Lessons to learn from Carillion’s Liquidation
27 Feb 2018

You’d have been hard pressed to ignore news that construction giant Carillion has entered liquidation, but you’d be forgiven for not monitoring its immediate impacts very closely. In fact, the story of Carillion is just the tip of the iceberg, with a further number of businesses entering insolvency as a direct result of their credit terms with Carillion. One such business is CCP, who went from a stable, highly profitable business with a large turnover, straight into insolvency, almost overnight, as the business failed to weather the loss of income from the Carillion insolvency. This domino is likely to continue as businesses fail, or possibly scrape through the losses they will have suffered.

Whether it affected you directly or not, Carillion is one of the largest and most high-profile insolvency cases in recent history, and businesses would be naïve to ignore the lessons which can be learned from its impact on other businesses. If nothing else, it should encourage you to review your business profile and credit management processes to ensure that you could weather this type of extensive crisis. Businesses should:

  • Review bad debt provision, particularly if it is a bad debt cash reserve within the business. Most commonly, bad debt reserves are calculated and set aside by reviewing historic bad debt and adding an additional contingency, with risk is evaluated based on past events. Very few businesses we consult with have ever reviewed what provision they actually need in order to survive, which is a common mistake that can leave you vulnerable. If any business was to review its historic business profile, number and type of customers, spread of risk etc., it is unlikely that two years will ever be identical; add to that the fact that no two bad debts are the same, and allocating a reserve on this basis seems very naïve. Instead, businesses should consider how much they can afford to lose before they will no longer be able to continue as a business, and implement this as their bad debt reserve. This will assure that regardless of whether a single large creditor goes bust, or a couple of smaller ones do, the business will still be able to survive in the short-term, if not thrive. Don’t forget, maintaining a bad debt reserve is only as effective as the calculations that have been used, plus that money cannot be invested into expansion and growth either; at this point it is worth businesses considering a credit insurance policy, which will provide an appropriate level of cover, restore most losses and free up your provision for investment elsewhere.
  • Review extended credit terms. There is usually a chasm between what a business wants to extend in terms of credit to their customer, and what they should extend to them. This is the age-old argument between sales and risk, where the sales function hopes and seeks to squeeze every drop of revenue from a lead, and the risk function needs that credit to be appropriate. It often seems counterintuitive to walk away from potential revenue, however it is vitally important that businesses extend appropriate credit to the businesses that they work with. As part of your new business process, there should be a function to validate how much credit is appropriate to extend to a customer, and these limits should be adhered to and regularly reviewed. These customer credit insights are a vital part of both a credit management policy, and a credit insurance provision if you are insured. All too often businesses chase the income at odds to the risk, and should a customer go bust, cannot survive the losses.
  • Review your credit management process; how and when you chase payment, what the appropriate sanctions are for non-payment, and how this impacts on future work. Commonly businesses miss the warning signs that point to customer instability, such as an increase in days between payments. Having an end-to-end credit management function, which regularly reviews invoiced and pending work and adjusts accordingly can help to avoid situations where a large client is prioritised, only for time to be wasted if that company enters insolvency. Your time, expertise and skills are best allocated to the customer who can and will pay and not the customer who used to and did pay.

Consider whether an insurance policy is better? We know this is a shameless plug, but that’s because we genuinely believe that in certain circumstances, insurance is the best option available to a business. Not only will it pay out in the event of a bad debt, but support will also be given to help identify appropriate amounts of credit, monitor any necessary adjustments in the level of credit that is extended, support with the credit management process, and enable the business to invest and grow through the expansion of markets, including through export. Credit insurance is not for every business, but it can be a highly effective tool and should at least be considered.

If you want an impartial, expert review of your current credit management procedures and any vulnerabilities within your business, speak to The Channel Partnership team for a free audit.