and assigns availability based on the company's availability schedule.

Volume 11, Number 4, Fourth Quarter 2005

On the Application of Statistical Analysis To the Prediction of a Rare Event
By: Albert Fensterstock
One of the more interesting classes of problems for which the application of statistical analysis provides extremely accurate solutions is the "finding of a needle in a haystack", or more colloquially the prediction of the occurrence of a rare event. In the business world this many times translates into the examination of a requested transaction and the determination of whether or not the request is fraudulent. In a typical business situation, fraud occurs when the purchaser has no intent of paying for the goods or services received. The goal of a fraud detection system, therefore, is to determine prior to goods or services being provided, that the purchaser does not intend to pay and not allow the transaction to be fulfilled. Because, for a given company, fraudulent transactions are usually a very small percentage of the population of legitimate transactions, spotting one before a company executes the sale is a very real and difficult problem.

By definition, for a fraud to be perpetrated it has to look like a normal event. Discerning, with the limited information usually available, which potential transactions are real and which are bogus is a problem that lends itself to statistical analysis.

With this said, this article will address itself to the steps that need to be followed to develop a statistical-based fraud detection system.

Credit Exchange Groups Today
By: William Croyle, CCE
Fifteen years ago, computers weren't common office equipment. Microsoft Word and Excel, the essential tools for today's credit department, were in their infancy. Software programs weren't easy to use. E-mail and the Internet were in existence, but a company's "web presence" simply wasn't part of doing business.

The Instability of the Profitability of the Major U.S. Domestic Airlines: Risk and Return Over the Period, 1983-2001 A Comparison to Other Industrial Groups
Richard D. Gritta, Ph.D., James Seal, Ph.D., Jason Goodfriend, Ph.D.
The U.S. airline industry's profitability has historically been extremely unstable over time. The "boom and bust" cycle of this industry is a matter of record. Record profits in the mid-1960s turned into losses for most of the 1970s and 1980s and into record losses again in the early 1990s. The late 1990s were characterized by record profits. Now the carriers are once again reporting record losses, even after some recovery from the events of 9/11. This instability has now led to the bankruptcy filings of a total of 8 major airlines since the deregulation of the industry ushered in with the passage of the Airline Deregulation Act of 1978

All firms and industries face different levels of business, financial and total risk. These risks cause volatility in operating profits (returns on assets) and in after-tax profits to stockholders (returns on equity). It is the interplay of these risks that is the key to understanding the volatile nature of air transportation. The purpose of this paper is to statistically measure risk and demonstrate the effects on returns and compare the airlines to other industrial groups. It will center only on the carrier classified as major passenger airlines. These are airlines with annual revenues of $1.0 billion or more. The time horizon of the study corresponds to the majority of the post-deregulatory period. Given the critical nature of this industry to the U.S. economy, the study has significance to a lot of different groups including shareholders, creditors, governmental agencies involved in air transport, and the flying public.

Adjusting the Inventory Account When Companies Use LIFO: Explanation and Application to Distribution and Chemical Industries
By: James F. Sander, Ph.D., CPA, Susan B. Hughes, Ph.D., CPA
It is widely understood that a disadvantage of LIFO is that it assigns the oldest inventory costs to the inventory account, which, when prices are changing, can result in an inventory value that is useless as a measure of current value. FIFO, however, avoids this disadvantage by assigning the most current costs to inventory.

The purpose of this article is to explain a simple adjustment that restates LIFO inventory to the more current cost based FIFO value and analyze effects of this adjustment. We begin by demonstrating the LIFO adjustment and explaining its effect on one company. This is followed by an analysis of the effects of the LIFO adjustment on a sample of companies from the distributing and chemicals industries.

We found the mean increase in inventory is 22.8%, but the effect is quite variable by company ranging from a decrease of 15.9% to an increase of 81.2%. This substantial change in inventory balance produces substantial changes in measures of financial strength, operating efficiency, and Z-score. All except one of the differences in the measures due to the LIFO adjustment are significantly different using paired t tests.

The Hourglass Economy: Will the Winner Take All? An Application of Financial Statement Analysis to Department Store Retailing
By: Steven C. Isberg, Ph.D.
Recent trends in the department store retailing industry indicate that the colossus Wal-Mart may become the champion in a "winner-take-all" contest in the middle/mass market of department store retailing. At the same time, upscale retailers such as J.W. Nordstrom and Neiman Marcus are showing their best performance in the past decade, if not ever. This is happening while the traditional upper middle-market regional department store chains are engaged in furious merger and acquisition activity in an effort to stave off economic collapse. What explains these events?

The answer, at least in part, is a phenomenon referred to as "the hourglass economy." This term refers to changes taking place in the distribution of income amongst different classes within the U.S. economy. It is characterized by a widening of disparities between the lower and higher income classes, as well as a "shrinking" of the traditional middle class of consumers. Combined with the fact that many economic markets are moving toward "winner-take-all" outcomes, the result has been a dramatic and maybe permanent change in the face of department store retailing.

This paper will continue by first examining the nature of the changes in income distribution over the past thirty years. It will then employ financial statement analysis to demonstrate the effects of these changes on department store retailing. Finally, it will discuss the concept of "winner-take-all" markets and what the outcomes may mean for business credit over the next decade.

Volume 11, Number 3, Third Quarter 2005

The Process of Business Process Restructuring
By: Lyle P. Wallis, CCE
Business processes represent the way an organization conducts its business. They are the way businesses harness technology to achieve organizational goals and strategies. The process methodology embraced by a specific company supports its ability to effectively and efficiently perform. Processes represent people's accountabilities, their roles, relationships, and segmented skills in combination with automation, lending to the achievement of maximum productivity.

In the past decade we have all heard quite a bit about Business Process Reengineering. Many businesses have implemented restructuring initiatives. Organizations have embraced a number of techniques designed to implement change to their operations. Methods employed include upgrading technology, restructuring manufacturing techniques & operations, streamlining the organization, replacing the senior management team, and downsizing across the board. Repeatedly, these efforts have failed to achieve long-term solutions to remedying existing problems or creating lasting efficiencies.

Downsizing has been a favored tactic amongst a number of organizations. Many so-called turn around experts have adopted this approach in a crisis situation to realize an immediate gain, only to determine that it fails to address long-term issues. To simply implement a BPR initiative and expect a long-term and lasting turnaround is totally impractical.

Preparing for the 21st Century Economy
By: Anthony M. Santomero, Ph.D.
After three decades of university teaching, it should come as no surprise that I think education is critically important to our nation's future. But in light of my current position, I would like to offer some perspective on the economic context for education in the 21st century. I also want to stress the importance of education and cooperative education for our nation's students, their futures, and the very future of our nation in the world order. This may sound like hyperbole, but I will suggest that it is not. Rather, it is a reasonable reading of the challenges we face as a nation and the stake we all have in our success in educating the next generation.

How do I come to this conclusion, and why the strong assertions? Let me explain. Although my university career centered mostly on economics and business as academic disciplines, serving as the president of the Federal Reserve Bank of Philadelphia and a member of the Federal Open Market Committee has given me a broader perspective on the current trends and future direction of our nation's economy.

My colleagues and I focus most of our discussion on economic growth, inflation, and employment. In turn, much of that discussion focuses on what will happen over the coming year or two at a very aggregate level.

We also consider longer-term trends and how they will shape the economic conditions facing our society in the future. A wide range of issues comes up during these discussions. How will geopolitical trends affect the U.S. economy? How will demographics here and abroad affect aggregate savings and labor supply? How will the ongoing changes in the use of technology affect productivity and wealth? How many jobs can our economy create each year based on these trends in labor productivity? Some of these questions are global in focus; some are local. Some are social; some are technical; and some are political. But all of these broad long-term trends will shape our economic fortunes in the future, as they alter our environment.

Two broad trends are unfolding in our economy as this 21st century opens, and we should consider their implications for our society, for our educational institutions, and for cooperative education.

On the Advantage of Statistical-Based Models for Credit Risk Analysis
By: Albert Fensterstock
Most of the B2B credit risk evaluation systems, currently in use, are based on some form of a judgment or rules based system. These systems should be reviewed to determine if a more sophisticated approach to credit risk analysis is applicable. The fact that computing costs have fallen dramatically and statistical-based credit risk analysis models can be delivered over the Internet means that this technology has become readily available and maybe more cost effective than an existing rule-based system.

Building a Firm Foundation for a Strategic Plan
By: Scott Hunter
By getting the owners out of management and letting people who know how to manage be in management, the firm became stronger, more secure and moved toward getting out of debt and toward greater prosperity in a time when things are tough for law firms. We saved hundreds of thousands of dollars in the last six months.

Methods of Estimating the Consumer Response to Higher Gas Prices
By: Richard D. Hastings, CCE
It is widely assumed that rising retail gas prices reduce consumer spending on finished (retail) goods. There are precedents and models from prior historical experience that support the intuitive thesis that higher gas prices almost immediately reduce consumer spending at retail stores. There are frequent references to 1970's price and interest rate behaviors, in addition to frequent references to the well-known gas price spike of 1979-1981 and its related recession.

This article briefly attempts to explore this concept and instead proposes that the rate of change of the price level of gas, and not the nominal price level, is the primary cause of a possible reduction in spending. This subject is of great interest today at a time when the world moves closer to a full-blown energy crisis, and at a time when rising gas prices in the United States approach levels that are perceived as potentially damaging to the economy and its largest contributor, consumer spending (personal consumption expenditures, or PCE).

The essence of our argument and conclusion is that severe price changes lead to a disruption of the harmony that exists between prices paid and prices received. Trip costs, under the current scenario, have risen only marginally. Critical to commerce and to all budgetary planning, whether business or household, is the expectation that future prices paid and received will occur within a tenable band of up-and-down oscillations. Today's energy price and supply crisis, in the aftermath of Hurricane Katrina, now makes it more difficult to forecast future profits and cash flow generation in the household sector, in addition to the commercial sector which is the basis of employment for the household sector.

Volume 11, Number 2, Second Quarter 2005

Building a Policy and Procedure Document for Your Credit Department
By: Mike Hourston
Should a credit department use a formal policy document to guide its credit and collection decisions? The president of a non-profit research foundation devoted to the study of credit recently estimated that only 20% of the credit departments in Corporate America utilize formal policy documents. A survey found that slightly over half of those companies that take the time to write a formal policy document actually monitor activities and adherence to those policies. Why aren't more credit departments using formal policy documents?

The Use of a Genetic Algorithm in Forecasting Air Carrier Financial Stress and Insolvency
By: Sergio Davalos, Ph.D. Richard D. Gritta, Ph.D. Bahram Adrangi, Ph.D.
While statistical and artificial intelligence methods such as Artificial Neural Networks (ANN) have been used successfully to classify organizations in terms of solvency or insolvency, they are limited in degree of generalization either by requiring linearly separable variables, lack of knowledge of how a conclusion is reached, or lack of a consistent approach for dealing with local optimal solution whether maximum or minimum. This research explores the use of a method that has the ability of the ANN method to deal with linearly inseparable variables and incomplete, noisy data; and resolves the problem of falling into a local optimum in searching the problems space. The paper applies a genetic algorithm to a sample of U.S. airlines and utilizes financial data from carrier income statements and balance sheets and ratios calculated from this data to assess air carrier solvency.

Key Executive Turnover and Operational Performance in Poorly Performing Firms
By: Lei Wen, Ph.D.
Prior research on key executive-Chief Executive Officer (CEO) has yielded mixed results as to whether CEO turnover is important for a company. This study focuses on CEO turnover in poorly performing firms. My findings suggest that financial performance is improved following CEO turnover in poorly performing firms, which is consistent with the theory that a new CEO can make a difference and CEO turnover improves post-turnover operational performance.

The Bankruptcy Reform Act of 2005: What it Means to the Credit and Financial Professional
By: Scott Blakeley
After eight years of political wrangling, the U.S. Bankruptcy Code has finally been overhauled, through the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "2005 Act"). So how does the 2005 Act impact you as a commercial creditor? Do you have greater protections and rights as a result of these amendments? What strategies might you consider to maximize payment on a delinquent account where a customer may consider bankruptcy? This paper will address these issues and more.

Volume 11, Number 1, First Quarter 2005

Corporate Credit Scoring Insolvency Risk Models in a Benign Credit and Basel II Environment
By: Edward I. Altman, Ph.D.
This article discusses two of the primary motivating influences on the recent development/revisions of credit scoring models. These are the important implications of Basel II's proposed capital requirements on credit assets and the enormous amounts and rates of defaults and bankruptcies in the United States in the years just following the turn of the century. Despite the fact that we have moved from a tumultuous and difficult credit environment in 2001-2002 to a historically mild and benign one, investment research on credit risk models has continued unabated. Two of the more prominent credit scoring techniques, our Z-Score and Moody's-KMV's EDF models, are reviewed. Both models are assessed with respect to default probabilities in general and in particular to the infamous Enron debacle. In order to be effective, these and other credit risk models should be utilized by firms with a sincere credit risk culture, observant of the fact that they are best used as an additional tool, not the sole decision making criteria, in the credit and security analyst process.

Creating a World Class Accounts Receivable Process - Four Powerful Approaches
By: Lou Mohanty
The role of Accounts Receivable departments, and finance as a whole, is rapidly transforming in today's enterprise. Formerly thought of as a purely administrative role, A/R functions extending from credit and collections to cash management are now being viewed as a strategic cornerstone that can deliver unprecedented competitive advantage and greater profitability for leading corporations. Recent surveys of forward thinking companies have cast a clearer light upon the forces that are currently driving A/R departments. As can be seen in Fig. 1, A/R departments are under pressure to provide strategic information around cash flow to CFOs and treasury groups, and at the same time to better manage the customer-to-cash cycle and improve transactional efficiencies. Mastering this three-part role of strategic financial guidance, revenue management, and low-cost efficiency is crucial to building high performance A/R departments. However, many companies face the challenge of fusing these three, often divergent, roles into one streamlined and effective organizational entity. This article discusses these challenges as well as four innovative approaches that world-class companies have taken to drive their A/R performance to new heights. The findings of the survey point out key challenges that confront today's A/R departments.

Best Practices for National Lien Administration
By: David Schmidt & Marwan N. Kashou
Mechanics Liens play an essential role by facilitating the extension of credit within the building supply industry. Vendors that perform work, provide labor or furnish materials to repair and improve real property are entitled to file a lien on the property involved. These lien rights provide building supply vendors with an extremely powerful credit tool. When a lien is filed it creates what is essentially a mortgage on the property until the expiration of the lien (unless renewed), the sale or foreclosure of the property (at which time the holder of the lien will receive proceeds from that transaction assuming there is value left after all prior liens are satisfied), or the vendor is paid for the services or materials rendered as stipulated in the lien. In short, liens provide a mechanism for the building supply industry to have access to collateral in support of transactions involving credit terms. In order for a lien to be effective, each step in the process must be executed correctly and in a timely manner. There are many aspects related to the filing of a lien: Preliminary notices, Notice to Owners, Notice of Furnishings, Notice of Intent, Recording a Mechanic's Lien, Perfecting the Lien, and Foreclosing on the Lien to name a few (for a glossary of lien terminology, see Appendix A). Even if you are only doing business within a single state, lien administration can be quite complicated. If you are dealing with multiple states or selling nationally, you face an even more difficult operational challenge as lien laws are legislated on a state-by-state basis. What is required in one state is not necessarily the same or even similar to the requirements of another state. Periodic changes to state statutes and regulations are commonplace. In addition, there is a lack of adequate off-the-shelf systems available to manage the lien process.

How Important is Credit and Collections?
By: John Bassford
As the business landscape becomes riskier, costlier and more unpredictable, the importance of competent credit and collections management has steadily and justifiably risen. Some larger more established companies have long since realized the economic and strategic importance of effective credit and collections, an accounting/sales hybrid that sits at the cross roads of all three spheres of business - accounting, sales and operations. Yet, surprisingly, many companies still subscribe to the notion that credit is little more than an obstacle to sales growth and that collections is primarily a clerical function. As a result, few areas of business are misunderstood and mismanaged as much as this critical cash-securing endeavor. This article provides a basic overview of the two fundamentals that must be in place in order for a company to fully reap the benefits of credit and collections: 1) Organizational structure and 2) managerial standards.

Volume 10, Number 4, Fourth Quarter 2004

Business Process Management: A Toolset for Credit Claims Administration
By: Cassie Dillon
This article explores the acknowledged success of Business Process Management (BPM) to improve the credit claims function by reducing resolution turnaround and lowering the frequency of needless claims. Preventable credit claims can be reduced through a BPM-enabled retailer compliance program that analyzes claims, expedites determination, validates claim denials with documentation and automates denied claim correspondence.

Expediting the Resolution of Disputes and Exceptions: Plugging a Hidden Profit Drain
By: Christopher C. Fox & Shay K. Code
A large percentage of aged receivables are caused by disputes and discrepancies. In order to resolve these disputes, AR staffs often require information not readily available through ERP systems. The delay in accessing the necessary information has a large, and often hidden, impact on your bottom line: a) higher DSO; b) higher deductions/write-offs; and c) customer satisfaction issues. The issues related to dispute management are costing the average Fortune 1000 company millions of dollars each year.

However, there are now practical ways to give collection managers desktop access to all the information they need to resolve disputes quickly. The underlying solutions are tightly integrated with existing IT infrastructure and do not impose significant change for AR staff. The result? A better dispute management process delivers lower DSO, fewer deductions and write-offs, and ultimately higher customer satisfaction. It adds up quickly when this profit drain is plugged.

Optimal Hedging and Foreign Exchange Risk
By: Nancy Beneda, Ph.D., CPA
This article illustrates the technique of computerized optimization and simulation modeling to manage foreign exchange risk. The results indicate that a lower level of risk can be achieved, given a specified level of expected hedging cost, from using optimization modeling. The focal point of the technique is its ability to identify optimal combinations of hedging vehicles (i.e. futures, options, forward contracts, leaving the position open). An optimal combination of hedging vehicles is one, which minimizes the variance of the expected cost of the commodity (i.e. foreign currency), given a desired level of hedging cost. This paper examines optimal hedging strategies for a long position in the Japanese yen/US$ foreign exchange market. In the context of this paper the expected hedging cost is the expected cost of the commodity (i.e. foreign currency) using a specified hedging strategy minus the expected cost of the foreign currency when the position is left open.

Assessing the Financial Condition of the Major U.S. Passenger Airlines Over the 1993-2003 Period Using the P-Score and Z" Score Discriminant Models
By: Jason Goodfriend, Ph.D., Richard D. Gritta, Ph.D., Bahram Adrangi, Ph.D., Sergio Davalos, Ph.D.
Rare prior to the deregulation of the airline industry in 1978, airline bankruptcies have now become rather endemic. Since 1982, over 140 airlines have filed receivership. This number includes eight of the carriers that were formerly referred to as "trunk air carriers"; now known as "Majors." Major carriers are defined as those air carriers with annual revenues greater than $1.0 billion.

The purpose of this paper is to analyze the recent performance of two statistical models that are designed to predict the likelihood of severe financial distress for a corporation. One of these models is the Altman Z-Score [Altman, 2002]. This model is applicable to any type of firm. The other model is a scoring approach developed by Pilarski and Dinh that is applicable specifically to air carriers [Pilarski and Dinh, 1999].

Since the failure rate in this industry is so high, such a study should be of interest to many groups including stockholders, bondholders and other creditors, lessors, governmental agencies such as DOT and the FAA, and the flying public.

Volume 10, Number 3, Third Quarter 2004

Business to Business Arbitration - Avoid the Innumerable Headaches of Litigation
By: Danel Dufresne
When two businesses enter into a contract, discussion about future litigation is often viewed as a potential deal breaker. The last thing either party wants to do is damper a business relationship by mentioning unpleasant "what-if" lawsuit scenarios. Businesses, however, must protect their legal interests by drafting contractual terms that anticipate future legal disputes with their business partners. A well-written arbitration clause is the best way to achieve such protection.
This article explains how arbitration works and why businesses often find arbitration to be a superior legal remedy to litigation.

Using Six Sigma to Improve Credit and Financial Management Competitiveness
By: Stephen De Lurgio, Ph.D.& Fred Hays, Ph.D.
"Mention quality in the executive suites of many U.S. organizations and the standard answer is, 'We did quality in the '80s. It didn't work. These 'enlightened' managers have 'moved beyond' quality to more sensible initiatives such as Six Sigma..."

Summarized Balances: A New Way to Increase Autocash Applications For Prox Terms Payments
By: David Bonneau
In a cash application environment where Prox terms can make up the majority of invoices and credit memos, and the payments are, in general, free of adjustments, other than discount issues, checks can be automatically applied using only the check amount by dissecting the portfolio into subsections following the customer's payment pattern.
Prox terms, where the monthly balance is due on a certain day of the month, are used in many industries. Though the larger accounts may have net terms, the majority of the customers will have a standard Prox term, often with a discount around the 10th of the month and the gross due on the 25th of the month, with the new Billing Period starting on the 26th.

