General Business Forum Brought to you by Square

A disaster and a lesson: What Carillion’s collapse tells us about business risk

  1. Carillion
    Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

    91 18
    5 |

    What a way to start 2018, folks. On Monday, it was finally announced that Carillion, one of the government’s biggest contractors, has filed for liquidation.

    This isn’t any old liquidation, though. The Wolverhampton based firm -- an “integrated support services business” -- delivers many infrastructure projects and manages several public services. Or, at least, it did.

    Its broad portfolio ran the gamut from construction projects to providing school meals. Being a many-tentacled beast meant Carillion had a vast army of smaller suppliers: among this number, a reported 30,000 small firms are still owed money.

    For these small suppliers, things are -- to put it mildly -- not looking good. A witness statement filed by Carillion’s chief exec expected recovery for creditors in liquidation is 0.8 to 6.6 pence in the pound.

    These businesses now face going down with the ship. It’s another sad chapter in small businesses’ struggle with supplying big corporates like Carillion. If you are one of these unlucky companies, then it will be tough but not altogether hopeless.

    The bad news: as a supplier on credit to the Carillion Group, your business will be an unsecured creditor. As Robert Moore put it simply: “It is best to treat this money as gone.” But, he added, “Does this mean you will need to make layoffs redundancies and so on immediately? Not necessarily!”

    Here’s the silver lining: “It is likely that a number of the contracts that were undertaken by Carillion will be picked up by joint venture partners or new contractors. Your subcontract status may mean that you will be asked to re-tender or supply the newly appointed contractor.”

    This mess isn’t just about direct suppliers, though. As Barryo points out on the forums, a collapse on this scale will echo across the economy. “Thousands of businesses will be affected by Carillion's demise and some of them won't even have realised they'll be affected,” they wrote.

    “For example, a stationery supplier could be forgiven for thinking that the construction industry's nothing to do with them, but if one of their customers happens to be a builders' merchant or is even reliant on payments from a builder's merchant, there could be a bad debt looming on the horizon!”

    It’s a scary reminder of how we’re often entangled in risks we don’t even know about. According to Barryo, the time is now to ask yourself a few key questions:

    “Do I have a robust credit control system that minimises my bad debt risk? Does it cover everything from the provision of credit in the first place, on enforceable terms which are acceptable to me, to the timely collection of payments and the clearing out of toxic ledger items that are contaminating the Balance Sheet and P&L?”

    “Do I know what effect a bad debt(s) will/could have on my cashflow, and what my options are/would be to deal with any resultant cash shortfalls?”

    “The tools and systems that will enable you to answer “yes” to these questions are relatively cheap and simple. If you can't answer “yes”, what are you going to do about it, and when?”

    Risk, and how to minimise it, should always be at the forefront of your mind. It’s easy to think when you’re dealing with a major business that there’s no risk of bad debt, but that’s a rookie error.

    Some suppliers to Carillion agreed to 120 day payment terms, just believing that, surely, this business couldn’t and wouldn’t go under. As MBE2017 warns, “No matter how often this happens, people forget the basics, by being too greedy and thinking that the unofficial bailout of Carillion in the form of new government contracts would continue forever.”

    Consider Carillion’s demise as a shot across the bow. It’s easy to rubber neck and just gawk as the Zeppelin goes down in flames. Now’s the time to look at your business and ask “Just how exposed am I?”

    #0
  2. Highland Spring

    Highland Spring UKBF Regular Full Member

    130 9
    I've seen a lot of flack aimed at KPMG Carillions auditors over the last few days, saying they should have qualified their Accounts and so on, but at the end of the day, it all comes down to their directors, they basically have run up huge losses and their lenders have run out of patience. Its not easy to deal with that, only to expose the issue in the hope that other similar companies will learn lessons. I am sorry for all the good people effected for no fault of their own, one of my friends left Uni 20 years ago and worked for Tarmac and Carillion all his working life, now is faced with looking for a job unexpectedly for the first time since...
     
    Posted: Jan 20, 2018 By: Highland Spring Member since: Jan 20, 2018
    #2
  3. TODonnell

    TODonnell UKBF Ace Full Member

    1,366 204
    Was the central problem this: they bid too low (and took too much on)?

    Bidding too low, then doing a cr*p job, is the curse of public tendering.

    My 2p.
     
    Posted: Jan 24, 2018 By: TODonnell Member since: Sep 23, 2011
    #3
    Farmbritains likes this.
  4. Highland Spring

    Highland Spring UKBF Regular Full Member

    130 9
    I think its more that their Directors didn't have a tight enough grip on the business, either didn't understand the scale of losses building up or not strong enough to re-negotiate before it was too late
     
    Posted: Jan 24, 2018 By: Highland Spring Member since: Jan 20, 2018
    #4
    Farmbritains likes this.
  5. sirearl

    sirearl UKBF Legend Free Member

    29,787 6,633
    Posted: Jan 29, 2018 By: sirearl Member since: Apr 23, 2007
    #5
  6. Noah

    Noah UKBF Enthusiast Free Member

    535 115
    The central problem is that for those who both make the decisions and reap the rewards, there is little personal consequence for failure*, and huge financial reward regardless of failure.

    * : Crocodile tears in front of parliamentary committees notwithstanding...
     
    Posted: Feb 7, 2018 By: Noah Member since: Sep 1, 2009
    #6