The collapse of Carillion, the UK’s second largest construction company, has exposed the enormous risk SMEs take by placing too much reliance on one major customer.
The construction company, which employed 43,000 people worldwide and had 450 key public-sector infrastructure projects on its books, went into compulsory liquidation on January 15th with £1.5b debts. That followed the failure of last-minute rescue talks between the company, lenders, and the government. It is believed to have used 30,000 sub-contractors to carry out work on those projects.
Being reliant on one major customer (or having a ‘short client list’) is a trap that many fast-growing companies fall into. It is easy to see why it happens—it is a relatively quick and straightforward way for SMEs to expand. It provides your firm with much-needed revenue and boosts your reputation, which can persuade prospective clients to take the plunge.
The trouble comes when the SMEs get 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 to any changes in the fortune of the ‘whale’.
When something goes wrong—as it did so spectacularly with Carillion in mid-January—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 one penny and 6.6 pence 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 dangerous dependency.
Having a long client list will also make your company more attractive to investors long-term.
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 it will 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 these 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. Unfortunately, instead of restructuring, the company continued to bid on contracts with unrealistically low profit margins in an increasingly desperate effort to maintain cash flow.
Hire a part-time FD
You can make it easy to avoid the ‘one-client’ trap by hiring a part-time FD who will help you to expand your client base and protect your cash flow.
To book your free one-to-one call with one of our part-time FDs, call 0800 169 1499 or just click here.
 ‘Most UK suppliers uninsured against Carillion’s collapse’, Daily Telegraph/Reuters, January 25, 2018, http://www.telegraph.co.uk
 ‘How to avoid a Carillion collapse’, Russell-Cooke, Accountancy Age, January 25, 2018, https://www.accountancyage.com
 ‘Carillion collapse: Insurers pay out £30m to suppliers’, BBC, January 25, 2018, http://www.bbc.co.uk