Outsourcing Collection of Delinquent Accounts: Experiences During Recession and Growth
By: Steven C. Isberg, Ph.D.
Business process outsourcing (BPE) is becoming more and more commonplace in the 21st century. While BPE is seemingly a recent phenomenon, however, companies have been using outsource providers to collect delinquent accounts for many years. A Credit Research Foundation (CRF) study conducted in 1998 examined the benefits of such outsourcing. The findings, which were generated for the period 1995-1997, indicated that outsourcing collections provided benefits that were related to the size of the companies referring the accounts. A limitation of the 1998 survey, however, was that it covered a period in which the economy was healthy and growing. Another question remains: are there as many benefits to outsourcing collection of delinquent accounts in a recession economy? To address this, CRF conducted another survey in 2003, covering collection experiences for the period 2000-2002.
There were a variety of differences in the findings between the two survey periods. The primary differences were observed in the way in which the recession affected the average sales levels of firms in each of the three size categories, and in terms of referrals of delinquent accounts to outside agencies. On average, sales for the smallest companies in the sample steadily grew over the period 2000-2002, while average sales for the largest firms in the sample decreased on average for the year 2002 after having grown in 2001. It was also evident that firms placed a both a greater number of accounts and a greater percentage of their sales for collection by outside agencies during the recession period. It also appears, however, that the collection agencies were just as effective in collecting accounts during the recession period as they were during the growth years. Finally, the distinct size differences that appeared in the 1995-1997 survey failed to appear in the later version.

Volume 10, Number 2, Second Quarter 2004

ERP: Aiding in the Collections Process
By: Robin Walker
Most companies have an Enterprise Resource Planning (ERP) system in place today. Unfortunately, ERP Systems have only managed to be a transaction management system at best. This has led to a plethora of ancillary systems built to run on top of base ERP systems. However, more recently, technology has extended these transaction management systems to enable extended processes to be handled. Both credit scoring and collections processes are now appearing in ERP's. This article outlines how a major ERP system can now handle risk based collections management.

Introduction to Genetic Algorithms: The Next Generation of Predictive Models for the Credit Manager
By Douglas Newell & Albert Fensterstock
Over the last several years, many companies have adopted some form of automated credit evaluation tool (credit scoring) to evaluate credit risk and improve credit department productivity. Previously, in the March 2003 issue of "Business Credit", we discussed "Judgment or Rules Based Systems", "Behavior Scoring (Statistical-based Systems)" and systems based on "Neural Networks." In this article, we want to introduce a new technology, "Genetic Algorithm-based Systems" that has certain characteristics that may make it superior to all of the current automated methods used for solving certain types of risk analysis problems. In head-to-head tests against standard predictive models developed using techniques like linear and logistic regression, Genetic algorithms (GAs) were found to:
· Deliver anywhere from a 5% to 20% improvement in predicting key operating and financial success factors like probability of payment or collection.
· Provide better insights because they use 100% of the available data rather than an analyst selected subset.
· Take anywhere from 50% to 75% less time to develop with potential commensurate savings in system development and implementation costs.
· Update on a daily basis to reflect the most recent customer behavior (i.e., all customers' terms and limits can be updated daily, and the probability of a given customer's payment for a new order, is based on the most current data).
· Offer clear and understandable results, (i.e. the user does not have to be a statistician to understand the models output).

How EIPP Can Improve Customer Satisfaction and Speed Cash Flow
By: Doug Roberts
Ask any CEO what is the one thing that makes a company successful, most of them will tell you "happy customers". Ask them to be more specific, and they will say "happy customers that pay you on time". It's the shrewd CEO that understands that without cash flow, there is no business. But how easy are you making it for your customers to pay your bills? Is it as easy as buying your products or services? As many companies are finding out, giving you money is often the most difficult thing for your customers to do.

Electronic Invoice Presentment and Payment (EIPP) is a growing technology that dramatically simplifies how customers access and pay invoices, and removes many of the inefficiencies that exist in today's manual invoice processing. With EIPP, paying you becomes simple - customers have self-service access to invoices at any time, and can import them directly into their A/P systems for processing and payment. The resulting benefits are the trifecta of operational improvement - increased customer satisfaction, increased margins, and increased cash flow. It's no wonder that in a recent survey of Credit Research Foundation members, over 87% indicated they would be adopting EIPP in the next three years.

Section 304(1), The Whistleblower Provision: The Real Power Behind Sarbanes-Oxley
By: J. Phillips L. Johnston, J.D.
For centuries, it's been an unwritten tenet of war that one side does not shoot the other side's messenger. The respectful treatment afforded messengers plying their trade back and forth between enemy lines, has been codified in great works of literature. In Henry V, Shakespeare has young Henry receiving the French messenger several times before the gruesome battle at Agincourt in 1415. Each time, the messenger faithfully and dispassionately relays the French King's rebukes, insults, and demands for surrender. And, each time, Henry contains his rage, knowing the herald is merely repeating what the king told him to say. Just before the battle begins, Henry listens to the messenger deliver the last of the king's insults, then sends him away with these words: "Herald, save thou thy labour; Come thou no more for ransom, gentle herald …" If only Shakespeare were writing for 21st Century corporate CEOs.

Until recently, 'shooting the messenger' was an accepted practice in corporate America, albeit figuratively. With few exceptions, whistleblowers could expect to be ostracized, demoted, transferred, and, more often than not, fired. The impact on the families of whistleblowers was tragic. Of course, that was by design. The implication was that if you wanted to keep your job, if you wanted to stay in the game, you had to play ball. Or, at the very least, obfuscate, ignore, and deny the fouls committed by your own team. This shameful treatment of people who only wanted to do the right thing, caught the attention of mainstream America in 1999, when Hollywood

Competition, Contagion, Leverage, and Bankruptcy: Some Evidence from the Market
By: John Theis, Ph.D.
A bankruptcy filing is a judicially recognized sign of financial distress conveying the highest order of bad for the affected firm. Is the firm's filing always bad news for other firms in its industry? With required SEC filings and news accounts, investors learn of filings shortly after their occurrence. Each bankruptcy filing conveys news about the firm and the industry. While the filing is among the most negative events for the company, it may be good news for other firms in the industry (Lang and Stulz, 1992, and Haensly, Theis, and Swanson, 2001). This study examines how Chapter 11 bankruptcy filings effect common stock returns of non-filing firms in the filer's industry. An event study similar to Brown and Warner (1985) using the standardized abnormal return method of Michelson and Partch (1988) provides evidence that leverage and competition both affect same industry firms' returns in bankruptcy filings.

Unlocking Working Capital: Moving from Reactive to Proactive Collections Management
By: Sanjay Srivastava
Working capital is the fuel that powers global business operations, but too often an unnecessarily high percentage of this fuel is continuously stuck in the pump: locked up in aging invoices and lengthy DSO (Days Sales Outstanding) cycles. Companies looking to improve cash flow have typically focused on collections. But traditionally, collections has always been a reactive process - picking up on aging invoices after they are already late in payment, and then resolving the underlying issues in an effort to collect. Because it's difficult to go up-stream and systematically uncover and resolve the root causes of issues that actually drive the delayed payments, most of the collections effort ends up squarely focusing on dealing with symptoms, instead of addressing the real issues. Approaching this problem after the fact, as always, extracts its cost in penalty-in time, effort, customer satisfaction and even employee morale. Meanwhile, corporate performance and shareholder value added suffer.

Based on process automation built around innovative dispute prevention technologies, it is now possible to take a more proactive approach to collections that is proving to yield enormous dividends-including the unlocking of millions in working capital, elimination of revenue leakage, and radical improvements in overall customer satisfaction. Many companies have already seen significant returns from their work in this area. This article talks about the attributes and best practices these companies have in common, the results they are seeing and how they have achieved them.

Best practices and improved technologies are driving improvements across the entire quote-to-cash cycle to dramatically shrink DSO and unlock significant working capital.Working capital is the fuel that powers global business operations, but too often an unnecessarily high percentage of this fuel is continuously stuck in the pump: locked up in aging invoices and lengthy DSO (Days Sales Outstanding) cycles. Companies looking to improve cash flow have typically focused on collections. But traditionally, collections has always been a reactive process - picking up on aging invoices after they are already late in payment, and then resolving the underlying issues in an effort to collect. And because it's difficult to go up-stream and systematically uncover and resolve the root causes of issues that actually drive the delayed payments, most of the collections effort ends up squarely focusing on dealing with symptoms, instead of addressing the real issues. As you would expect, solving a problem after the fact, as always, extracts its cost in penalty-in time, effort, customer satisfaction and even employee morale. Meanwhile, corporate performance and shareholder value added suffer. But what if you could head off the problem upstream in the quote-to-cash cycle, and not just deal with its symptoms at the back end in collections?

Volume 10, Number 1, First Quarter 2004

Introducing the DSO Efficiency Gap: Controlling the Controllables in the Credit & Collections Process
By: Deepak Verma
Credit and collections managers work to reduce DSOs, but external factors make it difficult to measure the results of their efforts. To help these managers measure the degree of impact that they can have on DSOs, we have developed a metric called "The DSO Efficiency Gap". This article will outline three methodologies for calculating your efficiency gap - as well as several best practices for closing it.

German Consumer Perceptions of the Euro Conversion: The Effect on International Credit Management
By: Martin Feinberg, Ph.D., Axel Grossmann, Damir Tokic, Ph.D.
At the beginning of year 2002, new Euro banknotes and coins became the means of currency for about 330 million people in twelve countries of the European Union. Misgivings concerning the Euro were especially prevalent in Germany. This paper utilizes an e-mail survey distributed to a sample of people in Germany in order to determine German consumer perceptions towards the Euro and the impact of the Euro conversion on international credit managers and professionals. The results show that German consumer perceptions significantly differ with respect to both consumer age and level of education. There is widespread dissatisfaction with the Euro. One can conclude that synchronized accounting standards due to the Euro conversion will enhance financial analysis for international credit managers. Hence, the conversion to the Euro should lead to significant credit enhancement.

International Diversification: Do Investors Need to Venture Abroad?
By: Farhad F. Ghannadian Ph.D., John R. Miller
The difficulties of creating a portfolio of international investments and the mixed bag that international mutual funds bring to the table can be distressing to an investor. Difficulties which range from unfamiliarity with infrastructure legal issues, accounting differences, and currency risk can have a dampening effect on international diversification. This article examines a group of chemical, electronic, pharmaceutical, textile, food, scientific, industrial, farm equipment and motor vehicle industries. Using a discriminant model it attempts to show accounting and financial differences among corporations that are more diversified internationally. This study concludes that regardless of industry differences, firms that have a greater portion of their operations in other countries and are more diversified internationally have a better profitability record. Investors having a portfolio, which is comprised of U.S. stocks, are better off if those U.S. stocks are diversified internationally.

Bahrain's Commercial Bank Performances During 1994-2001
By: Abdus Samad, Ph.D.
The main focus of this paper is to examine empirically the performance of Bahrain's commercial banks with respect to credit (loan), liquidity and profitability during the period 1994-2001. Ten financial ratios are selected for measuring credit, liquidity and profitability performances. By applying student's t-test to these financial measures, this paper finds that commercial banks' liquidity performance is not at par with the banking industry. Commercial banks are relatively less profitable and less liquid and, are exposed to risk as compared to banking industry. With regard to credit performance this study finds no unambiguous conclusion.

Assessing Credit Risk of Chinese Businesses - Some Pitfalls to Avoid
By: Adam Dupré
China is booming, and the West is beating a path to its door. Yet as more and more Western corporations rush into the China market, what are the risks and pitfalls that await those corporations looking to get into China? This article looks at the overall position of China's growth, the scale of its 'economic miracle', and finally at what faces Western businesses at the level of counterparty risk, both in terms of sheer availability of reliable intelligence, and also in terms of how China's culture and the speed of its growth, make it difficult to understand and interpret what information might be available.

Volume 9, Number 4, Fourth Quarter 2003

On Cash Collection, Disbursement And Float
By: William B. Joyce, Ph.D.
The cash shown in the company ledger is not the same as the available balance in its bank account. The difference is the net float. Cash collection and disbursement involves some interesting and important decisions. If you can predict how long it will take checks to clear, you may be able to play the float and get by a smaller cash balance. You can also manage the float by speeding up collections and slowing down payments. Concentration banking and lock-box banking reduce mailing time and the time required to clear checks. However, delays that help the payer hurt the recipient. Recipients try to speed up collections. Payers try to slow down disbursements. Both attempt to minimize net float.

Solving the Mystery of Credit Scoring Models
By: Sung Park
As the speed of business continues to accelerate, more and more companies are challenged to keep pace with the demands of their markets, their customers and competitors. The marketplace is shrinking, with distinctions among global, national and regional marketplaces blurring. To increase the efficiency of processing and to meet the demands of time-sensitive customers, businesses must make decisions in real time or near-real time. Larger organizations have been utilizing credit scoring to quickly and accurately assess the risk level of their prospects, applicants and existing customers. Increasingly, midsize and smaller organizations are appreciating the benefits of credit scoring as well.

The credit score is reflected in a number or letter(s) that summarizes the overall risk utilizing available information on the customer. The credit score empowers users to make quick decisions or even to automate decisions. Whereas a decision based on manual review may take hours, a decision based on a credit score will take seconds. However, not all credit score models are created equally. That's why organizations must understand and match their needs to an appropriate credit score model. To select the appropriate model, one must understand not only the similarities and differences of the credit score models available, but also understand and be comfortable with using credit scoring.

To feel confident about using risk scoring in your environment, you need to have a good conceptual and practical understanding of what a risk score is and how it is developed. A risk score is generated when information related to an entity (a business or a consumer) is fed into a risk model. The risk model examines the information and assigns the relative importance of each piece of information, aggregating the individual contributions of each piece of information into one risk score that summarizes the entity's risk level. That's it in a nutshell. Now let's explore in detail each step in the process of generating a risk score.

The Arbitration "Alternative": Don't Let Your Business Get Sucked In Too Quickly
By: Kevin A.S. Fanning, Esq.
Arbitration involves an agreement between two or more individuals or entities to submit a legal dispute for resolution with a qualified arbitrator or panel of arbitrators. The arbitrator hears evidence from the parties and renders a binding and final decision on the merits of a dispute, with very limited right of appeal. The use of arbitration by large and small businesses and individual litigants has increased exponentially in recent years. Approximately 35 states (including the District of Columbia) have adopted the Uniform Arbitration Act with few, if any changes. The other 15 states all enforce arbitration agreements and certify arbitration awards as judgments upon request of either party. Likewise, Congress adopted the Federal Arbitration Act several decades ago and federal courts have adopted an extremely strong policy in favor of arbitration of disputes.

There is no doubt that arbitration of disputes has its rightful (and sometimes mandatory) place in a multitude of arenas, including some employment disputes, government contracts, some product liability matters, domestic matters and other contexts. However, businesses should not assume that arbitration is the best alternative in every circumstance. Businesses should undertake a full analysis of the benefits and the shortcomings of arbitration prior to entering into arbitration agreements or drafting arbitration clauses. Although the view may be somewhat unpopular, a message of caution must be sent about the arbitration centrifuge that has continued to separate many companies and individuals from the court system: don't let your business get sucked in too quickly.

Top Ten Workplace Communication Skills How They Can Make Work Work For You!
By: Scott Hunter
If everyone would like to work in a thriving, enlivening and nurturing environment, why is it that almost no one loves being at work? Why is it that most of us simply acquiesce when confronted by the drudgery and suffering that, according to seemingly every statistical measure, characterizes life within many companies? Why is it that given the possibility of real fulfillment and satisfaction demonstrated by championship teams and by other successful organizations, we tolerate the gossip, petty jealousy, personal undermining and adversarial communication that seem to pervade many offices, assured of the inevitability of this condition?

Is this condition inevitable? Are we destined to an environment where the most we have to look forward to is Friday afternoon? Not at all. There are specific steps that can be taken to begin to reclaim some of the enthusiasm, some of the air of celebration and some of the fundamental respect for individual human dignity that is apparent within flourishing business organizations or on championship teams. This article explores these steps.

Risk, Capitalism, and Sarbanes-Oxley
By: Richard D. Hastings, CCE
The Sarbanes-Oxley Act of 2002 (SOA) is an important development in the history of American capitalism. The origins of SOA exist in the public, mass media perspective into the arcane and incomprehensible complexity of Enron Corporation, Enron's collapse, and the disappearance of audit firm, Arthur Andersen. Enron looms large in our history. Some historians now say that Enron represents a more powerful event in American history than September 11. If it is a primary cause of The Sarbanes-Oxley Act, then it is hugely influential.

This article examines SOA from the perspective that increasing levels of external controls over capitalistic commerce and organizational behavior, represent an ominous federalization of private industry. This article argues furthermore that SOA is an ineffective approach to risk management, and it makes fundamental errors in its analysis of the structural composition of risk. Some lawyers have already warned that SOA is a federalization of securities laws, diminishing states' rights. SOA is more than this. SOA interferes with the traditional conventions of capitalism by attempting to legislate away the phenomenon of risk.

Capitalism seeks risk, not the rules governing the removal of risk. SOA forces private industry to adopt a set of requirements similar to those imposed upon companies doing business with federal departments. SOA represents an extension of the federal agency system through the publicly traded companies it regulates, with far-reaching implications for the way privately-held companies will do business with publicly held companies. SOA interferes with the primary purpose of capital markets, and that purpose is to share the cost of risk.

Volume 9, Number 3, Third Quarter 2003

Replacing Defaulted Customers: The Hidden Cost of Default
By: Diana Yatsko, Frederick Scherr, Ph.D.
In today's intensely competitive marketplace, pressure on profit margins and higher credit default rates require a complete understanding of the effects of credit losses on an organization. This article expands the analysis of credit default to include impacts on an organizations sales growth and profitability. When credit default occurs, the organization must replace lost sales to defaulted customers in order to meet budgeted growth targets. We analyze the effects of this hidden cost on the organization.

The credit quality of a firm's receivables is affected by internal and external factors. External factors include the economy and the competitive environment; internal factors include credit policy, credit terms and collection strategies. Credit quality determines the obvious costs of extending credit, such as collection costs and bad debt expense. However, frequently overlooked in this analysis is the cost of replacing defaulted customers so as to reach a budgeted sales goal. This cost is dependent on the competitive environment, specifically on the degree of competition in the marketplace and the growth of the firm.

The greater the firms competitive environment, the more emphasis it should place on its credit risk and collection strategies. Why? The retention of a customer becomes a strategic goal within the organization when considering the cost to acquire new customers. Managing credit/collection policy and risks to ensure customers are maintained in a viable and "sellable" status is imperative in today's competitive environment. Customer's reaching a default status affect profit objectives, collection costs & bad debt reserves. But, also of importance is the effect default customers have on Sales goals.

Should Business Bankruptcy Be a One-Chapter Book?
By: Mitchell Berlin
What makes more economic sense? A bankruptcy system that auctions a firm's assets and distributes the proceeds among the creditors, or one that allows a firm to seek to resume business after renegotiations between its stockholders and its creditors? Or is there room - or even a need - for both? This article outlines current U.S. bankruptcy law and looks at recent research that has reopened the debate on the value of separate procedures for reorganizing the bankrupt firm.

Sensitivity Analysis in Capital Budgeting, Using Crystal Ball
By: Nancy Beneda, Ph.D., Petter Gokstad
This article illustrates how Crystal Ball software can be used in capital budgeting analysis to achieve a better indication of project results. We illustrate how sensitivity analysis and Monte Carlo simulation modeling, such as incorporated in Crystal Ball software, can be used to analyze and measure risk in capital budgeting. Using Monte Carlo simulation overcomes the limitations present in using just spreadsheet modeling. In Crystal Ball, a range of possible values for each uncertain input variable is described within the spreadsheet. The Monte Carlo simulation process then computes up to 1,000 possible forecasts (i.e. net present values), based on the input information and creates a probability distribution for the forecasts. The expected outcome (i.e net present value) is identified as the mean of all possible forecasts, which can be quite different from the outcome using static input variables. The techniques presented in this paper are considered to be especially useful to corporate financial managers.

Accounts Receivables: Quality Equation (RQE), Confidence Coefficient, and Forecasting Analysis
By: Ronald R. Hill
For years the value and contribution of a Credit Department has been measured by days sales outstanding or DSO. This single formula has been, and is, looked upon as the standard for measuring the effectiveness of an accounts receivable department. It is often relied on as a key indicator of the quality of accounts receivable customers. This is especially true when looking at trade accounts receivable.

Although DSO's do give a direct reflection of how quickly sales are converted from AR to cash, there are several things that DSO's do not measure that are quite important in the evaluation of the quality (or collectibility) of an accounts receivable portfolio.

Important factors that DSO's do not address include:

Aging of accounts receivable

Bad debt or Write-off amounts

Terms

I don't believe there is any single formula or equation that can display the entire answer to AR quality. I do believe there are different ways to look at financial data and express a more complete analysis of quality. For this reason, I designed the RQE, or, Receivables Quality Equation, and the associated analysis.

