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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.

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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 Dupr�
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,

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