Masonry Magazine October 1979 Page. 23
MONEY-SAVING IDEAS FOR MASON CONTRACTORS
GUARD YOUR WORKING CAPITAL
FROM UNCOLLECTIBLE DEBTS
By ROBERT E. PARMELEE
How safe does collection of business receivables appear to be in the problematical outlook for the construction industry? Extraordinarily high interest cost on borrowed money, notably mortgage financing and bank loans, spurs a slow paying/slow collecting and some no collecting of trade receivables. Inability to collect receivables is a main cause of business failures.
It is extraordinarily timely for the mason contractor, the architectural/design community, and provisioner of equipment and building materials to assure that working capital is safeguarded to keep it really working. From a sale comes working capital IF you collect.
Insurance is usually carried on fire, disaster, business interruption, product/design liability claims, performance, key personnel, etc. Often overlooked is the vital area of a possible big debt write-off. The large bad debt write-off can cut sharply into cash flow and working capital, and even fatally into a supplier's capital base.
While inflation persists there will be many a smaller operator, in particular, who may be too thinly capitalized to struggle long against rising operating costs, squeezed profit margins, and economic downtrend.
Protecting working capital against credit losses is the essential role of commercial credit (bad debt) insurance of accounts receivable in manufacturing, jobbing, wholesaling and middleman functions serving commercial and industrial clientele. (This insurance does not apply to sales to governments and their public entity subdivisions, nor to U.S. and Canadian exports. It is unrelated to consumer or home owners credit.)
In this 1979 outlook the prevention of credit losses is as important as reimbursement by the insurance company
About the Author
Robert E. Parmelee is senior vice president of American Credit Indemnity Co., the Baltimore-based, leading underwriter of commercial credit (bad debt) insurance of business receivables in manufacturing, jobbing, wholesaling and service lines dealing with commercial and industrial clientele. The company is a subsidiary of Commercial Credit Co., the major financial services company (assets $5 billion). Mr. Parmelee is a graduate of Heidelberg College and Harvard University Graduate School of Business Administration.
after the fact of the unexpected, abnormal credit default. Time and again the credits insurer has warned and guided a policyholder in cutting down, or phasing out, a shaky, unreliable client/debtor account before a big credit loss is allowed to happen.
Since the painful experience of the 1973-74 slump, my insurance company makes its credit insurance policies more flexible in order to accommodate a broadening industrial and commercial usage. It proceeds, as desired, with a monthly premium payment plan and is expanding its reinsurance facilities to allow larger exposures to financial risk in receivables.
Protection Against Excessive Credit Losses
The basic role is to protect against abnormal or excessive credit losses which can occur through failure of one or more larger client accounts, or a number of failures because of changing conditions in construction and the American economy. The purpose is to guarantee credit extensions to customer debtor companies to the extent that such are insurable, and to reimburse the insured for credit losses in excess of "normal" expectancy (deductible) for a particular company. It is generally used by companies with annual sales of $500.000 up to $100,000,000 and more. The premium expense is typically between 1/10 and 1/4 of 1 percent of covered annual sales volume.
It is not necessary to cover all client accounts in a credit insurance policy, although many policies do. An agreeable arrangement is to insure a group of large accounts of the kind that can severely damage working capital if one or more fails.
Credit insurance is a sort of "money back guarantee" if and when a sale goes sticky or uncollectible.
In the 1979 economic outlook credit guidance is very important. If the insurance company can help a policy holder avoid loss, then both seller and buyer are served.
When accounts receivable are given a guaranteed value, then working capital is kept healthily working. Credit insurance is justifiable regardless of economic cycles, and regardless of how good a debtor firm's credit appears to be at time of performance by the mason contractor.
Suppose there are many thousands of dollars involved in named coverage in a credit insurance policy. Client company accounts named in the policy go into a master file of my credit insurance company, which is American Credit Indemnity Co., in Baltimore. This means that the insurance guarantor is watching the accounts along with the policyholder's surveillance.
If serious collection problems develop, the insurer notifies the policyholder that it is unable to approve future deliveries to that client/buyer. As a result, a policyholder often evades the shock of a big credit loss.
Through use of the credit insurance company's name the policyholder is enabled to collect the receivables better.