Volume 9, Number 2, Second Quarter 2003

XBRL Streamlining Credit Risk Management
By: Mike Willis & Brad Saegesser
Computing power is changing credit assessment processes in profound ways. Credit risk modeling and benchmarking are becoming more integral to credit management, speeding the processes, enhancing analysis and lowering associated costs. The Extensible Business Reporting Language (XBRL), the new Internet standard specifically designed for business reporting and information exchange, is a logical next step in the evolution of technology-driven improvements in credit determinations. XBRL can streamline processes in credit assessment and risk management, increasing the quality, timeliness and frequency of analysis and decreasesing costs. Understanding how XBRL's power of automation enhances credit risk assessment and management is critical for any organization that extends credit, as the lender's own financial well being is often tied to those of its borrowers.

Emerging Issues Task Force Issue No. 02-16: Explanations and Implications
By: Richard D. Hastings, CCE
Since the publication by this author of "Understanding Claims through UCC, FASB and GAAP" in early 2001, regulatory agencies have increased their attention to the worlds of intercompany trade and accounting. "Understanding Claims" proposed that accounting irregularities were widespread in mercantile trade, and that poor coordination between regulatory agencies and ineffective semantics and outdated bookkeeping conventions contributed to a breakdown in financial reporting.

Today, new accounting guidelines exist for the recognition of intangible expenses generated by sales promotion. The Financial Accounting Standards Board (FASB), through its Emerging Issues Task Force (EITF) has come to consensus regarding major issues of intercompany commerce. It is now clear that the malfunction of the stock market, historic corporate frauds, a decline in investor confidence, and massive wealth destruction have each contributed to better investigations into root causes and possible remedies. Accounting, long considered pristine and objective in its methods and purposes, suffered a staggering blow to its reputation. Central to today's reforms is the role of accounting and audit and how these influence the formation of financial reports.

FASB and The Securities and Exchange Commission (SEC) have responded by reforming audit controls and practices, and the public has responded by accepting that accounting processes have played a role in the breakdown of corporate governance that led to financial losses incurred by millions of shareholders and investors around the world.

The rise in value of trade promotion has led to a rise in the relevance of intangible expenses to inventory valuation and revenue recognition, resulting in a new blend of product and period costs that represents a new chapter in the history of financial reporting and accounting.

An Assessment of the Financial Condition of Large Regional U.S. Air Carriers Prior to September 11, 2001: A Back-Propagation Neural Network Approach to Forecasting Financial Stress
By: Richard D. Gritta, Ph.D., Garland Chow, Ph.D., Sergio Davalos, Ph.D.
The U.S. airline industry, as a whole, reported record profits in the mid and late 1990s, but not all carriers shared equally. Some still remained financially stressed. This was true even before September 11, 2001, an event which caused financial chaos for the entire industry, and has led to the filings of both USAir and United. While, to date, there have been 140 carrier filings of receivership/bankruptcy since the airline industry was deregulated in 1978, many of these have been the smaller airlines. It is the current condition of these carriers that is the focus of this paper.

Prior research by the authors [Gritta, Chow, et al., 2002] designed a bankruptcy-forecasting model, based on data over the years 1982-1998, specifically for those carriers classified as regional carriers, using the Department of Transportation criterion. That research employed a neural network (NN) to profile the carriers. The purpose of this paper is to apply that model to assess the financial condition of this group prior to September 11. The attempt is to show the rather fragile nature of these carriers prior to the events of that date. The sample in the study consists of all of those carriers defined as large regional carriers under the DOT definition. This is an important segment of the airline industry, and such a study should be of interest to governmental regulatory authorities, lenders, stockholders, cities severed by these carriers and other vested parties.

Section II of the paper will first present an overview of the neural network developed for this class of airline. Section III will then define the variables in the model and summarize the development of the network. Section III will then apply the NN to these carriers. Comments on the state of the industry will be reserved to the Conclusion, Section IV.

How Efficient Were R&D and Advertising Investments for Internet Firms Before the Bubble Burst? A DEA Approach
By: Damir Tokic, Ph.D.
This paper uses input-oriented Data Envelopment Analysis to test whether Internet firms efficiently translated R&D and advertising investments into underlying volatility at the peak of Internet stock valuations. The investment opportunities approach to valuation of growth shares suggests that investments in new assets (such as R&D and advertising) increase both, the value of a firm and the firm specific volatility. The major finding is that R&D and Advertising expenses could had been reduced from, on average, 75% of revenue to 37% of revenue to produce the same level of volatility. This finding suggests that inefficient and excessive R&D and advertising investments resulted in negative profitability for Internet firms (and lack of future earnings visibility), which was the major cause of the dot.com meltdown.

Volume 9, Number 1, First Quarter 2003

The Role of Automated Detection in Reducing Cyber Fraud
By: Jan B. Rowland, Ph.D.
The roller coaster ride of Internet stocks masks an underlying fact: cyber commerce continues to grow and along with it, cyber fraud.

Experts say fraud is increasing and that the number of people committing fraud is burgeoning as techniques for committing fraud, once reserved to technological elites, now become available to a wider pool of criminals. The right individual armed with a computer can do more damage to a company than a conventional criminal.

Frictionless electronic commerce lowers transaction costs and speeds the supply chain, but it also enables criminals to attack with anonymity, sometimes hitting hundreds or thousands of companies at the same time and from parts of the world where they can be relatively immune from prosecution.

The trick for credit grantors to prevent fraud when conducting business on the World Wide Web is to use tools in the cyber world that are similar to those that protect them in the real world. One tool is money - spent on developing and managing digital certificates that help to verify the identity of an applicant, to encode sensitive information and to build firewalls. These efforts will help to keep unauthorized people out of a credit grantors' systems, and to ensure that documents are sent to, and received by, only authorized business partners.

But what if the authorized partner turns out to be a fraudulent business? Simply adding the encoding, process improvements and digital certificates cannot guarantee success. Fortunately, new and improved solutions for detecting higher risk are available to predict which business partners are likely to be fraudulent before their credit is approved.

Fraud is hardly new. What is new is the ease and speed with which fraud can be committed. While criminals have always preyed upon the gullible, the greedy and the unwary, the digital era's "new economy" offers those who practice deception for profit an unprecedented opportunity to score big - and get away with it.

Paying to Get Paid: Optimizing Accounts Receivables in the Transportation Industry
By: Howard K. Bass, Ashish Garg, Ph.D., T.J. Iijima, Ph.D.
Rising cost pressures and the slowing economy have put significant pressure on the already slim profit margins of the transportation industry, long plagued with sluggish growth and low returns. As management teams search for hidden fat in their budgets, the frequently neglected accounts receivable (A/R) function represents a prime opportunity to reduce costs. In an industry where the operating margins are in the single digits, reducing accounts receivable costs can deliver noticeable improvements to the bottom line.

Lending to Real Estate Investment Trusts
By: John Theis, Ph.D., JD, Paul Haensly, Ph.D.
Real estate investment trusts grow during periods of low interest rates. Much of this growth has historically been fueled by increased debt. This paper is a brief introduction to the risks in lending to REITs while it provides a means of inoculating the creditor from some of the risks. Covenants and financial ratios are two means of reducing default risk when lending to REITs or other such cash restricted credits.

The Real Benefits to Business of Electronic Bill and Invoice Presentment and Settlement
By: Albert Fensterstock
Presenting paper bills by postal delivery (29 billion annually), and payment of those bills by paper check is expensive and time consuming, for both biller and payer. The presentment of a typical business-to-consumer (B2C) bill costs the biller between $1.50 and $2.50 per bill. For the presentment of a business-to-business (B2B) bill or invoice, the cost to the biller can be $8.00 or more. For billers, the cost of traditional print and mail delivery has become prohibitive. Electronic bill presentment and payment (EBPP) should be a can't-miss opportunity. The expected savings from giving customers the opportunity to view and pay their bills online is huge. So, what happened?

Volume 8, Number 4, Fourth Quarter 2002

Collection Productivity: Transferring Effort into Dollars
By: Terry Callahan, CCE
Productivity is a measure of the rate at which outputs of goods and services are produced per unit of input. It is calculated as the ratio of the quantity of outputs produced to some measure of the quantity of inputs used. Productivity measures are used at the level of firms, industries and entire economies. Productivity is a 'supply-side' measure, capturing technical production relationships between inputs and outputs; but, implicitly, it is also about the production of goods and services that are desired, valued and in demand. At a very broad level, productivity measures are often used to indicate the capacity of a business to harness its human and physical resources to generate economic growth. This article explores a measure that been developed by CRF that measures collection productivity and its impact on the organizations cash flow and profitability.

Revisiting The Purchasing Card Prophecy
By: Floyd Goodson
Commercial cards in the U.S. have provided a strong value proposition for corporations and small businesses. The corporate card family of products has provided corporations with spending controls, enhanced reporting, rental car insurance protection, and discounts to many hotels, retailers, and other types of business services. The corporate card product offering is broad and includes products such as T&E cards, fleet cards, general-purpose corporate cards, corporate debit card products, and purchasing cards. In particular, purchasing cards have been promoted by issuers as a way to not only increase transactions on their card products, but to help streamline and automate e-purchasing systems within mid- to large-sized corporations. This article will focus on purchasing card advantages, challenges, and opportunities for issuers as well as users.

Over the past several years, purchasing cards, have made inroads with mid- to large-sized corporations as these organizations strive to reduce procurement-related expenses. In evaluating supplier chain strategies, companies have a host of technologies and payment options to choose from. Crafting a strategy, which benefits the entire enterprise, is key to developing a successful procurement campaign. Factors that determine the success of the campaign include: a senior management mandate, the accurate utilization of technology, and a robust education and training program across the entire organization. Measuring the results of a purchasing card program requires thoughtful diligence in identifying the processes and financial metrics to validate cost and savings forecasts.

Pursuing Excellence Through Standards Certification
By: Alan Steinhart , Robert M. Tharnish, Catherine M. Nowocien
Improving performance in key client-related processes is essential to promoting quality, productivity, and client satisfaction. Searching for a management system incorporating these value-adding benefits, The ABC Companies, Inc., a commercial receivable management firm, found a fit in the COPC-2000® Standard.

According to Alton Martin, Customer Outsourcing Performance Center's (COPC) co-founder and CEO, "Standards provide the structure and focus that assure the continued success of a business." They require management to take a hard look at the processes that make up their organization - particularly those that effect productivity and customer satisfaction. And compel them to find ways to improve or fine-tune them.

This article looks at The ABC Companies' rationale for pursuing Certification to the COPC Standard and the benefits it derived from adopting the Standard as its performance management system. It provides an overview of COPC-2000® and describes some of the inner workings of ABC's certification process.

The article also suggests some valuable applications related to COPC Certification for CFOs and credit managers.

Forecasting Operating Capital Requirements for a Growth Company
By: Nancy L. Beneda, Ph.D., C.P.A.
This paper sets forth a simple, but detailed, step-by-step, procedure for forecasting operating capital requirements for a growth company, using industry averages. The technique presented in this paper is especially useful for forecasting the operating capital requirements for new projects or high growth companies. An example of the technique for Community Health Systems is used as an illustration. Community Health Systems, Inc., a firm in the hospital industry, has a projected growth rate of 85% for the year 2002, and a projected growth rate of 25% for the next five years. The company also has a three-year historical sales growth rate of 26%. Having gone public on June 9, 2000, the company was reported in the August 12, 2002 issue of Fortune Magazine as one of the 40 fastest growing companies. The application presented would be especially useful in capital budgeting and project management of growth firms.

Volume 8, Number 3, Third Quarter 2002

Degree of International Involvement and Market Value of Dot.coms
By: Martin Feinberg, Ph.D.
Comparing R & D intensive and advertising intensive dot.coms has become an increasingly important topic with respect to the online economy. This paper builds significantly on the study by Tokic (2001) by evaluating the degree of international involvement for R&D intensive and advertising intensive Internet firms. The results show that R&D intensive Internet firms had higher foreign sales divided by total sales until the year 2000. As the Internet spread worldwide, advertising intensive Internet firms became relatively more internationally involved. In addition, the difference in market value between the two types disappeared as advertising intensive Internet firms became more internationally involved. If the trend of rapid international growth of the on-line population continues as predicted, one can expect that advertising intensive Internet firms will remain relatively more internationally involved than R&D intensive Internet firms. Therefore, one can also expect that advertising intensive Internet firms will have higher market values than R&D intensive Internet firms.

DSO Resolution Network
By: Jim Stanley
There are many indicators and measures of the effectiveness of a firm's credit management system. Each has its unique merits and offers a window on how well a firm is doing in terms of managing its accounts receivables and ultimately its cash flow situation.

For many companies a particularly useful indicator is Days Sales Outstanding (DSO). DSO represents the average time, in days that receivables are outstanding. This measure helps to show if a change in receivables is due to a change in sales, or to some other factor.

When DSO shows an increasing trend it often indicates there is a problem with the company's order to cash process. The problem can be the result of a decline in sales, as sales is a variable in the DSO calculation. It may also be the result of a deficiency in operations such as a misunderstanding of payment terms on the part of the customer, late delivery, defective merchandise, a pricing error or failures in the area of credit and collections. If sales are not on the decline an increasing DSO demonstrates that there are problems with the company's accounts receivable and the root cause of the problem should be identified and addressed.

Platform for a Leader
By: Dwight L. Mott
The Lone Ranger image - the idea that one heroic person is out in front taking charge while everyone else passively follows - is a myth. Yet, traditionally, when one uses the term "leadership", that is the idea that often comes to mind. I prefer to think of "leadership" in the sense being used at the Tour de France this month. In Joseph Rost's Leadership for the Twenty-First Century (1991), "leadership" is defined as "a dynamic relationship based on mutual influence and common purpose between leaders and followers in which both are moved to higher levels of motivation and moral development as they affect real, intended change." That's a mouthful, but essentially what it means is that leadership isn't some sophisticated technique for getting people to do what you want them to do. Leadership is getting people to want to do what you want them to do because they understand and share your purpose, vision, and values. Leaderships, then, is quite simply a collaborative relationship, built on mutual trust and integrity, with the goal of continuous improvement.

From Irregular Credit to Entity Failure
By: Samuel Wasserman, Ph.D.
Insufficient discussion has taken place regarding the prevalence of poorly structured corporations in today's uproar about corporate governance. Before continuing the assault on the individuals responsible for bad corporate leadership, more serious discussion needs to occur about the widespread acceptance of the badly structured corporations many of these persons led, and certainly some other companies we do not yet know who led them because their structural faults have yet to be discovered in a new public scandal. It was the degree of such acceptance--less during the 1980's and then with no reservations during the 1990's-that led to an unusual worsening of the size and risks of badly structured companies.

Volume 8, Number 2, Second Quarter 2002

Do Voluntary, Involuntary and Prepackaged Bankruptcies Affect Shareholder Wealth Differently?
By: John Theis, Ph.D., J.D. & Paul Haensly, Ph.D.
Prior studies using voluntary and involuntary filings show bankruptcies drastically reduce shareholder returns. This study compares shareholder costs for conventional voluntary, prepackaged voluntary, and involuntary filings. Event study results show conventional voluntary filings with large, significant, and negative abnormal returns at filing and the first distress announcement cost shareholders the most. Prepackaged and involuntary filings have significantly smaller negative abnormal returns at filing than voluntary filings.

Common Mistakes in the Statistical Analysis of Credit Decisions
By: John K. Ford, D.B.A.
The modern science of probability and statistics provides many tools of considerable value in credit analysis. This is not surprising since statistics and credit analysis have much in common. For example, a primary concern in statistics is deriving techniques for selecting a sample with certain attributes including restrictions on risk. The equivalent issue in credit analysis is developing procedures for constructing a receivables portfolio with limited risk. Although there are potential gains from the use of statistics in credit analysis, there are also possible problems. Many studies have found that even educated and experienced people are prone to particular mistakes in the interpretation of statistical information. The following examples demonstrate these errors in situations that are common in credit analysis.

Predicting Micro-Loan Defaults Using Probabilistic Neural Networks
By: Stephen A. De Lurgio, Ph.D. & Fred Hays, Ph.D.
This is the third of three recent articles on the use of Neural Networks (NNs) in credit management. This article continues the thread of DeLurgio and Hays (2001), and Yegorova, et al (2001). It illustrates the application of NNs in predicting the defaults of the SBA funded micro-loan program managed by the Growth Opportunity Connection of KC Mo. As shown here, Probabilistic Neural Networks (PNNs) are effective in predicting loan defaults when the data is insufficient for use of more traditional methods or the analyst is not knowledgeable of or capable of applying other methods. This study applies NNs in an environment of financial data scarcity and high-risk applicants. PNNs were found to be more effective then traditional statistical procedures including logit and discriminant analyses. More importantly, the methodology used to construct and validate models does not require advanced statistical analysis. The importance of cross-validation for users of NNs is clearly illustrated - one of the most important cautions for NN users. Of the initial 24 variables from micro-loan applications, only seven were needed to predict 83% of defaulting (30 out of 36) and 88% of non-defaulting (65 out of 74) loans. In contrast, a logit model accurately predicted only 47% (17 out of 36) of the default loans and 85% (63 out of 74) of the non-default loans; a discriminant model predicted 56% (20 out of 36) of the default loans and 85% (63 out of 74) of the non-defaulting loans.

The Cost of Equity Capital Using the Constant Dividend Growth Model: A Simple Application
Nancy Beneda, Ph.D., C.P.A. & Jeong Lee, Ph.D.
This paper presents a simple, but detailed, step-by-step procedure for computing the cost of equity capital using the constant dividend growth model. An illustration of the computation of the cost of equity capital using PepsiCo, Inc. is also presented in this paper. Most of the information used to compute the cost of equity capital in this illustration is obtained from Value Line Investment Survey database and two online sources, Institutional Brokers Estimate System (I/B/E/S) and finance.yahoo.com. The application presented would be especially beneficial for use in either a corporate finance course or a personal investing scenario. The model is relatively simple and all of the data used in this paper is easily obtainable.

Volume 8, Number 1, First Quarter 2002

Investing in Intangibles: Is a Trillion Dollars Missing from GDP?
By: Leonard Nakamura
In the 1990s, Americans saved less, but they became wealthy at an astonishing rate. What underlies this paradox of a lower savings rate coupled with increased wealth? As Leonard Nakamura states in this article, the short answer is capital gains. Stock-market capital gains are excluded from our measures of national income, yet they account for about half of the increase in American households' net worth in the past two decades. Nakamura discusses the pros and cons of including capital gains in national income accounts.

Writing David Copperfield in 1849, Charles Dickens put these rueful words into the mouth of the feckless Mr. Micawber:" Annual income twenty pounds, annual expenditure nineteen, nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty ought and six, result misery. " The inability to save leads to the poorhouse, as Dickens well knew, since his father's debts had done just that to his family. But in the 1990s Americans saved less and less, according to official U. S. statistics. Yet far from being miserable, they became wealthy at an astonishing rate.

What underlies this paradox of a small saving rate in tandem with increased wealth? The short answer is: capital gains. Specifically, saving and wealth gains diverge because of a convention in the U. S. income accounts that makes a good deal of sense. Because capital gains are so volatile, the national income accounts include only part of investment income: dividends and interest payments Capital gains are excluded, yet capital gains from the stock market have been responsible for about half of the increase in the net worth of American households in the past two decades. This rise in capital gains has occurred because firms can reward shareholders either with dividends or with capital gains, and U. S. corporations have been retaining more of their earnings in the form of intangible investment and not paying them out in dividends.

The official measure of U. S. household saving, the personal saving rate, is, like all economic statistics, a compromise between a theoretical ideal and the practical limitations of existing data. Ideally, we expect key statistics, such as the saving rate, real GDP growth and consumer price inflation, to convey important information as clearly as possible. In this ideal, a very low saving rate should not be compatible with substantial and sustained creation of wealth.

Let's look at Mr. Micawber again. If he has a steady income of 20 pounds a year and no capital assets, determining his income is simple: 20 pounds. And regular income, such as paychecks, are generally what our statistics measure. But what if Micawber owns some stock? Then measuring his income is no longer so simple. If his stock rises in value from 10 pounds to 11 pounds, should Micawber's income be calculated as 20 pounds or 21? And how should Micawber report his income when his paper profits disappear and turn into a paper loss? A key question then for Micawber's budget problem is: given that stock prices go up and down, how much of the gain can he rely on, and thus, how much can he afford to spend?

If we include capital gains in personal saving, the U. S. saving rate, properly measured, has generally risen rather than fallen. But improving our statistical measures is by no means straightforward. Why? Fortunately for our economic well-being, but unfortunately for the credibility of our statistical measures, economic activity is increasingly concerned with the creation of new products. This type of economic activity is difficult to capture accurately in our economic measures. In fact, given how we construct the personal saving rate for the United States, a low or even negative saving rate is likely to coexist with substantially accelerated creation of wealth.

Shedding some light on this paradox of diminished saving and increased wealth and why it's difficult to eliminate it is the purpose of this article.

