Economic Outlook Remains Uncertain: CPA Financial Executives Share Insights on Credit, Collections, Staffing and Customer Demand

By Lamoreaux, Matthew G. | Journal of Accountancy, May 2009 | Go to article overview

Economic Outlook Remains Uncertain: CPA Financial Executives Share Insights on Credit, Collections, Staffing and Customer Demand


Lamoreaux, Matthew G., Journal of Accountancy


[ILLUSTRATION OMITTED]

Recessions--roughly two per decade--have occurred quite regularly since World War II. Most last less than four quarters, according to International Monetary Fund data. But the depth and breadth of recessions are notoriously difficult to predict. This article focuses on what CPA financial executives have experienced in the current recession, using data from the first quarter Business and Industry Economic Outlook Survey (tinyurl.com/d2tomw) conducted by the AICPA and the University of North Carolina's Kenan-Flagler Business School. The JofA supplemented this data by interviewing CPA financial executives in multiple industries and regions of the country

CREDIT AND OPERATING CAPITAL

The executives, interviewed in March, shared experiences correlating with survey results that indicated 23% of executives had experienced higher credit costs and tighter restrictions.

For Manship Media Group in Baton Rouge, La., credit is a top concern. The 100-year-old family-owned business operates the daily newspaper The Advocate and two ABC-affiliated television stations. CFO Ralph Bender, CPA, explains that the company has substantial fixed costs and debt related to printing and broadcast equipment. "As the business has significantly retreated in terms of revenue, that's put some strains on our ratios and caused some increases in the cost of credit," he says.

Chicago-based CPA John Walles, who is CEO of the technology consulting firm Walles & Associates Inc., also has seen credit tightening. "Looking to expand [credit lines] is impossible," he said. "If you have a solid line in place, then you can maintain it."

However, banking executives, though not denying that they're being more careful, say they are lending. "Credit is certainly still available for good companies with quality collateral and good management," said Justin Horst, CPA, vice president and CFO of Omaha, Neb.-based Pinnacle Bancorp Inc. He adds that housing credit is tighter because of the dry up of the secondary market for mortgages and the imposition of stricter underwriting guidelines by Fannie Mae and Freddie Mac.

Ed Lette, chairman and CEO of Austin-based Business Bank of Texas, says bankers are followers and got too caught up in real estate values without looking at cash flows. He says he's not afraid of real estate, just "speculative" real estate. But he thinks his colleagues are likely now to push the pendulum back the other way--requiring more personal guarantees and other types of covenant restrictions (see "Checklist: Loan Covenants Tighten Up," page 20).

WHAT ABOUT EMPLOYMENT?

Employment prospects have continued to drop. Less than half (47%) of survey respondents expected to maintain or increase their employee head counts. In the previous quarter, 57% expected to do so.

Nearly one-third (32%) expected to reduce staffing by more than 5%. Technology and health care providers showed the best employment prospects with just under one-third expecting to increase the number of employees; but even for those industries the number of respondents expecting decreases exceeded the number expecting increases.

"I think it's turning into a little bit of a vicious cycle, so it's very difficult to predict when unemployment's going to peak," says Kenan-Flagler's Mark Lang, CPA, Ph.D., who analyzed the survey's results. He said companies are facing a downturn with respect to their demand, and as a consequence, they're rolling back spending.

Although Manship Media had not reduced staff other than by attrition, as of this writing, Bender pointed out there's hardly a newspaper in the country that hasn't reduced staff by at least 10%.

COMPENSATION ON HOLD

In the first quarter, more than 50% of the financial executives surveyed had implemented compensation freezes in their organizations. However, follow-up with a limited number of participants indicated that compensation freezes are not uniform. …

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