Carillion is not a word widely known in New Zealand, but recently in the UK it has become the name associated with what is probably the largest corporate collapse in their history. Carillion was a major construction and infrastructure business taking on numerous large government contracts such as building hospitals and roads. Quite how this collapse happened is still under scrutiny but the numbers speak for themselves - in its last Annual Report before plunging into insolvency earlier this year Carillion reported total assets of GBP 4.4 billion, net equity of GBP 730 million and a trade payables figure of GBP 750 million.
It is the last figure that is perhaps the most troubling - most of the trade payables will be owed to smaller businesses with probably little or no security over the amounts owed to them. It is estimated that more than 30,000 small suppliers have been caught at an average of GBP 25,000 each, or around NZ$50,000.
Despite the share price plunge that started 6 months prior to its eventual collapse, it appears that smaller suppliers, buoyed by the fact Carillion continued to win UK government construction contracts, assumed that due diligence had been carried out by the government and everything was fine. It was only when this turned out not to be true did reality hit home. The end result is that most, if not all, of these smaller businesses will receive little, if anything, of what is owed to them.
In light of this it is imperative that business owners consider some Do's and Don'ts with respect to supplying goods and services on credit:
- Do your own due diligence on customers to whom you extend credit terms
- Do be prepared to take quick action if things deteriorate - look at shorter payment terms, cash on delivery, security etc.
- Don't be afraid to ask for expert help to understand the exposure risks you are carrying with respect to credit terms
- Don't wait for a financial collapse to take these steps - by then it's already too late.