Discovering A New Way to look at the Receivables Outsourcing Decision
By: David Schmidt & Marwan Kashou
Over the past five years, outsourcing has enjoyed growing acceptance within the business community. During this period, year-to-year outsourcing growth has consistently exceeded 20 percent for companies with over $80 million in revenue, manufacturers being the most likely firms to embrace outsourcing. In addition, the outsourcing of financial services is seeing faster growth than any other type of outsourcing. Receivables outsourcing is an important component of financial services outsourcing and brings with it a long history. The use of third-party collection agencies has been a widely accepted practice for well over a century. Factoring has also been standard practice for many years in the garment trades and has made inroads in other industries. Bank lockbox services provide another example of third-party services enhancing the collection process, as do both dunning letter and reference checking services, which have been used by the commercial credit community since the 1970s. It has also been nearly two decades since deduction outsourcing firms began marketing their services, and the leading firms in this niche have reported yearly growth rates of more than 40 percent.

These outsourcing activities have paved the way for even more extensive receivables management services. At the same time, technology has made it possible for outsourcing service providers to provide seamless, order-to-cash functionality without the customer ever knowing they were not dealing with a direct employee. Not coincidentally, these capabilities address a marketplace that is constantly looking for ways to do more with less. The corporate downsizings of the 1980s created a vacuum that technology and outsourcing continue to fill.

Minimizing Deductions: How E-Business Applications Are Helping Companies Collect Faster
By: Veena Gundavelli
By incorporating e-business concepts into deductions management, companies are able to process deductions more efficiently, thereby lowering DSO and improving customer relations.

A deduction is the hardest type of open item to resolve in accounts receivable because of the complexity of the involvement needed from other departments of a given company. Effective and timely resolution of customer can contribute significantly to reducing the carrying costs of receivables and can lead to eliminating cash flow bottlenecks.

Deductions are increasing in number in most organizations, as customers are becoming increasingly aggressive questioning the level of service of their suppliers. As the economy becomes more turbulent, customers are becoming more apt to dispute vendor invoices and deduct the amount in question from their payments.

Deductions also reflect a breakdown of internal processes that is typically cross-departmental. Deductions issues consume a lot of resources and can potentially damage customer relationships, and needless to say, impact cash flow as well.

Companies with a proper handle on deductions resolution and that take an aggressive stand in managing deductions have a competitive edge over their peers in managing their profits.

China: Credit for the Future
By David I. Herer & Ronald K. Chung, Ph.D.
It has often been said that the 21st century will be the Age of China. If this is to be so, China has indeed waited a long time to assume this leading role on the world's stage. Tracing its culture back more than 50 centuries, China might argue that it is the oldest economy in the world. China currently carries the promise of becoming the largest economy in the coming years. But what might be even more remarkable than the age or size of China's economy is the rate at which it is growing, and the speed by which it aims to surpass its rivals.

With escalating interest and activities by US companies in the Chinese economy, this article looks at some of the issues company executives need to examine in their dealings with Chinese counterparts. Special attention will be devoted on the central role of credit in business practices in China.

Volume 7, Number 4, Fourth Quarter 2001

The Economic Outlook for 2002
Joseph W. Duncan, Ph.D.
The U.S. economy is now currently in recession according to the National Bureau of Economic Research, the agency that officially dates the beginning and ending of major economic business cycles. The state of the economy is uncertain in many ways. The recession officially began in March 2001, despite the fact that Gross Domestic Product (GDP) was continuing to increase. This starting date is thus unique in the Post World War II era since every other recession began in a period of declining GDP.

The economic declines of 2001 followed a decade of strong economic growth and a period of unprecedented investment in new enterprises and capital equipment. Thus the current declines come after a period of exceptional growth and prosperity. The weakness began in the year 2000 in financial markets, but many economic indicators showed some strength until the terrorist attacks on the World Trade Center and the Pentagon.

The U.S. has declared an unofficial "war on terrorism" and the economies of Asia and Europe are weakening as a result of the slowdown in the U.S. The cutbacks in air travel and tourism are having a ripple effect on hotels, restaurants and many related sectors. Economic uncertainty is dominant.

This article provides an overview of economic conditions in the U.S. It presents three scenarios of potential economic developments in the months ahead. The three scenarios are labeled:

1. Continued weakness
2. Moderate growth
3. Rapid bounce-back

In the discussion some of the key factors in each situation are highlighted along with an estimate of the likelihood that each will occur. The analysis also highlights some key considerations in the credit markets that underlie the basic economic system.

Valuation of Internet Stocks: Real Options and Earnings Visibility An International Perspective
Damir Tokic
The value of Internet stocks is a function of growth. As the industry reaches the mature growth stage, the source of value shifts from growth to earnings. The lack of earnings visibility is the major reason for recent devaluation of Internet firms. With 51% of U.S. population on-line, investors expect steady earnings from emerged industry leaders. However, a clear vision of earnings growth is blurred with managerial lack of business savvy. In international perspective, with only 4.3% of the World population on-line, there is an opportunity of growth for firms with defined international vision and experienced management team.

A Successful Neural Network-Based Methodology for Predicting Small Business Loan Default
Irena Yegorova, Bruce H. Andrews, Ph.D., John B. Jensen, Ph.D., Bert J. Smoluk, Ph.D., Steven Walczak, Ph.D.
This study contributes to the credit risk management literature by describing a new, user-friendly, generic neural network-based methodology for developing credit-scoring models for small businesses based on commonly available data. The methodology is used to construct and validate a model employing data from a pool of terminated small business loans made by an economic development lender based in Maine. A total of 138 variables representing loan characteristics are initially examined, and are subsequently reduced to a set of five input variables that are effective predictors of loan default. These variables, which are composed mainly of traditional financial ratios, are then used to build a probabilistic neural network model that correctly predicts the ultimate disposition of 92% of the loans in the out-of-sample testing. These results are better than those of a binary logistic regression model that correctly classified 86% of the loans.

The Credit Department in a Time of War and Terrorism: Dealing With the Aftermath of September 11th
Doug Fox, CCE & Scott Blakeley
September 11 has changed our lives. On the commercial credit front, credit professionals are experiencing greater risk with their open account sales. Customers are warning of earnings shortfalls. Bank financing, bond offerings and IPO's are significantly down since Sept. 11, making it difficult for customers to borrow. Customers are laying off workers in the face of fewer orders, delaying product orders, merging with competitors because of the downturn in business, facing extraordinary insurance premiums that may threaten their survival, and those customers that do not have enough cash or assets face a credit crunch, possibly resulting in bankruptcy and going out of business. The bankruptcy of one customer may result in the bankruptcy of one or more of its creditors, who may also be customers.

What does the new environment mean to the credit professional and credit agreements, customers and the economy? In such an environment, what are the real credit risks, both direct and indirect, in assessing an existing customer's credit line, and new open account sales? Of course, a customer's financial leverage is even riskier in today's environment.

But does this mean widespread default by customers on open account sales in the aftermath of Sept. 11? What steps should a credit executive take with credit sales in the face of recent events? Is the simple answer tightening credit extension and collections, or are there additional steps a credit professional may take?

Volume 7, Number 3, Third Quarter 2001

Delivering Credit Decisions at Internet Speed: Cost-effective Process Automation is the Key
Kenneth H. Hill
Invariably, the marketplace displays an uncanny ability to humble and educate us all. The collapse of the technology sector in the latter half of 1999 has frustrated both investors and innovators alike, but in so doing, has revealed principals that can be used to realistically evaluate the merits of various e-commerce initiatives. In other words, we should have learned something about what works and what doesn't. In particular, we have all been reminded that you cannot ignore fundamental economic principals. E-commerce may be a new way for transacting business, but you still need to make real profits, not just generate hopes and dreams.

Employee Role Automation: Proactively Managing Collections and Dispute Resolution
Fred Piumelli
By instituting an automated collection and dispute resolution system, the focus will move from daily task-oriented activities to strategic receivables management.

Understanding the Financial Interests in Neural Networks - A Tutorial
Stephen A. DeLurgio, Ph.D. Fred Hays, Ph.D.
The future of credit scoring and risk assessment requires faster and more effective credit scoring tools; NNs are an essential technology for achieving these objectives. NNs may well herald the difference between thriving or languishing in today's competitive credit markets.

This article develops important principles of Neural Network applications in finance and credit management. It is the first of a series of articles and lays the groundwork for more sophisticated applications in subsequent articles. As shown here, Neural Networks (NNs) are powerful analytical tools that can guide, enlighten or mislead managers. When properly applied, NNs provide solutions that may not be available from other methodologies. NNs differ from other statistically based tools like regression analysis, discriminant analysis, or econometric methods because NNs are capable of modeling complex logical and mathematical relationships that are beyond the scope of these other methods. However, NNs are not panaceas for all that ails the frustrated analyst. NNs may be inferior to other methods when these other methods are valid representations of the underlying relationships. While ignorance of the correct modeling approach may be justification for using NNs, the user of NNs must be knowledgeable of their advantages and disadvantages. Whether NNs are the best choice for developing predictive models or not, they are always very valuable benchmarks for what might be possible with better models. NNs have been effective in fraud detection, credit scoring and forecasting. NNs are so important in credit management because increasingly, organizations are pressed to make credit decisions that are both quick and accurate.

Selling Bankruptcy Claims: "Become Empowered Through Technology"
Sandra A. Kidney
With the tremendous downturn in our economy, the recent surge this year in companies filing for bankruptcy was inevitable. During the second quarter of 2001, the total number of new bankruptcy filings was up 24.5% from a year ago. At this rate, filings in 2001 are expected to surpass the record of 1.4 million new cases filed in 1998 according to the ABI Network Update August 24, 2001.

Credit executives will be tested once again, as they were in the late 80's and early 90's, to determine the "right" approach for handling their bankrupt receivables. Fortunately, among the major differences between then and now, are the many technological resources that the credit executive can utilize today.

Volume 7, Number 2, Second Quarter 2001

Risky (e)business: The case for an Internet-based credit risk solution, and the case for a credit risk solution tailored to the Internet
Jurgen Leijdekker
First, e-business was new, different, and all the hype. Then the pendulum swung back, and e-business was supposed to be business as usual. Now that the hype is over and the dust has settled, we can go back to some basic questions. What is different about doing business on the Internet? What does this imply for trade finance and credit risk management? How can Internet infrastructure be used to make credit management more efficient? Are there companies with practical experience, to draw lessons from?

eCredible is a subsidiary of international credit insurer NCM, part of the Swiss Re Group. The company provides an Internet-based solution for credit risk management, both aimed at managing the particular risks for online trade, as well as making credit management processes for offline trade more efficient. In this article, the author discusses eCredible's experience to date. First, he argues that risk management may be one of the few business processes that need to be modified when trading online. Second, he argues that Internet architecture can be used to make credit management more efficient, prompting companies to take another look at whether to "build or buy" their credit management capacity.

This case may look familiar to you. There's a company in California, selling electronic components, both on and offline. Credit risk is managed by a 10-person department, facilitated by a credit insurance policy with a fairly high deductible. The credit managers spend a substantial part of their time communicating with information agencies, the insurance company's underwriters and claims department, collection agencies, etc. At the same time, the strain on the department is increasing, as more buyers flock to their website, demanding "real-time" credit approval, often for small exposures. The CFO and Credit Risk Director would like to make changes on two fronts: first, they feel that the credit managers should spend more time managing the more complex and high exposure cases, and less on processing the straightforward transactions or running after the various service providers. Second, they would like to speed up the credit approval process, so that online customers get the "real-time" experience that they expect on the Internet.

Bubble Bedrock: How the changing game of commercial credit fueled the credit bubble
Richard Hastings
The expansion of credit observed throughout the world since the early 1980's - much of it a response to financial crises caused by inadequate and inefficient financial and mercantile markets in the 1970's - requires participation from many sources of credit. Unsecured commercial credit is often an overlooked form of investment for which there is insufficient information due to anti-trust and competitive pressures to restrain information. In the universe of credit, the foundation of the bubble is built upon a bedrock of unsecured mercantile trade credit transactions without which there would be limited discussion of bank loans, stock issuances, long-term unsecured debts, or of Federal Reserve System action. Poorly structured business models with dangerously high likelihood of default on obligations became objects of unsecured credit during the 1980's and especially in the 1990's.

During the late 1980's, asset-based lending and loan syndication expanded to new levels. At the bedrock of this system was a three-pronged assault made by the banking sector upon the supply chain. Firstly, to make sure inventory purchases were possible; secondly, to make sure receivables were secured along with inventory to justify making new loans; and lastly, to make sure consumers had enough credit to make final purchases in order to lock in the entire financial device. The wave of asset-based lending especially in the trade of goods between manufacturers and distributors of goods and their commercial customers (including other intermediaries and retail firms) is one of the major components of today's historic credit bubble.

The Economics of Check Float
James McAndrews and William Roberds
Americans commonly think of themselves as living in a technologically advanced nation. According to standard measures such as computers per capita or Internet usage, the United States ranks at or near the top of the list of developed countries. In some respects, Americans' penchant for technology carries over to the area of payments. For example, the United States ranks near the top among industrialized countries in use of debit and credit cards. What is surprising to many observers, however, is that cash and checks still dominate the overall market for retail payments.

The popularity of cash is perhaps to be expected. Despite advances in communications technology, cash remains an economical means of payment for small transactions and continues to be used widely throughout the world. Among developed countries, however, only the United States remains dependent on the use of checks. In 1997 (the last year for which statistics are available), American consumers and businesses wrote an estimated 66 billion checks. This figure amounts to roughly 250 checks per capita annually, or one check per business day per U.S. resident. The aggregate value of these checks is estimated at $77.8 trillion, $1,177 per check on average. And despite the rapidly expanding use of electronic payment media, the market share of checks remains quite high at 73 percent, measured as a percentage of noncash retail transaction volume. Chart 1 shows that comparable market shares for Canada and the United Kingdom, two countries which formerly saw wide use of checks, amount to only 36 and 31 percent, respectively.

Certainly the market for retail payments is an evolving one, and recent years have seen dramatic increases in the use of electronic modes of payment. However, the extent to which electronic forms of payment have substituted for checks is less than what is often supposed. Chart 2 plots U.S. per capita usage of checks, payment cards, and direct bank transfers over the period from 1988 to 1997. Comparable figures for Canada are also plotted. Both countries have seen strong growth in the use of noncheck forms of payment. Growth in the use of direct transfers has been very similar in both countries while growth in the use of payment cards (particularly debit cards) has been somewhat faster in Canada than in the United States. In Canada this growth has involved extensive substitution away from check payments, so check usage per capita is actually falling. By contrast, per capita check usage in the United States has actually trended upward slightly over the same period.

The resource costs of maintaining a check-based retail payment system are considerable. Wells (1996, 5) estimates that the cost of a check payment averages about $1.60 (in 1993 dollars) more than the cost of a payment made electronically via the Fed's Automated Clearinghouse (ACH) system, when the costs to all parties are taken into account. While ACH transactions are admittedly imperfect substitutes for checks, it is instructive to contemplate the potential resource savings of moving away from the use of checks to an electronic instrument with the cost characteristics of the ACH. Multiplying the $1.60 figure by 66 billion checks, an estimate of the savings from moving all check payments to such an electronic payment instrument would be about $100 billion annually. Even if check usage in the United States were to fall only to the same levels as in the United Kingdom or Canada, the resulting annual savings would still be approximately $60 billion.

Forecasting Future Cash Flows
Albert Fensterstock
Most professionally managed companies prepare annual financial and cash budgets. A process that requires them to forecast future cash flows. I am sure that most of you, at some time in your career, have prepared cash forecasts. However, most of the cash forecasting methods in common use do not have the ability to provide management with answers to questions like:

What is the probability the company will not have enough cash generated from normal operations, through May 2001, to cover required interest and principal on the bank debt due in June 2001? Or,

What is the likelihood the company will generate over $1,550,000 of cumulative cash flow during the next twelve months from sales and accounts receivable collections?

In other words, most cash forecasts do not allow a company, with any degree of confidence, to answer risk related cash flow questions, the answers to which may have a material effect on the company's well being.

Volume 7, Number 1, First Quarter 2001

An Application Of Value At Risk To An Accounts Receivable Portfolio
Albert Fensterstock
Within the financial community, during the last decade, the implementation of value at risk (VAR) models has made a significant impact. In 1993, the Bank for International Settlements (BIS) announced its intention to introduce a capital requirement for market risk, where VAR was defined as market risk. Subsequently, in 1995, additional impetus for developing internal VAR models was provided when the BIS agreed to allow certain banks to use their own internal models, rather than standardized regulator proposed models to calculate their market risk exposure.

So what is VAR? Basically, VAR summarizes the worst loss over a target horizon with a given level of confidence. VAR models seek to determine the maximum potential loss of value on a given asset or liability over a given time period at a given confidence level (e.g. 95%, 97.5%, 99%, etc.). Typical statements about a debt portfolio that has been evaluated using a VAR model might be: Under normal market conditions, the most the portfolio can lose over a year is about $1.5 million at the 95% confidence level. Or: There is only 1 chance in 20 that the portfolio will lose more than $1.5 million in value over the next year.

VAR models, up to now, have primarily been developed to measure the inherent risk in various types of debt instruments. The first models looked at public tradable debt (corporate and government bonds, notes, etc.) that can be bought and sold under normal market conditions. Additional models were then developed to evaluate the VAR of non-tradable loans (i.e., not public), and major financial houses and various consultants to the financial industry have continued to develop and improve their models to a high level of sophistication. With respect to a portfolio of accounts receivable, however, there has been precious little work accomplished. This article seeks to introduce the value at risk concept to corporate credit personnel and presents one way that the VAR of a given accounts receivable portfolio might be measured.

Compressing the Settlement Cycle Through Internet-Based Collaboration
K.F. Effgen
The timeline for settling invoice deductions often extends beyond 100 days for consumer goods manufacturers and their retail trading partners. Large transaction volumes - some companies handle as many as 20,000 deductions every month - makes it imperative that customer service, credit, and sales & marketing departments have appropriate tools to resolve discrepancies in a timely manner.

Besides existing workflow software that automates tasks and establishes follow-up procedures, the Internet can potentially pave the way for trading partners to compress the resolution process. The accompanying timeline in this article illustrates where the timesavings can occur. When compared with existing practices, Internet technology can significantly improve productivity.

The hype of the Internet, specifically in B2B, has been focused on selling or offering goods between commercial trading partners. Whether transactions are conducted in vertical industries such as chemicals, lumber and wood products, or plastics, there are several portals that allow both buyers and sellers to view product offerings, conduct auctions and otherwise transact supply-side business.

Up until now there has been no counter-balancing weight on the settlement side. Interestingly, the potential opportunities for an Internet-based "settlement portal" are as enormous as they are on the procurement side. There are two sides to every transaction; a purchase and a payment. In the commercial B2B market, settlement involves trade credit transactions, not credit card transactions. As such, repetitive transactions between Established Trading Partners (ETP) can not only be conducted via the Internet, but also settled via the Internet.

"The E-volution of Credit Management"
Dorman Wood, CCE
In June 1896 at Toledo, Ohio, eighty-two delegates representing several local credit groups met to endorse a national movement for the exchange of credit information. Thus, was born the National Association of Credit Management (NACM).

Since that milestone meeting over one hundred-four years ago, our profession has experienced and endured many changes. During my thirty years as an active credit professional, I have been witness to and involved in some of these changes. (And, despite some rumors, I was not present at the meeting in June, 1896.)

What Makes Two Firms Worth More Together Than Apart
William B. Joyce, Ph.D.
A merger generates an economic gain if the two firms are worth more together than apart. Gains from mergers may reflect economies of scale, economies of vertical integration, improved efficiency, fuller use of tax benefits, the combination of complementary resources, or redeployment of surplus funds. In other cases there may be no advantage in combining two businesses, but the object of the acquisition is to install a more efficient management team.

Business-to-Business EIPP: Presentment Models, Part 1
The Council for Electronic Billing and Payment
In the short time since the release of the first web browser in 1993, the Internet has evolved from a mere information dissemination vehicle into a robust transaction environment. Industries are rushing to develop new tools and infrastructure to support expectations for an interactive Internet, but, ironically, still struggle with changing fundamental user behavior; most business processes are still transacted through paper media, including billing and payment.

While some larger businesses have used Electronic Data Interchange (EDI) to automate business processes, the costs are prohibitive to many companies. The Internet is emerging as the venue for non-EDI businesses to automate inter-company transactions.

Electronic Bill Presentment and Payment (EBPP) - the business-to-consumer (B2C) process by which bills are presented and paid through the Internet - is gradually becoming a standard tool for companies that regularly bill large numbers of individual consumers.

Electronic Invoice Presentment and Payment (EIPP) - the process by which companies present invoices and make payments to one another through the Internet - is a promising tool in the business-to-business (B2B) environment that has not yet achieved significant adoption rates.

The motivations to migrate toward EBPP and EIPP include:
Shortened transaction cycles and accelerated revenue cycles
Improved cash flow management
Increased marketing opportunities
Improved productivity
Reduced direct costs (e.g. postage and printing)
Enhanced customer service

While both B2C and B2B transactions have some similar processes, the B2C environment is generally much simpler. In consumer EBPP transactions, companies typically present bills on a web site for consumers to view and pay.

B2B, on the other hand, involves more participants and more complex processes, creating a longer, more intricate value chain. Business transactions include procurement, contract administration, fulfillment, financing, insurance, credit ratings, shipment validation, order matching, payment authorization, remittance matching and general ledger accounting. Each of these steps may be governed by complex business rules. For example, trading partners may require multiple billing accounts per customer, with a separate workflow review process for each.

