Credit Check

One in seven midcap companies may be a credit risk. Are any of them tied to you?


Editor’s Note: For a look at how three dozen industries are faring on key metrics associated with timely payment of invoices, check out the 2009 Credit Risk Benchmarking Report
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“Credit is pretty simple,” says Barbara Smith, CFO of Gerdau Ameristeel. “If you have a set of good policies, and have a good process for adhering to them, and good people, you’ll be OK.”

Anything else? “Metrics,” she adds. “Metrics are key.”

Smith is the finance chief for North America’s second largest minimill steel producer (with $8.5 billion in revenues), and she readily admits that her company is keeping a closer eye on customers. “We know from past experience which segments will be hit hardest,” she says, “and we know that smaller companies will face more credit issues.”

But watchfulness, she adds, can make a huge difference. “We’ve had customers go into distress, but by the time they became insolvent our exposure had become minimal.”

When Smith talks about metrics, she’s talking about a wide range of measures, including internal benchmarks such as the commercial side’s ability to collect. “They may take more risks,” she says, “unless they have incentives to make sure invoices can be collected.”

Smith’s team also looks at some fairly straightforward measures, such as how long customers are taking to pay. “If you know that a reliable customer is now 10 or 20 days late, you know there’s trouble,” she says.

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Indeed, days payable outstanding — and, equally important, a company’s DPO relative to the payment performance of its own industry — is a key component of CFO’s Credit Risk Benchmark. Intended to help companies spot potential trouble, the benchmark showed that approximately one in seven midcap companies across nearly three dozen industries poses a potential credit risk to its suppliers.

That number varies by industry, with the highest percentages of troubled companies appearing in the pharmaceuticals (46%), biotech (35%), and media (26%) industries.

Pam Krank, president of Credit Department, an accounts-receivable consulting and outsourcing firm, says CFOs are “finally putting credit risk at the top of their lists” for the first time in her 18-plus years in business.

Many companies have devoted substantially more rigor to assessing the financial health of both their suppliers and their customers. Corning, for example, now looks at a host of metrics for its suppliers, ranging from working capital to return on equity. And if it can’t find the data it needs publicly, it calls the supplier and asks, then builds short-term projections of the supplier’s financial health.

As for assessing customers’ ability to pay, one CFO says he now requires his staff to refresh the credit file for any customer that hasn’t ordered in the past six months. With no recent payment history to go by, he says, he has to go to greater lengths to assure creditworthiness, including checking trade references and flagging any customer that is more than five days late with a payment.

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