Risk & Economy » How FDs should react to Carillion collapse

The collapse of building group Carillion has raised concerns about how much companies really knew about the company as it teetered on the brink of collapse. Certainly hedge funds that drove down Carillion’s share price were on to something- prompted by factors such as the stricken building group’s policy of paying suppliers on 120 day terms.

But what should the firms caught in the Carillion supply chain do next and what advice is being offered for companies more broadly when it comes to due diligence on customers and suppliers as part of a wider risk management strategy?

Lee Causer, partner and construction industry specialist at accountancy firm Moore Stephens, says many of Carillion’s suppliers will have automatically assumed that a group the size of Carillion would be rescued. “Therefore, many will not have prepared for its collapse and will struggle to get alternative contracts in place,” he says.

Causer says the failure of Carillion will inevitably lead to disruption across the supply chain, and financial turmoil for sub-contractors who relied on business from Carillion. “Its collapse could trigger a number of insolvencies across the construction sector, in an industry that already experiences the highest levels of insolvency per year in the UK. The ramifications of the failure of Carillion could be huge,” he adds.

Undertaking a health check

Peter Kubik, Partner at UHY Hacker Young, another accountancy firm, says: “Any company affected by Carillion’s collapse should conduct a health check to make sure they are still a viable going concern. There will be a huge knock-on effect amongst smaller firms, especially as many creditors can expect to receive less than 1p for every £1 they are owed by Carillion.”

Philip King, chief executive of the Chartered Institute of Credit Management, says it’s vitally important to understand as much as possible about any company that you are in any commercial arrangement with-what he says should be a high priority in any corporate strategy.

He says this is advice may have come too late for many companies supplying Carillion, and not just those directly connected to what was the UK’s second biggest building group. “Suppliers that are directly related to Carillion will have been worried already, but many companies won’t have been thinking like that until now, including those that may be two or three links down the supply chain,” he adds.

“Companies must be asking: How well do you know who you’re dealing with?” says King. “Companies must undertake credit references, something that businesses often don’t do,” he advises.

CICM’s corporate check list:

  1. Check out the exact name and legal status of the business you’re supplying. If it’s a sole trader or partnership, the proprietor or partners are personally liable so make sure you have their full details. Businesses can disappear much more quickly and easily than individuals! For limited companies you can obtain information and documents at : https://www.gov.uk/get-information-about-a-company
  2. Check if the business is a signatory to the Prompt Payment Code. If so, they have committed to the Code and, if they don’t pay promptly, you can raise a challenge and the Chartered Institute of Credit Management will intervene on your behalf. Their Prompt Payment Code entry will also give information about how they pay and what you need to do to ensure you are paid promptly. If it’s a large company (Turnover £5.75m or 250 staff) there will be a link to their entry on the Duty to Report portal after April 2017.
  3. Don’t be afraid to push for all the information you need – if you can’t get it now, it will be far more difficult later.
  4. Watch out for cultivated ‘friendly’ references that the potential customer gives you. Referees that you choose are far more effective.
  5. Invest in credit reference information – it could save you a bad debt.
  6. Set some rules that you (and all your employees) always follow and don’t be tempted to break them, even if you’re put under pressure to supply urgently

 

 

Read more