Furthermore, B2B transactions are more likely to be disputed than B2C transactions. Invoices are often "not paid as billed," and transactions often need to account for discounts, promotions, and special buyer relationships.

The complexity of the B2B market has been compounded by the emergence of e-commerce. Traditional business processes and relationships are challenged by new technological capabilities (e.g. extranets, Application Service Providers), and by an emerging necessity to accommodate both established and spontaneous relationships in a real-time environment.

In an effort to promote greater understanding of the new e-commerce environment for B2B electronic invoicing and payment, this document outlines three current EIPP models: Seller Direct, Buyer Direct, and Consolidator, and for each model presents a:

Model Overview - describes and defines the model
Process Flow - explanation of the steps in the transaction process between buyer and seller
Usage Analysis - discusses assumptions and attributes about who would use the model
Key Model Differentiators - distinguishes the model from other models, and identifies benefits and challenges from both the buyer and seller perspective
Implementation Considerations - describes different options for implementing the given model

Understanding Claims through UCC, FASB and GAAP
Richard D. Hastings
Attempts by Financial Accounting Standards Board (FASB) and other contributors to Generally Accepted Accounting (GAAP) Principles to improve private industry practitioners' adherence to best practices in accounting seems to have mixed results. Recent attempts by the Securities and Exchange Commission (SEC) to enforce FASB advisories have led to well publicized investigations, including the investigations at Aurora and more recently at Lucent Technologies.

There is much concern within mercantile trading partners about the unusually difficult situation for trade claims (also referred to as charge backs, or as disputes). It appears that certain procedural loopholes exist between GAAP, Uniform Commercial Code and contract law that encourages an excessive number of expense disputes to occur. The following article attempts to explore the relationships between expenses, GAAP, FASB advisories and contract law to see if the excessive number of trade claims is possibly the result of inadequate coordination between practitioners and the advisors to FASB, UCC revisions and GAAP. It appears that private industry adherence to better practices would exist if more questions were raised regarding the origins of claims in the foundations of UCC and GAAP.

Volume 6, Number 4, Fourth Quarter 2000

The Economic Outlook for 2001
Joseph W. Duncan, Ph.D.
At the end of 2000 there was a sense of pessimism about the future of the U.S. economy. This was predicated on the election deadlock, an ongoing stock market decline, a weak third quarter set of statistics for economic indicators, "dot.com" layoffs, emerging credit concerns, predictions of a global slow down and countless other worries.

The article has set forth some of the facts about current economic conditions. It has demonstrated that many of the concerns are overstated. The article sets forth the view that most of the current slow-down is a return to more sustainable levels. Further, the basic demands for new technology remain strong. The growth of consumer spending will weaken but higher incomes and higher employment will lead to future growth in consumer spending levels.

There are danger signals to keep in mind. The tightening credit markets are one such area. The gridlock in Washington and the aftermath of the election could have negative impact on consumer and business confidence but past history shows that both the public and business have an ability to quickly adjust to new and difficult conditions.

Economics and the New Economy: The Invisible Hand Meets Creative Destruction
Leonard I. Nakamura
As the third millennium begins, the buzzwords "new economy" and "new paradigm" are invoked repeatedly to explain the U.S. economy. In general, these words refer to a view that the globalization of world markets and high-tech innovations have changed our economy enough that we need to think about it and operate within it differently. Perhaps what we notice most is a new Zeitgeist of accelerating change in the worlds of work and knowledge, change that's emphasized in books with titles like Blur (Davis and Meyer) and Faster: The Acceleration of Just About Everything (Gleick). Unsurprisingly, economists by no means agree that there is a new economy or that there is a need for a new paradigm.

One sign that there has been a fundamental shift is that direct production of goods and services no longer absorbs the preponderance of workers' time. In 1975, production of goods and services ceased being the occupation of the majority of U.S. workers. Never before had a society been so productive that it could afford to assign most of its workers to white-collar tasks such as management, paperwork, sales and creativity.

As recently as 1900, production workers in goods and services accounted for 82 percent of the U.S. workforce (Figure). Over the course of the century, that number declined by large steps, to 64 percent in 1950, and to 41 percent in 1999. Managers, professionals and technical workers, who are increasingly involved in creative activities, have risen from 10 percent of the workforce in 1900 to 17 percent in 1950, to 33 percent in 1999.

In 1999 the U.S. economy employed 7.6 million creative professional workers - 2.3 million engineers and architects, 2.9 million scientists, and 2.4 million writers, designers, artists, and entertainers. At the start of the century, this group numbered 200,000 workers - less than 1 percent of the 29.3 million workers then employed. By 1950, the count had risen more than five times to 1.1 million - almost 2 percent of the total of 59 million workers. There are now more than six times as many creative professionals as in 1950, representing 5.7 percent of the workforce (Table).

These creative professional workers are paid for their efforts primarily through property rights to their creations: they (and the corporations that employ them) are granted copyrights, patents, brand names or trademarks. These property rights in turn create temporary exclusivity, temporary monopoly power that negates the unfettered access to markets so prized in economic theory.

The clash between creativity and traditional economics runs deep. Perfect competition is the central paradigm economists have relied on to describe capitalist economies. This paradigm, which underlies Adam Smith's "Invisible Hand" theorem, focuses on production processes and abstracts from the informational tasks that managers, professionals, clerks, and sales workers perform. The paradigm of perfect competition was formulated by William S. Jevons, Leon Walras, and Carl Menger in the late 19th century, a time when direct production of goods and services dominated work. Is this paradigm still appropriate in an age in which innovation is such an important economic activity; millions of workers are employed in creative activities, such as designing, inventing and marketing new products; and more and more economic activity is devoted to creating technical progress?

In light of the changes summarized above, perhaps the theory set forth by Joseph Schumpeter and often referred to as creative destruction is a better paradigm for the current U.S. economy. Paul Romer (1998), a Stanford professor of economics and one of the new Schumpeterian theorists, uses the metaphor of cooking to describe direct production as following existing recipes while creativity is seen as creating new recipes. The new recipes that result from creative endeavors allow a higher standard of living. But creative efforts are risky: while some efforts will fail and yield little, if any, payoff, efforts that yield successful new products are richly rewarded. Firms and workers whose products are outmoded by the new products are harmed. The unevenness of reward implies that an economy that devotes a lot of its resources to creative efforts may have greater inequality, as well as a higher average standard of living, than one that is less creative. And if creativity continues to increase in importance, inequality may continue to rise in the long run, or at least may not decline.

Managing the Outsourcing Process
Timothy P. Smith
Organizations around the world are increasingly considering outsourcing as a strategic management tool, which can be leveraged to allow them to focus on their core competencies. Outsourcing is viewed as a means to reduce costs, improve customer satisfaction, and provide enhanced efficiency and effectiveness. However, many organizations never realize the full benefits of an outsourcing relationship.

Outsourcing relationships fail when they are viewed as short-term or tactical solutions, rather than part of long-term strategic plans. The process of considering and/or implementing an outsourcing solution must be systematic and fully documented to achieve the desired results. A multi-step approach, including Planning, Analysis, Design, Implementation and Operations phases, along with a contingency exit strategy, is required to achieve a successful outsourcing implementation.

A Successful Loan Default Prediction Model for Small Business
Irena Yegorova, Bruce H. Andrews, John B. Jensen, Bert J. Smoluk
This study contributes to the credit risk management literature by implementing a credit scoring model using commonly available data on small business loans made by an economic development lender based in Maine. A total of 117 variables representing loan characteristics are initially examined, and a series of practical screening methods are used to isolate the more statistically relevant variables for predicting loan default. Only the most statistically significant variables with an economically "correct" sign are then used to build a binary logistic regression model. Three ratios, the current liabilities/current assets, the sales/gross margin and the equity/working capital are found to be highly significant in predicting loan default. The resulting model correctly predicted 87% of bad loans.

The Diversity of the Credit Portfolio
Richard H. Borgman, Ph.D., John K. Ford, Ph.D.
The cheapest and easiest approach to managing the loan or receivables portfolio is to invest every dollar in one credit. Of course this strategy carries the risk of a single default destroying the entire value of the portfolio. The objective of diversification is to spread portfolio dollars over a number of loans and reduce the probability of a catastrophic loss.

Volume 6, Number 3, Third Quarter 2000

Reducing the Cash Gap by Factoring
Daniel J. Borgia, Ph.D. and Deanna O. Burgess, Ph.D.
Growing firms often find themselves strapped for money. A gap in cash is created when bills are paid weeks before cash comes in from customers. The cash gap can be shortened by concentrating efforts on fast moving inventory, implementing a just-in-time inventory model, negotiating extended credit terms to suppliers, and getting cash out of customers through discount programs and credit card transactions. Only after exhausting these alternatives does factoring typically make sense.

Factoring provides quick access to cash through sales of receivables. The cash gap is shortened to the extent factoring brings in money earlier than receivables normally would. In general, firms that sell receivables immediately receive a percentage of the outstanding accounts sold. Once the receivables are paid, the factor forwards the balance of these collected accounts to the firm less a factoring fee. This article describes typical factoring arrangements and the costs/benefits of this form of financing. Fees can be high but may outweigh the costs of lost sales, ventures, opportunities, or at the extreme, going out of business.

A survey of small to medium sized businesses that use factoring provides a consumer profile of typical factoring arrangements. A majority of those surveyed are young, rapidly expanding organizations using factoring to support short-term entrepreneurial expansion efforts. Firms report that factoring typically provides access to seventy to ninety percent of cash tied up in receivables, with the balance provided within sixty to ninety days less a ten to twelve percent fee. In all, those that use factoring report high satisfaction, and often use the same factor on a repeat basis.

An Objective Approach for Estimating Bank Loan Fair Values
William B. Joyce
An objective approach for estimating fair values of bank loans using observable information is provided. The market value of a bank's stock is used, and it is partitioned into components. While the historical cost of assets (the book values of loans) is observable, a fair value (market value) is not. A fair value estimate of bank loans is important to investors, creditors, regulators and other interested parties.

The Way We Will Be Sure Isn't the Way We Were
Max Moses
The next decade will bring significant changes to the credit, collections and bankruptcy industries and the way business, including the practice of law, is done. We have talked to a number of key players in the industry to get their thoughts on what the business will look like and have checked with a number of other sources to compile this compendium of visions of the way of the business world over the next ten years.

The Diversity of the Credit Portfolio
Richard H. Borgman, Ph.D. and John K. Ford, Ph.D.
The cheapest and easiest approach to managing the loan or receivables portfolio is to invest every dollar in one credit. Of course this strategy carries the risk of a single default destroying the entire value of the portfolio. The objective of diversification is to spread portfolio dollars over a number of loans and reduce the probability of a catastrophic loss.

Dynamic Settlement Process
L. H. "Skip" Kaiser
E-commerce enterprises are quietly automating their settlement processing. In the business-to-consumer world, credit cards are proving to be the preferred method of payment. In the business-to-business environment, credit cards, usually in the form of purchasing cards (p-cards), are an acceptable payment medium for only a small portion of the marketplace. In most B2B transactions, open terms such as net 30 days are the norm, and business customers are loath to relinquish the benefits derived from trade credit. At issue is not so much fees and interest rates, but that business customers do not want to give up control. With open terms you can take deductions to redress product and service deficiencies, and even hold up payment entirely without any real short-term threat of a penalty. In addition, business customers use open terms to facilitate internal audit controls between the purchase of goods and services and their subsequent payment.

The challenge for B2B companies has been to cost effectively automate their settlement processing. In order to thoroughly understand the dynamics involved in moving from manual cash applications to automated processes, it is essential that the different types of costs involved in remittance processing, no matter what the technology, be first understood.

Volume 6, Number 2, Second Quarter 2000

Capital Structure and Financial Stress
William B. Joyce
Debt policy is an important part of capital structure. Legal bankruptcy can be expensive, time-consuming and painful. There are costs associated with financial distress even if legal bankruptcy is ultimately avoided. Additionally, potential conflicts of interest between the firm's security holders may arise and information problems may arise when new securities are issued or when there is a change in investment policy. Finally, there may be incentive effects of financial leverage on management's investment and dividend decisions.

The Dynamics of Risk, Liquidity and Information in Commercial Credit Granting Applications
Richard D. Hastings
Recent innovations in information technologies require profound reconsiderations of existing philosophies of credit risk management at the supplier level. It is becoming more likely that the quantity of organized information on buyers and sellers and terms is such that previous reliance upon intuition and traditional quantitative analyses to make optimized decisions is obsolete. Additionally, the historical pattern of stockpiling resources, most visible in the development of the retailing industries and its supply chains, is being challenged by these improvements in information availability and the contemporaneous reduction of uncertainty.

Federal Reserve Chairman Greenspan has discussed this subject in detail on numerous occasions. "Before this revolution in information availability, most twentieth-century business decision making had been hampered by pervasive uncertainty. Owing to the paucity of timely knowledge of customers' needs and of the location of inventories and materials flowing throughout complex production systems, businesses required substantial programmed redundancies to function effectively. Doubling up on materials and people was essential as backup to the inevitable misjudgments of the real-time state of play in a company. Decisions were made from information that was hours, days, or even weeks old. Accordingly, production planning required costly inventory safety stocks and backup teams of people to respond to the unanticipated and the misjudged." - excerpt from Remarks by Chairman Alan Greenspan, "Technological Innovation and the Economy" at the White House Conference on the New Economy, April 5, 2000.

The relevance to the daily responsibilities of credit professionals of these and other remarks in this address is of historical dimensions. The following discussions will focus on the philosophical foundations of emerging revisions in credit and risk theory.

In particular, we notice a dependent relationship of the quality and availability information to the liquidity of material supply and capital; that is, as the quality of information increases for any market of supply of goods and services, so does the liquidity of each of these changes. If quality and availability are characteristics of information, then a market for information exists and all markets are defined as more or less liquid and efficient. As information improves, as supply of capital and goods improve, risk diminishes. However, we argue that the expanding world of information includes within it a necessary element of uncertainty. The expansion of knowledge about buyers, sellers, goods and capital automatically conveys less information about certain areas of influence in a way that is not anticipated by the information user. As the velocity of delivery of information increases, so does there occur rapid change of choice and of the number of unknown parties involved since the latter may choose to involve themselves without sufficient information about their involvement. This process automatically creates a form of uncertainty, since we may not know what information others have about the environment we observe.

We are entering into a period of economic history in which the transaction may be as complex as any firm, since each transaction contains information about many parties to the contract, about related transactions and other subsets of participants and supplies. As we make a decision to enter into a situation at a fixed price, the information we used to make that decision points to events and changes we may not effectively and quantitatively include in our pricing of the decision. Credit decisions at the supply chain level involve themselves in a range of focus: from the open debits of each invoice of a related purchase order, to industry analysis of customers, to the study of economic data on rates, employment, and resources - the determinants of macroeconomic laws. We now see the barriers breaking down between these realms of risk, thereby creating a new dynamic of risk philosophy.

In preparation of this article, we obtained the valuable input of Mr. Joseph G. Haubrich, Consultant and Economist at the Research Department of the Federal Reserve Bank of Cleveland. His comments are considered his own and are not necessarily reflective of the views of the publishers of this article or of the Federal Reserve Bank of Cleveland.

Introduction to Abandoned Property
Jeremy D. Katz
The concepts underlying abandoned property law can be traced back to British common law, when abandoned land was returned to the king as a matter of right. This permanent transfer of property rights to the king was called escheat. In the United States, where the concept has been adapted to apply to intangible personal assets, such as salary checks, bank account balances and securities, the states receive the property instead of the king. The states do not take permanent possession, as did the king but act as the custodian of the property in perpetuity on behalf of the rightful owner. Nonetheless, this custodial relationship is frequently referred to as escheat.

Virtually every company has abandoned property and is required to file reports annually with the states. Industry experts estimate the $3 billion plus remitted to the states annually is but a small percentage of the actual property considered abandoned. What accounts for the rest of the property? It is either not being reported to the states because a company does not understand what constitutes property and the reporting obligation or because a company erroneously believes that abandoned property may be treated as income.

Abandoned property law has been evolving steadily since the creation of the first model unclaimed property act in 1954 by the Conference of Commissioners on Uniform State Laws. There have been three model acts promulgated by the Conference that define what abandoned property is and how it must be reported, with the most recent version being published in 1995. These are called model acts because it is up to the states to adopt them in full or in part. The Acts were created to achieve three goals: to reunite the lost owners with the property that is rightfully theirs, to protect the company from subsequent claims by the owner after the property was transferred to the state, and to ensure that any economic windfall is for the benefit of the citizens of the state and not for the company.

How well do you "Comprende" collecting south of the border?
Robert G. Smith
Selling to Latin America is not the same as selling to Michigan. Sure, you knew that. So what? Big deal, they speak Spanish there.

Actually, over half the consumers in South America speak Portuguese and the Spanish spoken in Argentina is considerably different than that spoken in Colombia. There are meaningful differences in word usage between all the Spanish-speaking countries in Latin America and Central America. There are also meaningful differences in culture and business practices among the Latin and Central American nations. To effectively conduct business in these countries one has to have a thorough understanding of the respective marketplace.

Whither Cash Flow? Whence Value? Chapter II
Steven C. Isberg, Ph.D.
Why would anyone pay a price in excess of 60 times the sales per share for a corporate stock? If there were earnings at a net margin of 10%, this would equate to a price earnings ratio of 600: but there are no earnings! What is being valued here?

The answer, as we will see, is a growth option. When growth options are present in an investment, traditional models of valuation, such as the p/e model, are passed up in favor of others. These more accurately measure the value of a growth option in economic environment characterized by a high degree of uncertainty. While uncertainty, represented by volatility in future outcomes, leads to lower prices in the traditional models, it leads to higher prices in others, such as option valuation models. Option models explain more of the behavior observed in markets where the future is less certain yet asset prices are high. This article will review two types of valuation models and show how each can be used in a dynamic economic environment. It will close by discussing why it is important for credit managers to have an understanding of these different approaches to valuation.

Don't Be Out-Scored by Your Competition
Michael Banasiak
The advent of e-commerce and the prospect of seamless integration along the order-to-cash continuum is making unprecedented demands upon the commercial credit fraternity. While most credit departments operate in an environment that is a collage of both paper-based and automated systems, e-commerce is inexorably leading us to a fully automated transaction-based model. The obvious problem is how to automate the paper-based tasks. Failure to do so effectively will create bottlenecks that have the potential to greatly diminish the utility of a business-to-business (b2b) e-commerce system.

Volume 6, Number 1, First Quarter 2000

The State of American Retail Stores
Richard D. Hastings
"If, Then, So and What? Or"

If:
Interest rate increases are offset by increases in productivity.
Managerial and Professional jobs are significantly up during the last few years.
Unemployment is at a 30+ year low.
Consumers report a decreasing concern about losing their jobs.
Consumer confidence is at an all-time high.
Equity prices continue to increase, and market liquidity is very strong.
Real average hourly earnings are up sharply.
Full-time employment is strong, and part-time jobs show no significant increase.

Then:
We are looking at the broadest and most powerful economic expansion in The United States of America in more than 100 years.

So:
You go with the flow of the macro economy, including online technologies, non-local labor resources, lower cost environments, constant process improvements, and continual personal reinvention and learning.

And:
Any retailer that doesn't follow suit will disappear during the next few years. That means, simply: any retailing company that is not following the general trends in the macro economy - including expanding, borrowing, investing, and especially providing a superior return on the investments of its customers - will not exist in the new economy. Consumers today exercise powerful liquidity. Their investments are often yielding in excess of 100% return annually, and with job security there is no need to draw against existing investments. The idea again: retailers must follow the model of the macro economy.

What?
Retailers must provide a comparable form of return, a high consideration for the consideration granted by shoppers. The consideration provided by retailers must be substantially in excess of what shoppers provide. This includes both visual and environmental stimulation; an excess of goods; excellent supporting services; and monetary promotions in addition to daily low prices.

Or:
The retailer will disappear.

Using Discounted Cash Flow Analysis to Evaluate the Operations of a Credit Department
Albert Fensterstock
The use of discounted cash flow (DCF) analysis to evaluate ongoing internal operations is rarely considered by management. In fact, the Credit Executives Handbook, published by the Credit Research Foundation, does not even mention this technique, which has been used successfully by Investors, Merger and Acquisition Specialists, Real Estate Entrepreneurs, Product Developers, Accountants and many others, for a great number of years, as the basis for analyzing competing alternatives.

One of the reasons that this technique may have been overlooked, as a management tool, is that it assumes an investment or series of investments that produce a return in the form of one or more positive cash flows. As credit is usually not considered in this light, DCF is rarely used. In this article, however, we will suggest an approach that if properly applied can provide a company with an unbiased method for evaluating the operations of a credit department, a sales operation and many other internal functions, at any desired level, i.e., individual, group, overall, etc.

