Carillion Crash – Lessons to Learn
It is hard to escape the news about the construction and service giant Carillion and the fact that it has gone into liquidation. It is also hard to believe that a large company with over 450 public sector contracts has folded. The news does not look good as the company has gone into liquidation rather than administration. This would suggest that there is little of value left in the company, otherwise trying to find another buyer through the administration process would have been a preferable outcome. There are many questions which need to be answered about how this situation could arise and why the UK Government continued to give out contracts to a company with severe profit warnings. As Carillion’s business model was based on acquiring large scale, multi-million pound contracts with parcels of work being sub-contracted to numerous SMEs it is not just Carillion employees who are affected by this news. Best business practice suggests being contracted by large, established companies is a safer way of working. Sub-contractors of Carillion relied on the size of their major contractor as a safety net to ensure they would get paid and not be subject to the vagaries of market conditions. Even the Government appears to have taken the view that giants such as Carillion cannot go under.
There is little that can be done immediately for those companies and individuals affected by this news. It is going to take a long time for the appointed Insolvency Practitioner and PwC (Price Waterhouse Cooper) to unravel the financial dealings of Carillion, to plug the hole in the pension gap and identify exactly how much creditors (including suppliers and sub-contractors) will receive, if anything. Of more immediate concern in the here and now is the impact this is going to have on the rest of the supply chain. In particular what can smaller SMEs do to ensure they are not caught out by such a situation again?
What can you do?
So what can companies to do to ensure they insulate themselves in the future from this situation? Here are our top tips:
Due Diligence – this means ensuring that the company, customer or supplier you are going to do business with is solvent and in a strong financial position. Something in this case which even the Government decided to ignore, an oversight which will cost us all. At the very least you can check all limited companies on Companies House. Have they filed all their paperwork? Does the MD or CEO have a string of bankrupt companies behind them? What do the last accounts they filed look like? If significant amounts of money are involved it may be worth going a step further and getting a more detailed Company Report (we offer one for just £12 + VAT).
Credit Control – do you have a robust credit control system in place? Always invoice for goods and services as soon as they are delivered. Follow a systematic credit control procedure. Firstly send out a reminder a few days before a payment is due, if it isn’t paid on time follow up with a series of letters, emails and phone calls. Let’s be honest most of us are more likely to pay those who ‘shout’ loudest or who continually remind us what we owe them. We are much more likely to be lax with someone who doesn’t chase us or stay on top of their outstanding invoices.
Debt Recovery – have you reached the end of your credit control process and still not got paid? Just as you are experts in your field, debt recovery organisations are experts in theirs. We understand that it is both time consuming and uncomfortable to chase debts. However we do it every day, have heard all the excuses there are and can save you time to concentrate on what you do best – manage your business.
It is impossible to completely avoid situations like the one which has arisen with Carillion but there are ways to prepare and to minimise the impact such events have on your own company.