There is nothing like a high profile company failure to propel the topic of credit management to the top of most people’s agenda.
Credit Management can drift along in silence week after week, month after month, and as long as there is enough coming in to pay the bills, all is well. Some companies still see credit management simply as “billing and collecting” and anyone who has been reading my articles or attending the training courses over the years will know that there is much more to it than that.
Over the years working in credit, I have come across a number of company failures, which is always a source of sadness. Every failure is a tragedy and the extent of the tragedy is linked to the amount it ended up costing you.
The demise of Sammon Group was linked to the collapse of Carillion and there are a number of sub-contractors around the country who are not only suffering from the effects of a significant financial loss, but also from the loss of a significant amount of business. This in turn will impact on the suppliers who are owed money from these sub-contractors and so on ad infinitum. So, what can you learn from this that you can put into effect straight away to protect yourself in the future?
It is interesting to note that both Carillion and Sammon Group closed their doors because they ran out of cash. In both cases, they looked to their bankers to provide additional working capital and it was not forthcoming, leading to closure. I have always maintained that your source of working capital should always be your debtors ledger, and collecting what you are owed when it is owed is the best and cheapest way to remain solvent.
No single customer should account for more than 33% of your business. You must ensure your own survival by spreading the exposure across as many different customers as you can. In 2017 Carillion was reported to be over 65% of Sammon’s business.
Every business should set out the rules for granting credit in two simple measures:
We all know that doing business involves taking a risk. While a working crystal ball would be handy, sadly there is no such thing. There are times when the writing is on the wall – in the case of Carillion prior to their collapse, they had nearly £900 million of debt and posted half year losses of £1.15 billion, not to mention the £587 million pension deficit. So you wouldn’t need a degree in accounting to work out how that was going to end. Sammon was different, most commentators believed that they had a future; they survived the worst recession in the country’s history and were increasing turnover year on year. Yes, things were tight; they had about €10.5m in liquid assets and creditors (including Revenue) of around €16m. Had the cash continued to flow and new contracts added, there was every chance they could have traded their way out of trouble. Even Ulster Bank, who you would expect to have expertise in risk, put €3.35m into the business last November. After the collapse, Oireachtas Finance Committee Chairman John McGuinness said a group of more than 60 creditors of the collapsed Sammon group estimates they were owed €14m. I am sure there were more.
One figure that was given to me by James Riordan of Credit Risk Brokers was that almost ¤2m was paid out by the three major credit insurance companies in Ireland to Sammon creditors who
had credit insurance. What about the others? What about the small family businesses and sub-contractors who were owed the ¤12m? A simple credit insurance policy would have protected them from the pain of financial loss. After so many years working in the area of credit management, I cannot understand the reluctance of all business to insure their debtors. It is often the largest asset in the business and it is also often the most insecure, as it is out of your own control. You insure all other assets: your buildings, your cars, your vans, your equipment – why not your debtors?
In my experience it is the best way to control your potential losses and to help you grow your business in a risk reduced world. One thing we have all learned is when it comes to the construction
industry, anything is possible. I hope you will benefit from the lessons above and do something to protect your own business, before it is too late.
This Business Support article featured in the November/December 2018 edition of The Hardware Journal.