Whither Cash Flow? Whence Value? Chapter I
Steven C. Isberg, Ph.D.
Recent changes in the structure, character and behavior of business organizations, as well as capital, product, and service markets, have been turning traditional cash flow and "multiple" valuation methods on their respective heads. How is it that a firm like amazon.com (as of March 2000) can be selling at $62 per share while having losses of $2.18 per share? What economic measure is being valued? Exactly how do we price such an investment? In another instance, think about what happened to Proctor & Gamble in March of this year. Announcement of a relatively moderate earnings decline created a huge loss in share value ($40 MMM), with the price/earnings multiple falling from 37 to 19! It has been claimed that this was actually a complete revaluation using a different model of pricing.

Closer to home, suppose you as a credit executive, ergo finance expert, have been invited (coerced, impressed, etc.?) to participate in the process of valuing an acquisition target? You find out that your company's goals are to add to market share, and that the "target" has no earnings, and therefore, little or no cash flow on which to base an analysis of value. You might be able to project cash flows on your own and discount them in the traditional fashion. The result, however, may lead to a price that is substantially above or below market value. If it is above, then you overpay; if below, you don't secure a deal. So how do we determine this price?

These and other valuation issues will be discussed in a two-part series beginning with this article. This first article will examine two approaches to valuation using a discounted cash flow methodology. The critical lesson to be learned here relates to the value of having continuous access to financial capital. What will be shown is that in cases where debt financing used to fund an investment can be rolled over, the value of that investment can be substantially greater than in cases where the debt is paid off. Further, these examples will illustrate the importance of understanding and properly measuring the cost of capital. While most traditional valuation modeling examples assume capital costs to be constant, the analysis here shows that a changing cost of capital over time will have a significant effect on the value of a corporate investment. This implies that the investor's access to capital markets will influence the price to be paid. The second article will outline different methods of comparison valuation using economic multiples. These models will then be viewed in the context current activity in the high growth end of the public equity markets, where many of the traditional valuation models no longer seem to apply.

Post Audits Can Be Managed: What are the right questions to ask?
Kenneth E. Green
Of all the deductions that manufacturers are forced by their customers to address, post audit deductions are the most tedious to deal with, the most difficult to research, and the fastest growing of all deduction categories. To compound the problem, not only must you deal with individual in-house auditors reviewing what can be termed age old issues, there are often multiple in-house teams and third party auditors with overlapping date range responsibilities. To say that post audit waters are muddy, is to understate the problem dramatically.

To ignore post audits, however, giving in to your customer's and third party auditors' demands is to incur unnecessary write-offs or to issue unnecessary credits. Further, it sets your company up as a target for post audit deductions in the future. We believe that asking the right questions identify how best to manage these difficult issues.

Credit Management and the B2B Business Model
Michael Hinchman & Tom Corbett
There have been sweeping changes in Credit Management over the past decade. Some departments have evolved from the Credit and Collections department to the Customer Financial Services department and then again to become the Customer Support Group. Credit executives have adjusted their strategies to handle the migration from legacy systems to the infamous Enterprise Resource Planning systems and the advent of cross-functional teams. E-business initiatives guarantee that the frenzied pace of change will not abate. The current forecasts for the expansion of e-business clearly show that credit executives will need to move at warp speed to keep up.

The Gartner Group estimates that Business-to-business (B2B) e-commerce will grow at aggressive rates through 2004, causing fundamental changes to the way businesses do business with each other. The worldwide B2B market is forecast to grow from $145 billion in 1999 to $7.29 trillion in 2004. By 2004, Gartner predicts B2B e-commerce will represent 7 percent of the forecasted $105 trillion total global sales transactions. A more conservative estimate by Forrester Research Inc. says B2B electronic commerce will reach only $2.7 trillion in 2004 and according to the Boston Consulting Group business-to-business transactions on the Net will reach $2.8 trillion by 2003. Regardless of which consulting group's estimate is more accurate, the figures dwarf the $109.3 billion spent in 1999.

Volume 5, Number 4, Fourth Quarter 1999

The Economic Outlook for 2000
Joseph W. Duncan
As the new millennium begins there is a strong sense of optimism that the world economy will begin getting stronger. The move to the 21st from the 20th century has a certain "ring in the new" sense with many analysts focusing on the New Economy and the opening of new information based markets in a global economy seeking to reduce trade barriers.

The U.S. economy will soon set a post World War II record for the longest period of business expansion. In December of 1999, the economy entered its 105th month of growth. Officially, the 1991 recession reached a bottom in March of 1991. The record for the growth phase of business expansion occurred in the 1960's when defense spending for the Vietnam war extended the business cycle for an extended period. That record will certainly be eclipsed in the first quarter of the year 2000.

Additionally the stock market continues to make new records and is likely to end 1999 with an unprecedented fourth double-digit year of growth, and the forthcoming election of a new president furthers the theme of "better times ahead". Yet, the age of the current expansion, the risks of policy missteps, and the unease that problems may lie ahead remain as factors that must be considered when looking at the crystal ball that shows the forecast for the year 2000.

Skill Sets for the Near Future
E. John Broderick
Is it truly possible that increased work, an unending learning process, the high probability of forced job change and a divisive split in the basic nature of your career field could be good news? An objective view of the current trends affecting the credit field seems to indicate that this is the case--for those who are prepared. If you pay minimal attention to the general economic news you know the current job market is termed an "Employee's Market", meaning a high demand for skilled workers. It seems as if everyone is in demand. With the advent of the Internet, skilled professionals are even auctioning their skills to high bidders. The phrase "free agent" has been borrowed from the sports world and now describes the professional who is willing to offer their services on a project or temporary basis. The demands of the marketplace have caused employers to amend their hiring practices to include hiring bonuses and compensation incentives to a degree never before experienced by American Industry. Practically every aspect of corporate life is being affected by a drive to take advantage of opportunities presented in such positive economic times.

New Guy, Old Guy, Dead Guy
By Dan A. Wolner, CCE
Ask a group of corporate executives to explain the purpose of credit and most will have difficulty. They all understand customers expect credit or need credit. They know why credit is extended -- convenience, cashflow, competition. But that still doesn't answer the question, "What is the purpose of credit?"

An adaptation of the copyrighted Profit System of Credit and Collection Management, developed by Abe WalkingBear Sanchez, A/R Management Group, Inc., this article is designed to answer that question. It will also discuss the importance of using the answer to construct a framework of workable policies, procedures, people requirements and performance measurements that will produce improvements in corporate performance, motivation and market value.

Business-to-Business Electronic Commerce
John Wenninger
To improve efficiency, some large retailers, suppliers, and distributors have begun to conduct business-to-business commerce electronically. This practice could grow rapidly if the Internet becomes the primary low-cost network for such transactions. Before the Internet can fully support business-to-business commerce, however, companies must overcome several technological and security obstacles.

In recent years, a number of companies have reported gains in operating efficiency through the use of business-to-business electronic commerce, or the movement of information electronically between businesses over computer networks. This success could have important implications for U.S. industry. By extending the benefits of computers to the exchange of information between suppliers, manufacturers, and retailers, business-to-business electronic commerce may give companies the added advantage that they need to achieve measurable productivity gains

The idea of using computers in commerce is not new--many business processes have been automated over the past decade. Until recently, however, most companies have used the computer primarily as a tool for storing and analyzing proprietary data related to internal operations or to customers. Today, several advances in computer network technology are helping companies to extend the use of computers to the procurement, production, and distribution processes. Through the electronic exchange of information with suppliers, distributors, and retailers, companies can better direct the production, inventory, and distribution of goods and more promptly alter prices and production strategies.

This article looks at how business-to-business electronic commerce can help companies more efficiently manage the various steps involved in bringing goods to the market. In addition, we examine some of the obstacles that have hindered the widespread use of electronic commerce between businesses. Finally, we consider how the computerization of information exchange between companies might affect business-to-business relationships and industry overall.

Creative Solutions for Trading in Today's Global Market:
Enhancing Credit Management Strategies with Credit Insurance
By Eva Taylor
Through technological advances and trade liberalization, the marketplace is evolving into a true world economy. US exports are on the rise. Increased foreign competition in the US, profitable overseas ventures, and improved private sector trade services have all contributed to the 52% growth in US exports over the last six years. And that is in addition to increased domestic sales.

That's great news. However, these trade opportunities usually come with new and unique problems. Cultural differences and language barriers are just the beginning. When you cross national boundaries, you must also navigate through an entanglement of different legal and accounting systems.

The same technological advancements helping to open doors to new markets by simplifying global trade also brings new tools to handle the intricate issues involved with trading internationally. Whether you are conducting business domestically or abroad, these improvements allow for greater access to important customer and trade information through access to the Internet and employment of new hardware and software that assists with credit scoring, analysis, logistics and communication.

Even with these technological advances, you are confronted with the challenges associated with developing the most cost-effective credit management strategy for your company's success. Besides assessing risk to your accounts receivable, you are required to develop collection tactics and determine strategies that maintain sales initiatives while minimizing loss. If your company trades internationally, you could be responsible for establishing guidelines for governing risk taken in complex overseas markets.

In order to gain a market advantage, international business has added a number of alternative credit management tools to their credit management arsenal. Credit insurance is one of these tools. Knowledgeable credit executives have used these flexible programs to help mitigate risk, increase sales, and facilitate financing. By enhancing your credit management program with alternatives like credit insurance, you can redirect your resources from a focus on some of your detailed activities to high-level account portfolio management.

Real Business Cycles: A Legacy of Countercyclical Policies
By: Satyajit Chatterjee
Business cycles have troubled market-oriented economies since the dawn of the industrial age. The upward march of living standards in capitalistic countries has been repeatedly punctuated by periods of markedly high unemployment rates and slow growth or an outright decline in the living standard of the average person. This alternating pattern of boom and bust is what the term business cycle means.

In an article published in 1986, Edward Prescott forcefully argued that during the post-World War II period, business cycles in the United States mostly resulted from random changes in the growth rate of business sector productivity. He showed that upswings in economic activity occurred when productivity grew at an above-average rate and downswings occurred when productivity grew at a below-average rate.

Prescott challenged the dominant view that business cycles are caused by monetary and financial disturbances. According to that view, upswings in economic activity result from unexpectedly rapid increases in the supply of money, while downswings result from slow growth or a fall in the money supply. In contrast, Prescott and his collaborators presented evidence that business cycles of the sort seen during the postwar era would occur even if there were no monetary or financial disturbances.

John Long and Charles Plosser coined the term real business cycles to describe business cycles whose proximate causes are random changes in productivity. Without a doubt, the most controversial aspect of real-business-cycle theory is its implications for countercyclical monetary and fiscal policies. Real-business-cycle theory appears to ascribe no importance to existing countercyclical policies. Moreover, it implies that some policies aimed at reducing the severity of business cycles are likely to entail more costs than benefits.

Both implications contradict long-held views. Indeed, these policy implications strike many economists as so outrageous that they simply dismiss real-business-cycle theory as false. Yet, the theory has successfully countered the many objections leveled against it. As a result, macroeconomists are beginning to take it more seriously. Of course, countercyclical policies are of paramount importance to the Federal Reserve System. As real-business-cycle theory gains increasing acceptance among economists, an understanding of its policy implications becomes crucial. Consequently, this article briefly describes real-business-cycle theory, then turns to a discussion of its implications for countercyclical policies.

The policy lessons of real-business-cycle theory are more subtle than they appear at first blush. Although the theory ascribes no ostensible role to postwar countercyclical policies, its success in accounting for U. S. business cycles may be the clearest indication yet of the effectiveness of these policies. At the same time, though, the doubts raised by the theory about the wisdom of some policy initiatives to control business cycles may be well founded.

Volume 5, Number 3, Third Quarter 1999

The Importance of Revolving Credit Facilities to the Credit Manager
Scott Friedman
For today's credit manager, looking at a customer's revolving credit facility is a crucial step in the evaluation process. However, credit agreements are legal documents that can run up to 400 pages, the majority of which have no significance to the credit professional. In order to recognize what information is important in a credit agreement, we should take a step back and look at the purpose and characteristics of a revolving credit facility.

A Model for Working Capital Requirements and Corporate Liquidity Management
Joseph J. Kiernan, Ph.D.
A significant (and positive) development in corporate financial management over recent years has been an increased emphasis on liquidity and the management of operating cash flows. Reasons for this increased emphasis include economic recession, corporate restructuring activities, and the need to increase and conserve operating cash flows to meet higher debt service requirements or finance more modern facilities. In the academic, as well as the professional, world old tools are being reassessed and new tools developed to aid the treasury professional in the efficient management of corporate cash resources. The purpose of this paper is to integrate two tools of liquidity management; the cash conversion period and the net liquid.

The Ultimate Y2K Guide for the Credit Industry
By Max G. Moses
I'm certain that you are just as tired of hearing and reading about the Y2K computer bug as I am. By now, everyone in the civilized world knows that if your computer stores, displays, manipulates or uses a two digit year in any fashion, that the world as we know it may come to an end on January 1, 2000.

This article will deal with the much-anticipated new millennium strictly from the standpoint of the credit industry. Through a series of brief articles, sidebars and factoids this feature will provide information that should be immediately useful to many facets of the credit industry.

A User's Guide to Forfaiting: What It Is, Who Uses It and Why?
John F. Moran, Jr.
Italian and West German exporters have long been familiar with Forfaiting and still provide the bulk of the market. UK, Scandinavian, Spanish and French exporters are latching onto the possibilities of the technique with enthusiasm. The American and Canadians, meanwhile, have been slow to catch on (some Forfaiters think it is because they are suspicious of its simplicity coupled with a lack of complex documentation). For people who are not using the technique, below is a concise introduction to Forfaiting using questions those new to the technique would typically ask.

Automating the Collection Function
Robert Hays
By now, as credit/collection professionals, you are well aware of the importance of computerizing your collection functions. It seems that almost every periodical you read confirms the need for a computerized department. Every trade show you attend devotes time to the efficiencies to be achieved by this or that computer program. At the same time, every management meeting that reviews the bottom line seems to result in you having to do more with less. OK, you're now convinced that you must modernize, but where do you begin? What is the next step? How much money do you need to spend, and how do you justify the costs? The process of automation is the same no matter how large or small your collection department. Whether you have a one-person shop, a staff of ten, or several collection sites with hundreds of people, you should go through the entire process.

The Credit Life Cycle
By Scott R. Tillesen
The notion of business life cycles suggests that products and businesses have a definable beginning and end. In between are phases characterized by benchmarks such as market size or share, research and development expenditures, profitability levels and other observable traits. These phases may vary in intensity and length of time, but business enterprises and products go through these periods--let's call them life cycles.

The phases of a business life cycle can be characterized by other issues, too, and some are credit-related. Credit professionals should take the phases of the credit life cycle into consideration when making credit decisions. In each phase, there is a predictable pattern of business risk, expected recovery and a time-frame for action, and each can be important in the determination of credit worthiness.

Volume 5, Number 2, Second Quarter 1999

Everything You Always Wanted to Know About Discounting, but Were Afraid to Ask: A Finance 101 Primer
Benjamin S. Wilner, Ph.D.
The above is one of the three most important equations in finance. This article takes this seemingly illogical statement and expands it to demonstrate the financial concepts of Present Value (PV), Net Present Value (NPV), Future Value (FV), and Internal Rate of Return (IRR). This article additionally demonstrates how to apply these concepts on a computer spreadsheet. By understanding these concepts, a credit manager can properly determine optimal credit terms, compare proposed repayment plans, and evaluate various investment opportunities.

I must provide one warning before you read any further: Finance is not a spectator sport. You cannot just read this article and be able to immediately apply these concepts. You must practice and get to know the ins and outs of these formulas.

This article commences a regular series of articles on basic financial topics. Future topics include: financial market efficiency, corporate control, raising capital, bankruptcy, and game theory.

Y2K- A Global Perspective

The Year 2000 Problem (Y2K) is vast and complex, and is not simply an Information Systems (IS) issue. It can affect any system that uses dates, such as hardware, embedded firmware, operating systems, random number generators and security services, database-management systems, transaction-processing systems, banking systems, spreadsheets, phone systems, and more. This type of network interruption or breakdown can severely disrupt the flow of knowledge and information in businesses, both internally and externally, between businesses and international, national and local organizations, financial institutions, and governments.

Why Did Europe Form A Monetary Union?
Gwen Eudey
European countries have become more and more integrated in recent decades. Now, Europeans routinely sell goods and services across national boundaries, own stocks and bonds from other countries, and work abroad. But since each country had its own currency, Europeans spent a lot of time and resources trading one currency for another.

To make their financial lives easier, 11 European countries have joined together to form the European Monetary Union (EMU), which will have only one currency, the euro.1 A common currency will not only save these countries time and money, but it will also increase trade within Europe as well as make it easier for citizens of one country to buy stocks and bonds in another.

However, monetary union also has costs. European countries can now adjust their exchange rate and monetary policies in response to severe domestic economic problems. Although the introduction of a single currency will simplify trade between European countries, each country will give up the ability to use monetary policy to influence its economy. No individual country's central bank will be able to set interest rates. And no country in the EMU will be able to adjust its exchange rate vis a vis the others.

How large a sacrifice will it be to give up independent monetary and exchange rate policies? The answer depends on the types of macroeconomic "shocks" that hit the economy and how well other adjustment mechanisms compensate for the lack of exchange rate flexibility. In particular, it will depend on the degree to which prices and wages adjust to accommodate those shocks, the degree to which labor can move across borders, and the extent to which fiscal policy can be used to control the economy.

EDF(tm) Credit Measure - A Market-based Measure of Default Risk
John Andrew McQuown, Tim Kasta, and Glenn P. Sullivan
Companies extend credit to each other in two fundamental ways: trade credit and leverage. Each of these modes expect a certain return and each encompass a certain risk. You cannot avoid risk. You can only ensure that you are sufficiently compensated for the risk taken. When defaults occur, credit investors suffer losses. Accordingly, issuers should pay investors a spread over the default-free rate of interest proportional to their default probability.

Trade credit is a natural byproduct of the ordinary course of business. Accounts receivable evidence an extension of credit to buyers of goods and services, while accounts payable represent amounts owed to suppliers. These extensions turnover at comparatively high frequencies, typically on the order of every 45 days, or 800% annually. As the turnover of receivables slows, the cost of sales rises, and of course conversely for payables. To provide incentives to purchasing customers, receivables often contain discounts on billed amounts when payments are prompt. When payments extend beyond "normal", an explicit rate of interest is frequently applied to the balance due, and the level of this rate is high in relation to the credit riskiness of the obligor. For example, 1.5% per month, or 18% annually, is not uncommon. This rate exceeds the default free rate (of about 6%) by 12 percentage points, and represents a substantial penalty to even the least credit worthy company.

Leverage, in the form of short and long-term liabilities, is usually a more permanent, and extensive, feature of most companies' capital structures. Here, the turnover, or amortization rate, is in the vicinity of 5% to 25% annually, sharply lower than trade credit. Another feature of leverage is an explicitly applied rate of interest that, presumably, reflects the riskiness of the obligor. If the providing investors are not satisfied with their portfolios' return expectations, the remedy may be to obtain credit of riskier obligors bearing higher rates of interest. Here, the individual obligors' return-to-risk characteristics are enhanced as investors exercise control over their portfolios' diversification. Diversification, a portfolio effect, diminishes risk without disturbing the return expectation. In fact, diversification lowers, by 90% or more, the risk-to-return characteristic of the typical "stand-alone" exposure. Trade creditors typically exercise less control over the diversification of their accounts receivable books than leverage-investors over their portfolios. However, trade creditors do worry when their accounts receivable book is over-concentrated in too few buyers (obligors).

Credit losses are a cost of doing business that cannot be ignored. In the instance of banks, credit losses can be sufficiently severe so as to threaten their existence. Accordingly, in both forms of credit extension, lenders need to understand the default rates of obligors in their portfolios. Even when a rigorous collection procedure is instigated upon default, both trade and leverage lenders usually suffer losses. Thus, interest income, or the extent of the receivable owing, must be decreased by an amount of this "loss expectation" to understand the economics of the extension of credit.

Ninety percent, or more, of the uncertainty embedded in the economics of credit extension traces to the probability of default of the particular obligor. Thus, getting to the heart of the economics of credit means obtaining timely and accurate estimates of individual obligor default probabilities. Before the fact, there is no method to discriminate unambiguously between issuers who will default and those who will not. Ex ante, that is, we can only make probability assessments of the prospects of default. Default is a deceptively rare event. The typical borrowing firm has a default probability of around 2% in any year. Thus, there is a 98% complementary probability of that firm not defaulting.

However, there is considerable variation in default probabilities across firms. For example, the chances of a triple-A rated firm defaulting is only about 0.02% per annum. A single-A rated firm has a chance of around 0.10% per annum, five times higher than a triple-A. At the bottom of the rating scale, a triple-C rated firm's chances are about 15%, 750 times higher than a triple-A.

A naive approach to investing in credit would be, simply, to assume firms will not default. After all, 98% of the time they don't. However, the consequent losses would destroy investment performance or if the investor is a highly leveraged institution, such as a bank, would bankrupt the lender in short order.

Strictly subjective judgements are no longer an adequate basis for discriminating among firms' default prospects. The measurement of default probabilities has evolved into a science. There are two critical ingredients to competitive default probability measurement: data and models. Models are the means by which data are transformed into default probabilities.

