Wrestling With a Bad Economy.

It has been a decade since the credit management profession has had to deal with a recession, but in comparison to its predecessors, the recession of 1991 was quite mild. Unless you were around in 1982 when things were really in a slump, chances are you have not experienced truly tough times. "A lot of the credit people I deal with are relatively new to the profession and haven't previously had to work through a problem economy. During the course of a year they may have had two or three accounts in their receivables portfolio that were having problems, but now they are facing upwards of a half dozen problems at once. It's a new experience for this latest generation of credit professionals," observes Scott Blakeley of the law firm of Blakeley & Blakeley, LLP in Irvine, California.

It should come as no surprise that recent economic uncertainties have served to reilluminate all the risks inherent in extending trade credit. During the long string of sunny days emanating from our once booming economy, there were few dark recesses where risks could lurk. After all, everybody was making money. But now the shadows have grown longer, and the risks loom larger than many credit professionals can remember. All of a sudden, cash has become tight, and that shift, even if it were only psychologically based, is bound to have a profound effect on commercial credit and collections in the months ahead.

Reading the Tea Leaves

What makes the credit manager's job even more difficult, is that our current economy is very hard to read, much less predict. At the time this article is being written (mid March), the economic indicators are mixed. Even though the American Bankers Association pegs the chance of a recession in 2001 at only 34 percent, nobody is disputing that growth is now minimal. "Though I see the overall economy slowing down," notes D. K. Malhotra, associate professor of finance at Philadelphia University, Philadelphia, PA, "the whole economy is so large nowadays that you cannot expect the whole structure to come down in one day. It begins with just one sector, but given the integrated nature of the economy, slowdowns will move from one sector to another. Some sectors, like technology, have been hit quicker than some others, but in the end, it will affect almost everybody. The recovery process will also roll from one sector to another, with some sectors recovering quicker than others."

In that type of an environment, certain industries could face recession-like conditions while the overall economy still exhibits some growth thanks to the healthier sectors. The same is true on a regional basis. According to the Beige Book published March 7, 2001, by the Federal Reserve Bank of Philadelphia, "manufacturing activity decreased in the first two months of the year in all Districts except Boston and Richmond, where it rose modestly, and New York and San Francisco, where conditions varied among manufacturers." Keep in mind that Silicon Valley, home to many firms in the troubled technology sector, is a major part of the San Francisco District. This varied landscape makes it all the more crucial that commercial credit pros constantly monitor the pulse of the industries to which their company is selling goods and services. Government statistics, banking industry reports, trade publications, industry credit groups and feedback from sales reps in the field are all invaluable resources to the credit manager on the lookout for trends that will have an impact on credit and collections.

Identifying trends is only the start of the process. "During times like this, you need to have both a proactive and a reactive strategy," states Professor Malhotra. That requires extrapolating current trends into the future, and making plans accordingly. "You must consider what is going to be happening one year from now because it will take that long for the effects of this economic slowdown to reach the common man. It is, therefore, better to have some proactive strategies in place," he explains, because you can never be exactly sure when troubles will arise.

Spread Your Risks Around