The collapse of Carillion, the UK’s second largest construction company, has exposed the huge risk SMEs take by placing too much reliance on one major customer.
The construction company employed 43,000 people worldwide and had 450 key public-sector infrastructure projects on its books, it went into compulsory liquidation in January with £1.5b debts. It is believed to have used 30,000 sub-contractors to carry out work on those projects.
Being reliant on one major customer is a problem that many fast-growing companies can have. It is a quick way for SMEs to expand. It provides revenue and boosts reputation.
The trouble comes when an SME gets to the point where more than half their revenue stems from that one source.
It means their future cash flow and profit is dependent upon the one client’s financial position, management, and market. That makes them extremely vulnerable.
When something does go wrong—as it did so spectacularly with Carillion — it is those SMEs with an over-reliance on the big player that are in real danger of collapsing too.
A Daily Telegraph/Reuters report says that Carillion creditors are only expected to recover between less than 1p and 6.6p of every pound they are owed in insolvency proceedings, according to court papers.
How to Avoid Being Dragged Under by a Major Defaulting Client
If your business has one client that accounts for more than 15% to 20% of turnover, look for ways now to move away from this risky dependency.
• If possible, look for clients in different markets or industries. This way, if one industry or market slows, your business will not suffer as much as if you are entirely dependent on just one market or industry.
• Limit the credit terms you offer to large customers. Try not to settle for 120-day payment terms such as Carillion offered (which was double the construction industry-average, according to Accountancy Age). The more clients you have the less likely you are to be forced into accepting bad payment terms.
• Run regular credit checks and tighten up your collection services to avoid falling into the late-payment trap, which can threaten your company’s ability to trade and in worst cases, lead to insolvency. It has been estimated by Bacs Payment Scheme that 640,000 of the UK’s 1.7 million SMEs have to wait beyond the agreed payment terms.
• Take out insurance against bad debts. Insurers are expected to pay out more than £30m to those Carillion suppliers who are owed money—but only those who had insurance policies to cover them against bad debts, according to a BBC report. The sums will vary from £5,000 to several million pounds. It is estimated that medium sized companies are owed about £236,000 while larger firms face a shortfall of more than £15m.
Only a minority of Carillion suppliers had trade credit insurance to cover them against the risk of not being paid if the company it does business with collapses.
‘One insolvency can risk a domino effects to hundreds of firms in the supply chain,” Mark Shepherd of the Association of British Insurers told the BBC.
• If you are dealing with a major public company, pay attention to profit warnings. Limit your exposure if such a client does issue a profit warning. Carillion, for instance, issued the first of three profit warnings on July 10, 2017. At that point it announced an £845m write-down on its contracts. Things seemed to have spiralled downward from then on.
For more information about trade credit insurance, call us now on 01392 363111.