Data pertinent to estimating default probability arise from two sources: financial statements and market prices of firms' debt and equity. Historically, far more use was made of financial statements than market prices in estimation of a firm's default probability. Statements are, inherently, reflections of what happened in the past. Prices, by contrast, are forward looking. Prices are formed by capital providers as they anticipate the future prospects of the firm. Prices contain, thereby, ex ante information. The most accurate default measurement derives from models employing both sources. There is a limit, of course, to the information that can be extracted from statements or prices.

The most functional models are grounded in theory that works. Unfortunately, there is not much theory in economics, macro or micro, which works. Most models are ad hoc, i.e. they lack structure that reflects the causative linkage among the included variables. Even so, ad hoc models have considerable predictive power. But, alas, we cannot determine why they work. Ad hoc models are destined to remain undecipherable "black boxes", even to their designers.

The conclusion advanced here is simple. When available, we want to use market prices in default prediction, for they add substantial predictive "power". Moreover, we want an integrating model whose conceptual structure is readily understandable and appealing to experienced intuition. And finally, the model's conformity to actual default experience must be rigorously tested.

Models using market prices are no more expensive to deploy than those using only financial statements. Moreover, market prices can be economically refreshed as often as you like, e.g. daily, whereas models employing only financial statement data have an irreducible quarterly lag. This lag can be even longer for international firms.

On the other hand, when estimating the default probability on private firms, we only have statement data. We must do the best we can with statement data. The model needs to deal with firms whose capital structure is at variance with the norm. For example, when examining the possible impact of a recapitalization, we will want to obtain an accurate estimate of the new default probability. These requirements lead us to a model based on causation rather than correlation.

Therefore, with private firms, we prefer a model whose conceptual structure is the same as that for public firms. Indeed, the conceptual model developed by KMV is the primary focus of this discussion. From it, we can comprehend the value added by equity prices to the predictive power of statements alone. Moreover, we can assess its robustness in coherently appraising firms whose financial ratios deviate from the norm. The conceptual model, accordingly, places private and public issuer default assessment on common ground in credit portfolio management.

Volume 5, Number 1, First Quarter 1999

Economic Value Added: The Invisible Hand at Work
Michael Durant, CPA, CCE
Adam Smith, one of the fathers of classical economic thought, observed that firms and resource suppliers, seeking to further their own self-interest and operating within the framework of a highly competitive market system, will promote the interest of the public, as though guided by an "invisible hand." (Smith, 1776)

The market mechanism of supply and demand communicates the wants of consumers to businesses and through businesses to resource suppliers. Competition forces business and resource suppliers to make appropriate responses. The impact of an increase in consumer demand for some product will raise that goods price. The resulting economic profits signal other producers that society wants more of the product. Competition simultaneously brings an expansion of output and a lower price.

Profits cause resources to move from lower valued to higher valued uses. The consumer dictates prices and sales. In the quest for higher profits, businesses will take resources out of areas with lower than normal returns and put them into areas in which there is an expectation of high profits. Profits allocate resources.

The primary objective of any business is to create wealth for its owners. If nothing else the organization must provide a growth dividend to those who have invested expecting a value reward for their investment. As companies generate value and grow, society also benefits. The quest for value directs scarce resources to their most promising uses and most productive users. The more effectively resources are employed and managed, the more active economic growth and the rate of improvement in our standard of living as a society. Although there are exceptions to the rule relating to the value of economic wealth, most of the time there is a distinct harmony between creating increased share value of an organization and enhancing the quality of life of people in society.

In most companies today the search for value is being challenged by a seriously out of date financial management system. Often, the wrong financial focus, cash strategies, operating goals, and valuation processes are emphasized. Managers are often rewarded for the wrong achievements and in many cases they are not rewarded for the efforts that lead to real value. Balance sheets are often just the result of accounting rules rather than the focus of value enhancement. These problems beg for approaches to financial focus that are completely different from current approaches. New approaches must start nothing less than a revolution in thinking in the process of economic evaluation.One of the focuses that have proved to be incorrect in the valuation of economic worth is earnings per share (EPS). Earnings per share have long been the hallmark of executives that appear in meetings of the shareholders, as the measure of their accomplishments. This, along with return on equity has long been thought of as the way to attract Wall Street investment. There is nothing that points to EPS as anything more than a ratio that accounting has developed for management reporting. Many executives believe that the stock market wants earnings and that the future of the organization's stock depends on the current EPS, despite the fact that not one shred of convincing evidence to substantiate this claim has ever been produced. To satisfy Wall Street's desire for reported profits, executives feel compelled to create earnings through creative accounting.

Accounting tactics that could be employed to save taxes and increase value are avoided in favor of tactics that increase profit. Capital acquisitions are often not undertaken because they do not meet a hypothetical profit return. R&D and market expanding investments get only lip service. Often increased earnings growth is sustained by overzealous monetary support of businesses that are long past their value peak.

We must ask then, what truly determines increased value in stock prices. Over and over again the evidence points to the cash flow of the organization, adjusted for time and risk, that investors can expect to get back over the life of the business.

Economic Value Added (EVA) is a measurement tool that provides a clear picture of whether a business is creating or destroying shareholder wealth. EVA measures the firm's ability to earn more than the true cost of capital. EVA combines the concept of residual income with the idea that all capital has a cost, which means that it is a measure of the profit that remains after earning a required rate of return on capital. If a firm's earnings exceed the true cost of capital it is creating wealth for its shareholders.

Accurately and Efficiently Measuring Individual Account Credit Risk On Existing Portfolios
Michael Banasiak and Daniel Tantum, Ph.D.
Many credit managers are faced with a daily challenge to make accurate and quick individual account credit risk decisions on their existing customer portfolios. Managing the existing portfolio becomes particularly challenging, as the number of accounts in the portfolio increases. As portfolio size increases, the ability to manually review each account's credit risk and financial capacity becomes a very time consuming and costly endeavor. Furthermore, business customers are often expecting almost instantaneous turn around times of credit decisions. The existing account decisions made by the credit manager may take on many roles from credit authorizations of repeat order requests, credit line increase requests, annual due diligence review, to collection action decisions. For most companies conducting business to business transactions, the existing accounts are where the majority, sometimes up to 90%, of the revenues are derived. Therefore understanding the credit quality of these receivables is of the utmost importance.

In this article, the authors will discuss how credit managers can use statistical tools to measure existing account credit risk from a credit authorization, credit line management, and collection perspective to make accurate, measurable, and verifiable decisions. Existing accounts will be defined, as accounts that have been transacting business for at least three months from first sale or have had at least one transaction in the last 12 months.

Many credit managers know that statistical based New Application Scoring Models have been successfully used for over 10 years to accurately automate the new credit application process for business to business transactions. However, what is not generally known in the industry is that another type of statistical credit scoring model, which we will call a Behavior Scoring Model has been successfully utilized by a small number of companies to manage existing commercial accounts for about 10 years. The less common use of Behavior Scoring Models is counter-intuitive given the greater risk exposure of existing accounts versus new accounts.

Know Your Customer = Stopping Diversion = Increased Profits
Todd Sheffer, CFE
Annually, an estimated $12 billion of American exports are diverted illegally back into the United States--where they actually compete against the same companies that manufactured the product in the first place. In addition to costing U.S. manufacturers billions of dollars in lost profits and consumer confidence, diversion can cause the destruction of legitimate distribution networks and become the stepping stone to the introduction of stolen and/or counterfeit products into the marketplace. In addition, diversion of food, beauty aids and pharmaceutical products are a real threat to the health and well being of U.S. consumers.

Workflow Automation: The New Frontier of Productivity
Rashid N. Khan
The PC revolution redefined how individuals work and has forever changed the desktop. Today we have an excellent choice of applications for boosting individual productivity, such as word processors, spreadsheets, database managers, and presentation software. Following the PC revolution, we are now in the throes of the Internet revolution. Internet hardware and software has come of age. Prices have dropped and the Web has become a necessary part of white-collar work environments. The infrastructure continues to improve rapidly as hardware and software companies pour billions of dollars into Internet development. Just as the postal service and the federal highway system revolutionized and propelled commerce to new levels, so will the Internet revolutionize how we conduct business within organizations and commerce between organizations. Workflow automation is one aspect of this revolution that changes the way business processes are implemented.

Business productivity depends upon individual productivity and group productivity -- that is, the way in which individuals interact with each other. This is the realm of business processes that determines how individual members of an organization interact with each other, how tasks get distributed and routed, and how information is shared in the pursuit of organizational goals. In most companies, business processes have evolved on an ad hoc basis as the business grew from infancy, and more and more demands for services and information were placed on the business from internal and external sources. Little "engineering" went into the design of these processes. Most business processes are hard to define, let alone quantify. Since we cannot quantify the cost of simple business processes, most of us mistakenly assume that they are free because they are so simple and are taken for granted.

The global competitive environment of the 90's is forcing us to look at the cost of even the simplest of processes. Several factors are contributing to the increased interest in business process automation:

Companies worldwide are "right-sizing" due to global competition. This forces management to scrutinize all business processes with the objective of eliminating unnecessary processes, and making the necessary processes more efficient. Companies are realizing that simply reducing workforce, without eliminating or changing how the work is processed, is only a "quick fix" that cannot be sustained. To "right-size" permanently, companies must eliminate unnecessary processes and make the necessary processes more efficient.

Companies are being forced to reduce the delivery cycle time and the cost of products, services, support, and information for internal as well as external customers. Organizational responsiveness demands efficient and streamlined workflow.

Organizations are "downsizing" their computing infrastructure. With the PC revolution firmly in place, organizational computing power is being distributed away from the centralized mainframe to the desktop. A powerful computer at every desktop begs for more efficient solutions to traditional paperwork and manual workflow.

The Internet revolution is here to stay since it provides the most cost-effective means of sharing information. While the Internet is rapidly becoming the preferred means of electronic commerce, the intranet is emerging as the dominant platform for sharing information within organizations.

Cash Flow Measures of Credit Risk
Gary W. Emery, Ph.D.
Non-financial companies provide a familiar form of trade credit to their customers and receive trade credit from their suppliers when a product is delivered and the payment is deferred. They also provide a less familiar form of credit to customers and suppliers when both delivery and payment are deferred. Option contracts and forward contracts (commitments) to sell or buy a product at a specified price on a specified date in the future are examples of the latter type of transaction. These contracts are known as derivative instruments because their values are derived from the market value of the underlying product or asset.

A company is exposed to credit risk when it extends trade credit or buys or sells derivative instruments because it incurs losses if the counterparty does not fulfill its obligation. Credit analysis is concerned with assessing the amount and cost of this credit risk so its effect can be weighted when the original agreement is established. There is heightened interest in credit analysis because the narrowing of profit margins has made bad debts more costly and the expansion of derivatives trading has exposed companies to unfamiliar risks.

This article describes the factors that affect a counterparty's incentive to default on its obligations and shows how to use a single method, called Lambda analysis, to measure a counterparty's risk and the risk in a specific transaction. Companies that have derivative transactions should assess the risk at both levels. Other companies, that are only exposed to credit risk through their trade credit decisions, can restrict their analysis to the counterparty (customer) itself. In either case, the use of a single method facilitates learning and communication throughout the company.

Volume 4, Number 4, Fourth Quarter 1998

The Economic Outlook for 1999
Joseph W. Duncan, Ph.D.
As 1998 draws to a close, the economy is characterized with uncertainty about the global situation, especially the problems associated with stock market volatility, the Asian financial crisis and the failure of Russia to honor its internal debt. Yet, the current economic expansion in the United States is about to set records.

The Process of Reengineering Collections
Frederick A. Piumelli and David A. Schmidt
Using automation to help reengineer the collection process has resulted in breakthrough performance gains commensurate with traditional measures such as days sales outstanding (DSO). One of the reasons the improvements have been so great is that the challenges are so formidable. Recognizing these challenges is the first step toward formulating a solution. Critical to an effective solution is a comprehensive reengineering and automation strategy. Everything else is tactical, including the pitfalls to avoid. Once the strategy has been set, building a system that will get the job done becomes much easier.

The Year 2000 Computer Crisis: Management and Legal Gauntlet of the Millennium
Steven L. Hock
After festering for years behind the scenes in computer technology circles, the Year 2000 computer crisis has emerged as a hot topic in the business and popular media. Much of what you read and hear may be unduly dramatic and doomsday-like. But much will also be unjustifiably complacent and ostrich-like. There lies the danger.

What is the problem? Dates play a key role in dependable functioning of the hardware, software and embedded systems our companies rely upon in day-to-day operations for innumerable computerized tasks, including any tasks requiring date dependent arithmetic calculations, sorting and sequencing data, and many other functions. To oversimplify the problem a bit, most software and a substantial amount of hardware and embedded systems recognize years by only two digits ("98" for 1998) instead of four digits.

Unfortunately, when the system is asked to perform a date sensitive function involving the year 2000 ("00") or beyond, the system may crash or yield inaccurate and often wildly unpredictable results.

The "Best Practice" Company and Other Benchmarking Myths: Five Lessons from Real Data
Edith A. Wiarda, Ph.D. and Daniel D. Luria, Ph.D.
SMM (small to medium sized manufacturer), isolated too long, seeks Benchmarking Partnership Interests: trading Performance Metrics, discovering Best Practices. Object: Continuous Improvement, World Class Performance.

Benchmarking has been around long enough to have developed its own mythology.

We hear time and again impressive tales of Xerox's lead-time reductions, Kodak's machine reliability gains, Motorola's reengineered business processes, Ford's design-for-manufacturability turn-around. With the right measures and the right partners, any company can strive for world class status.

Despite the hype, benchmarking remains a common-sense proposition. Don't reinvent the wheel. Learn from what others do right. Look outside your own firm for good ideas.

Unfortunately, the mythology often gets in the way of common sense. This is especially true for smaller firms - and for the independently operated branch plants of large corporations -- who quickly find that bench marking approaches meant for the Fortune 100 have little to do with them. Told by customers or quality auditors to "do benchmarking", smaller shops plunge in gamely. But they soon get bogged down in the search for potential partners, none of whom seems to be the sought-after keeper of Best Practice. The shining Factory on a Hill can't be found -- and even if it could, there'd be a two-year wait for a plant tour.

Game Theory and the Credit Manager's Dilemma
Albert Fensterstock
The genesis for this article was a recent credit association meeting in, of all places, Las Vegas. After a particularly good evening at the poker table, we suggested that some of the strategy used by good poker players might be applicable to improving the credit granting decision and collection process and possibly lead towards a methodology that could optimize the return from a given accounts receivable portfolio.

Before we can discuss the possible analogies, however, we need to set the stage, so a review of some of the results from the theory of games is necessary. First some history. Game theory was initially formalized in 1944, by John von Neumann, one of the most brilliant mathematicians of this or any other century and Oskar Morgenstern, a noted economist, in their book Theory of Games and Economic Behavior. A critical conclusion of their work emphasized the fact that the theory of games has some important practical applications and is not just a subject for mathematicians. In fact, game theory is one of the first examples of rigorous mathematical development centered primarily in the social sciences. Since the publication of von Neumann's book a significant amount of research has been accomplished and many practical applications have appeared in economics, management science, political science, biology, and other fields. In particular, solutions have been implemented relating to competition, strategic optimization, equilibrium, information, bargaining, coalition behavior and equitable allocation. And recently a book has appeared, relative to consumer debt, Games Creditors Play, by Winton Williams, that explores both the causes and cures of counterproductive collection practices, examining the actual dynamics of the collection process and providing new insights by using elementary game theory to evaluate the outcomes of that process.

Volume 4, Number 3, Third Quarter 1998

Performance Measurement - an Executive Overview
Michael Tipping
"Would you tell me please which way I ought to go from here?" asked Alice. "That depends a good deal on where you want to get to." "I don't really know," replied Alice. "Then it doesn't matter which way you go," said the cat.

Most organizations have already recognized that their strategic objectives are not purely financial in nature. And, even if they are primarily financial, the organization that ignores key "non-financial" performance areas can be fairly certain that it will not achieve its long-term financial objectives. What's wrong with traditional reporting and management systems? Organizations that rely primarily on financial reporting systems have to recognize a number of shortcomings:

Financial systems do a reasonable job of delivering information to shareholders - and this, of course, is what they were designed to do. Unfortunately, they do a poor job of telling managers how they are doing in other critical areas such as Customer Service, Human Resources, New Product Development, and Process Improvement.

In fact, managing by financial systems has often been compared to "driving by using the rear-view mirror." This analogy is very apt because:

•you can't see where you are going, only where you've already been
•although you just heard a bump, you are not sure what you hit!
•and you won't know what you did hit until it shows up in the mirror sometime later!

In other words, by the time issues show up in your financial results, they have already become problems.

Nowadays, in an effort to overcome this reliance on financial systems, many companies do track other key performance measures on a regular basis. But, this is typically done on an "ad-hoc," piecemeal basis, rather than as an integrated and comprehensive approach to managing performance. As a result, even those financial systems, which have been enhanced by the addition of other key performance measures, will likely exhibit some or all of the following problems:

Asian Financial Crisis: A Credit Perspective
Ronald K. Chung, Ph.D., CCM and Hung-Gay Fung, Ph.D.
A year after the beginning of the Asian Financial Crisis, its economic impact on the global economy is still not fully revealed. Furthermore, it does not appear that the Crisis is approaching the end of its course.

To steer their companies through the crisis, corporate executives must gain a proper perspective of the factors leading to the crisis. In doing so, this paper offers an alternative explanation to the causes of the crisis. From our analysis, we find that a key factor leading to the crisis is the role of credit. Prior to the crisis, while signs of deteriorating financial situations were present in these Asian countries, macroeconomic factors such as budget deficits, foreign debts owned by governments and trade deficits were not out of line in comparison to other emerging markets. Our analysis indicates that a key contributor to the financial problem in Asia was the lacking of well-developed credit markets providing the necessary liquidity for companies to finance their long-term working capital requirements for growth. As a result, companies needing the financing would have to resort to short-term loans. What made the situation worse was the fact that most of these loans were denominated in foreign currencies such as US dollars. With a number of defaults by key corporations in Thailand and Korea in early 1997, creditors reassessed the risk of lending to these countries, and decided to reduce their loan exposure in the region by refusing to renew these short-term loans upon maturity. This, in turn, created tremendous pressure on the currencies leading to further credit tightening and, eventually, the financial crisis.

This paper begins by examining the broad characteristics of the financial crises in Southeast Asia. The paper then considers factors contributed to the crisis, especially the role of credit and its management by private companies in the crisis. This should allow corporate executives to develop a proper perspective to lead the company out of the crisis.

On The Use of the Cash Conversion Cycle in Working Capital Analysis and Credit Analysis
Matthew A. Walker, Ph.D.
The cash conversion cycle (CCC) is a concept and method of analysis that is covered in most introductory finance textbooks and bank management textbooks. It is purported to measure the number of days between cash outflows and cash inflows, and has been used as a liquidity measure and a measure of short-term financing needs. The technique for measuring the CCC varies somewhat from book to book as does its interpretation and its suggested uses. This paper illustrates the problems involved with computing and using the CCC. It is shown that the results of the computation are ambiguous, difficult to interpret, and not of much use in providing input to the financial planning process and to performance measurement.

Dollars and Sense: Evaluating Remittance Processing Software
L.H. "Skip" Kaiser and David A. Schmidt
Most new releases of accounts receivable software include automated remittance batch processing (auto-remit) capabilities. Auto-remit invites you to import cash receipts as an electronic file, rather than manually entering them on-line. The development of this electronic file is usually outsourced to your EDI partner or lockbox bank.

The prospect of acquiring auto-remit capabilities is seldom a primary reason for installing new financial software. When accounts receivable software modules are being evaluated, auto-remit capabilities are often just another "add-on" or additional functionality that comes with the package. Not surprisingly, the attitude toward this feature often is, "now that we have it, let's try it." Thus, the question of whether the benefits from using the A/R software's auto-remit function justifies the expense of developing an electronic cash receipts file is a secondary consideration.

When the question is finally addressed, in most cases the answer will be yes. However, the economic incentive is usually small because few customers provide the correct invoice numbers with their payments or pay exactly the amount owed. Though A/R software can identify invoice numbers being paid when there is an exact match with the remittance data and determine whether a cash discount is for the correct amount and within terms, over 75 percent of cash receipts may still end up in the re-work file pending manual application. A/R software simply does not have the capability to drill down into both the remittance advice and the A/R open items database to find any matches that are not obvious.

This is where remittance-processing software earns its keep. Rather than relegate unmatched cash receipts to your A/R's re-work file, remittance processing software uses a customized battery of sophisticated matching algorithms to identify exactly what the customer is paying and then automatically process any needed credit or debit memos to finish the job. Without detailed system knowledge, it is difficult to recognize all the manual tasks an auto-remit application must replace in order to maximize cost saving and efficiency benefits. By analyzing the tasks performed during the cash application process, the underlying dynamics that enable remittance processing software to match over 90% of cash receipts with the unpaid items in your A/R each and every day can be fully understood.

Volume 4, Number 2, Second Quarter 1998

The Euro and It's Impact on U.S. Corporations
Robert M. Gruber
The international monetary system will undergo a major change beginning in 1999. The changes brought about by the introduction of the Euro, a new currency to be adopted by eleven European countries will rock the world of international finance and commerce. The continuing development of global business will take a big step forward, as the impact of the change will be felt outside the European Community as well. The purpose of this article is to explain the development of the Euro, its application in the field of international cash management and finance, and the potential changes to everyday business, especially in the United States. Even though the United States is not directly impacted by the new currency, the secondary repercussions for all United States businesses, not just those doing business in Europe, will surely be felt sooner rather than later. It is incumbent upon managers in all areas of business to contemplate the impact of these changes on business activities and plan accordingly.

Financial Analysis with the DuPont Ratio: A Useful Compass
Steven C. Isberg, Ph.D.
Financial Analysis and the Changing Role of Credit Professionals
In today's dynamic business environment, it is important for credit professionals to be prepared to apply their skills both within and outside the specific credit management function. Credit executives may be called upon to provide insights regarding issues such as strategic financial planning, measuring the success of a business strategy or determining the viability of an acquisition candidate. Even so, the normal duties involved in credit assessment and management call for the credit manager to be equipped to conduct financial analysis in a rapid and meaningful way.

Financial statement analysis is employed for a variety of reasons. Outside investors are seeking information as to the long run viability of a business and its prospects for providing an adequate return in consideration of the risks being taken. Creditors desire to know whether a potential borrower or customer can service loans being made. Internal analysts and management utilize financial statement analysis as a means to monitor the outcome of policy decisions, predict future performance targets, develop investment strategies, and assess capital needs. As the role of the credit manager is expanded cross-functionally, he or she may be required to answer the call to conduct financial statement analysis under any of these circumstances. The DuPont ratio is a useful tool in providing both an overview and a focus for such analysis.

A comprehensive financial statement analysis will provide insights as to a firm's performance and/or standing in the areas of liquidity, leverage, operating efficiency and profitability. A complete analysis will involve both time series and cross-sectional perspectives. Time series analysis will examine trends using the firm's own performance as a benchmark. Cross sectional analysis will augment the process by using external performance benchmarks for comparison purposes. Every meaningful analysis will begin with a qualitative inquiry as to the strategy and policies of the subject company, creating a context for the investigation. Next, goals and objectives of the analysis will be established, providing a basis for interpreting the results. The DuPont ratio can be used as a compass in this process by directing the analyst toward significant areas of strength and weakness evident in the financial statements.

Defending Preference Claims: What's Mine is Mine - What's Yours is Negotiable
William B. Creim and Laurie K. Jones
This article discusses practical strategies for trade creditors who receive preference demand letters. It first reviews the basic preference law and defenses. Next, it discusses the different parties who may be responsible for collecting preferences, and finally, it outlines practical strategies for trade creditors to use when defending preference claims.

Managing Concentration Risk in Receivables
Richard H. Borgman, Ph.D. and John K. Ford, Ph.D.
The management of accounts receivable can be a complicated task, with direct implications for the firm's bottom line. The credit manager must identify sources of risk and balance potential sales with potential losses when setting credit policy. The firm's business type, financial position, approach to risk, and customer profiles must all be considered when establishing the firm's risk preference. However, all firms can reduce receivable risk by applying the principle of diversification. This article describes an analytic tool that measures the level of diversification in a portfolio of receivables. The concentration ratio measures concentration risk, the degree that a pool of receivables is concentrated in a relatively few accounts.

Consignment Risks: A Creditor's Perspective
Scott E. Blakeley and Thomas A. Johnson
Of a credit executive's many responsibilities, one of the most important is managing credit risk. One alternative to a sale on open account (e.g., the usual net 30 days) is a sale on consignment, where the owner transfers possession of goods, but not title to the goods, to a third party. The third then sells the property and returns the proceeds to the owner, usually less a commission. Consignment sales can help minimize the risk of non-payment, and can be a desirable way of doing business with a retailer or wholesaler on shaky economic grounds.

However, a consignment transaction is not without risk. For example, inventory on consignment, or the proceeds of the same, may become the subject of a competing creditor's claim unless the consignee has complied with the Uniform Commercial Code's (UCC) requirements for perfecting a security interest in the inventory.

As the case of Bank of California v. Thornton-Blue Pacific illustrates below, where a consignor fails to take these steps to protect ownership of its inventory, the consignor risks losing the inventory, or the proceeds from the sale of the inventory, to a competing creditor.

Volume 4, Number 1, First Quarter 1998

Gaining an Understanding of Your Customers Using Portfolio Analysis
Ruby C. Kerr
To successfully manage a process, you must control and measure that process. To manage the credit process, today's credit executive must go beyond traditional "customer" analysis and move to analysis of the entire receivables portfolio. This is as true for the management of the accounts receivable portfolio as it is for the production of any goods or services.

Many firms still focus on the number of customers they serve - an important issue for operations planning - without giving sufficient attention to the profitability and risk associated with each group of customers. By applying the concept of portfolio analysis to the company's accounts receivable, we can measure the performance of that asset along several dimensions.

Artists and writers often prepare a portfolio of their work to show to prospective purchasers or employers. The term "portfolio" is also used to describe the collection of financial instruments held by an investor or the loans advanced by a bank. In financial services, the challenge of portfolio analysis is to determine the mix of investments appropriate to one's needs, resources, and risk preference. The contents of the portfolio should change over time in response to the performance of individual portfolio elements and changes in the customer situation or preferences.

Using portfolio analysis to analyze the accounts receivable will help the credit professional understand the company's exposure to risk at any point in time. It will also help us determine what sort of customers we should seek to serve and which business segments best fit the mission and capabilities of the organization. This value-added service provides information that can be used by the organization in deciding which markets to serve.

Portfolio analysis serves as a good planning system that provides information for use in strategic business decisions to maximize long-term earnings growth and to minimize bad debt. It encourages management to evaluate the business along multiple dimensions on an aggregate basis and explicitly raises the issue of the cash flow implications as management plans for growth.

This analysis gives management the tools to evaluate each business segment in the context of both its environment and its unique contribution to the goals of the company as a whole. It addresses the issue of potential value of a particular customer to the firm. This value has two variables: first, the potential for generating attractive earnings levels now; second, the potential for growth (i.e., significantly increased earnings levels) in the future.

Management needs to understand how promising the current set of customers is with respect to long-term return and which customers should be developed or liquidated. The portfolio analysis approach provides for the simultaneous comparison of different customers and leads to a targeted marketing focus. It also underlines the importance of cash flow and risk management as strategic variables.

Credit In The Future: Insights into Developing Cooperative Work Teams
Daniel F. Jennings, Ph.D., P.E.
The Credit Research Foundation, in preparation for the Centennial Credit Congress of the National Association of Credit Managers, investigated the role of business credit ten years into the future. Eight focus groups of senior credit, finance, and sales/marketing executives were used to collect qualitative data. The output from the focus groups was used to develop a survey which was administered to over 1000 credit and finance executives.¹ An important finding of this survey is that business credit in the future must evolve into a complete customer service organization including handling the customer relationship from the initial billing through cash application and would include all services required to manage the order fulfillment process. In order to accomplish such an approach, the survey results indicated that task-oriented jobs organized in functional silos are obsolete and that future activities must be organized around business processes in which work is completed by "process teams."²

Since business credit, today, involves a functional expertise, how can these process teams be formed and managed? To what extent are teams being utilized by business firms? What are the characteristics of a high-performing team? How can individuals be transformed into team players?

The purpose of this article is to examine how an effective team may be developed. This article begins by identifying the extent to which teams are presently being utilized by companies. In the following sections basic team concepts are discussed, team decision making is described, different types of teams are identified, the creation of a high-performance teams is explained, the transformation of individuals into team players is discussed, team implementation issues are reviewed, and the reasons why some teams do not work is reviewed. Finally, a summary is presented.

Stock-for-Debt Swaps: Net Operating Losses Still Available to Facilitate Chapter 11 Reorganization
Laura L. Takasumi and Aaron Jay Besen
Under the Taxpayer Relief Act of 1997, net operating losses can now be carried forward for up to 20 years after the date of the loss (it used to be 15 years) and carried back only 2 years (it used to be 3 years). Since 1986, the Internal Revenue Service has made it very difficult for a corporation to use old net operating losses when the ownership of the corporation changed hands. This so called "trafficking in net operating losses" was effectively stopped by changes to Section 382.

Under certain circumstances a corporation can continue to use these old net operating losses. This opportunity exists where, a bankrupt corporation ("Deadbeatco") has unsecured creditors who exchange their debt for stock. This "bankruptcy exception" can be an attractive alternative in the right circumstances. Because a bankrupt corporation almost always will have significant net operating losses, the use of this exception can allow the reorganized Deadbeatco to offset income taxes for many years. Creditors who otherwise might not be paid can receive equity in a business with potential growth, benefit from projected income (without the burden of income taxes) and perhaps receive repayment in that manner.

Network Issues and Payment Systems
James J. McAndrews
Networks play an integral part in the production and consumption of certain goods and services, including transportation, communications, and payment systems. A network good or service has two main characteristics: the value a person gets from the product increases as more people consume it and the technique a firm chooses to produce the product will depend on techniques chosen by other firms. For example, consider a telephone system. The greater the number of people connected by telephone lines, the greater the number of people any member of the system can call and the more he or she will enjoy belonging to that telephone network. Similarly, firms that offer phone service will produce switches and lines compatible with those of other firms that offer phone service, so that they can offer their customers the valuable service of connecting to all other parties.

It is helpful to think of network components as nodes connected by links. Perhaps the most transparent example is a railroad system, a physical network composed of lines (the links) that connect destinations (the nodes). A railroad to one destination is of some value, but a railroad system that connects a traveler to many destinations potentially has great value. To create an extensive railroad system, regional rail lines must use compatible gauges. This complementarity between the components of a network leads consumers to place a higher value on larger networks and leads firms to take into account the production decisions of their rivals.

Other examples of physical networks include highways, oil and natural gas pipelines, water systems, and computerized airline reservation systems. Certain information services also have network characteristics. The Internet, for example, can be thought of as a network in which the computers are the nodes, and the software and the telephone lines to which the computers are connected form the links that allow files to be exchanged and seamlessly read by different machines.

Payment systems, such as credit cards, ATMs, currency, and checks, are also examples of network goods. Here, the nodes might be merchants, consumers, and banks, which are linked by the exchanges of information among them. In some cases, such as in an ATM network or a point-of-sale (POS) debit system, the links may also consist of telephone lines. In others, such as in the checking system, the links consist of methods of delivery of the check from the merchant to its bank, and from that bank, through a clearinghouse (similar to a telephone switching system), to the consumer's bank. In a credit card system, the complementarity between the components is obvious: as more people use credit cards, more merchants are induced to add terminals, since allowing customers a convenient means of payment will potentially increase their sales, and as more merchants permit credit card payment, the value to the customer of having a credit card increases too.

Economists have recently renewed their interest in many of the unique issues that arise in network-dependent industries. Below, we'll discuss some of these issues, including compatibility and standard-setting among service providers, the role of an installed base of network facilities, and access to network facilities. In addition, the more common economic issues of pricing policies, the tendency toward monopoly, and the introduction and adoption of alternative technologies take on new dimensions in network industries. Network economics is increasingly relevant in today's economy because of the growth of the communications industry and the computer hardware and software industries and the introduction of new forms of payment systems such as electronic money. An understanding of the economics of networks and the unique features of network goods gives insight into the organization of markets for these goods and provides the basis for formulating good business and public policy concerning these goods.

Below, we'll also analyze some payment-system issues from the perspective of network economics and show that formulating appropriate public policy would be difficult without a knowledge of the economics of payment networks.

Volume 3, Number 4, Fourth Quarter 1997

The Economic Outlook for 1998
Joseph W. Duncan, Ph.D.
The Cold War is over but significant conflicts remain in Bosnia, the Middle East, Iran and Iraq. The U.S. economy has been called the "Goldilocks" economy because it is neither too hot nor too cold. Despite a relatively calm environment, world stock markets are reflecting great uncertainty through their recent high volatility. The uncertainty flowing from these conflicting tendencies has generated many questions about the overall outlook for the U.S. economy in 1998.

Developing A Strategic Plan: A Guide to Promoting Your Credit Organization's Future
Clifford Miller
In an earlier work, How to Write A Credit Policy, I began by considering the root of the word, policy. Like police and politics, the word is derived from the Greek idea of a society, which makes rules and laws in an attempt to establish order. Such discipline carries many negative connotations, yet the Greeks realized that orderly rules in their daily lives would result in a more civil and polite world.

This same ancient civilization was often led by a general, strategos, from which we derive the word, strategy. This leader would concern himself with long-term goals. As opposed to individual foot soldiers who would fight in small skirmishes and separate battles, the strategos was concerned with the ultimate results of war. It is not over simplifying to say that the soldiers followed rules (or policies) while the generals provided strategies for long term survival.

This discussion, of course, is pertinent to our modern business world. While companies and departments can increase efficiency by utilizing well-defined policies, their long-range survival depends on a sense of strategy. No entity, whether a civilization, commercial business or a department within a firm, will continue to exist without a plan for the future. For this insight, we are indebted to the Greeks.

In this paper, we will begin by considering some elements of strategy. We will then review the reasons for a department to develop its own strategic plan, present a method for such development, and guide you through a step-by-step process that will result in a plan that is tailored to your own special needs.

Trade Credit Policy and Management in the United States: An Empirical Study
Karen S. Cravens, Ph.D., CPA., CMA and Richard Pike, M.A., Ph.D., FCA.
The granting of credit by businesses represents a key corporate asset, but one which is often overlooked in academic research. Perhaps this oversight is due to the lack of recognition of how such an ordinary asset can be managed to create competitive advantage. To provide insight into how this asset might be used in a more strategic sense, we conducted a survey to determine how managers use credit and what factors determine credit policy.

Results of the study show that some policies and monitoring measures are common throughout most firms. Yet, respondents indicate that their firms do select particular measures and employ practices designed to meet internal objectives. Although this study does not investigate the underlying strategic intent of respondent firms, contingency theory suggests that firms select and employ policies and procedures which have proven to be most effective for their own specific needs. This study provides an overview of existing practice to allow trade credit professionals a basis for comparison to their own firm's situation.

In management it is often difficult to make choices without some indication of the current or previous operating environment. Effective managers recognize that the past or current practices are not necessarily the only basis on which to make a decision. However, an examination of existing practice can provide a manager with information useful in formulating a future course of action. More importantly, an awareness of practices by others can highlight an omission in policy or a need to consider modification or alternatives. The goal of this study is to assess current trade credit policy and management practices in the United States as a basis from which managers may evaluate the situation of their own companies.

Using Statistical Analysis to Determine a Potential Retailer Credit Problem
Albert Fensterstock
This application of statistical analysis was developed for the purpose of determining whether or not a retailer represents a potential credit problem. It was developed based upon the hypothesis that retailers not in control of inventory and accounts payable levels will eventually loose the ability to implement merchandising strategies that are required to remain competitive. To test this hypothesis, we studied the historical financial data of a number of supermarkets, mass merchandisers and home centers. Some of these chains have filed for Chapter 11 protection, some are considered troubled, and at least one chain in each group is considered well run.

Within their industry group, each chain was compared to a well run or model retailer. Without exception, every retail chain in our study that had filed for Chapter 11, for at least one of the financial measures discussed, exhibited very high variability over time when compared to the model retailer. In every Chapter 11 case there was an indication that management was not in complete control, from period to period, of the inventory/payables/cost of sales relationship. This finding was consistent with our hypothesis that the management of inventory and payables levels over time, taken in conjunction with cost of sales, as measured by the variability of certain financial measures is vital for most retailers' long-term health. Our findings indicate that retailers that are unable to manage these variables are companies that must be watched very closely by credit managers as they very likely will become a serious credit risk - if they are not one already.

Volume 3, Number 3, Third Quarter 1997

Credit Risk Assessment and the New Latin America Economic Order
Lucas Gomez, CCE
If we look back at the economic evolution in Latin America for the past ten years, we find a region which has made significant adjustments to economic fundamentals to remain competitive in a global economy. In the early eighties, the region was in the midst of a debt overhang crisis that was threatening the economic, political and social fabric of its institutions. A decade later, opportunities for investment and credit in the area continue to be attractive - hyperinflation, for the most part, has been conquered, and the region is expected to have continued growth in Gross Domestic Product and personal income at or ahead of historical levels. Isolationism is no longer the back-bone of the Latin countries economic programs, and most countries in the region have formulated economic agendas to deal with the realities of the nineties and to ride the wave of globalization.

Technology and the Management of Credit Risk
Venkat Srinivasan, Ph.D.
Credit is an integral part of commerce in the US and, increasingly, in the world. The management of credit risk has evolved over time from an art form to a more normative framework. It is interesting to note the rather striking difference in the sophistication of credit risk management techniques in different types of corporations - manufacturing, retail, leasing, insurance, and banking.

Today, rapid advances in technology and the maturation of software applications hold exciting opportunities for the management of credit risk. The collective promise of these developments is substantive and requires a fundamental and holistic approach to harness their full potential. With the phenomenal changes in the environment introduced by technology and newer generations of decision support software, credit decision processes are likely to change more rapidly in the future.

Of course, technology in and of itself, is only the means to the end; not the end. In the excitement of the possibilities offered by technology we must not forget this basic fact. To engineer the credit department of the future, one must adopt an architectural perspective to the application of technology. Focus must shift to the optimal engineering of credit risk processes using technology as an enabler such that the technological environment is capable of supporting rapid changes in credit risk management processes.

Making Payments on the Internet
James J. McAndrews
The Internet has begun to make the idealized marketplace discussed in economic textbooks seem more plausible. It allows low-cost, speedy, convenient, and informative communication across the world. However, to become an active market in goods and services the Internet must be devised for buyers and sellers to securely and conveniently exchange payment over the Internet. Software companies and financial institutions are now developing methods that will allow people to pay on the Internet. A review of these efforts reveals the importance of security, authenticity, and privacy, which are often overlooked or taken for granted in other instances of making payment.

Money is an ancient human artifice. For approximately 3000 years coins have been minted in India and Greece. Minting coins for use as media of exchange was a significant improvement over the alternative: exchange of metals by weight for purchases. Coins made a particular amount and quality of metal easily recognizable and hard to counterfeit. Milling the edges of coins made the practice of removing small amounts of metal from the coins very easy to detect. The creation of banks of deposit and their vaults made safeguarding coins easier. Hence, coins became readily identifiable and transferable, attributes that raw metals did not possess. These attributes made trade easier.

Our society is grappling with ways to create, once again, a way to make payments in a new medium: the Internet. The designers of Internet means of payment have the same concerns that occupied mints centuries ago: how to make the proposed means of exchange easy to recognize and authenticate, but hard to counterfeit and steal. Today's designers work with powerful mathematical means of encryption, which can serve the same roles for Internet payments that minting coins served for earlier payment systems.

Several attributes of a successful medium of exchange - one of money's primary roles ? have emerged over the centuries. Money should be identifiable, divisible, easy to transfer (both technologically and in the sense of there being widespread acceptance), and easy to protect against theft. The attempts to create successful media of exchange over the Internet reveals the importance of these attributes as well as the difficulties of successfully designing a system with those attributes.

Trends in Credit Risk Management Survey
The Australian Institute of Credit Management and the Corporate Recovery and Insolvency Consultants of Ernst & Young Australia release the results of its annual Credit Risk Management Survey. The following article summaries the findings of their survey.

In today's low interest rate environment, business could perhaps be forgiven for paying a little less attention to the risks associated with credit than in the past. While the excesses of the 1980s remain a distant memory, the lessons learned from that period have retained their value: successful businesses are those that make their assets work smarter, not just harder. They don't squander hard won gains due to poor credit management.

Credit risk remains a significant business issue in the 1990s, one that is too often ignored by business owners and managers as they seek to maximize sales and optimize customer relations.

Bad debts - which contributed significantly to business difficulties during the late 1980s and early 1990s - retain their capacity to undermine business stability and profitability in today's increasingly competitive business environment.

Unnecessarily high debtor balances tie up working capital that could be better used to reduce business debts and interest costs. Also, company boards that do not maintain appropriate credit management polices run the risk of failing to honor their commitments to effective corporate governance.

The benefits of managing credit risk effectively are significant. Focus on customer service is enhanced, helping to ensure that sales are maximized and targeted. Sound credit risk management also increases cash flow by minimizing bad debts and ensuring payments are collected as soon as possible. In short - management cannot afford to ignore this area if their business extends credit.

Despite the importance to business of managing credit risk, there remains a chronic lack of information on the issue. This survey, unique in Australia, seeks to redress this shortfall by attempting to identify trends and benchmarks in the way businesses manage credit risk.

AICM and Ernst & Young surveyed more than 230 businesses from 16 industry sectors, including manufacturing, mining, construction, communications, finance, insurance and government. The respondents reported average annual sales in excess of $80 million, and average accounts receivable of $10 million.

Funding for this site is provided by our 2009 Platinum Partners: