The Carillion Catastrophe
The simple money lessons to take from a business failure
The recent collapse of global outsourcing company Carillion has caused a lot of anxiety and stress not just for its 43,000 workforce, 20,000 of which are based in the UK, but many thousands of people employed by its 30,000 sub-contractors. In addition, some lenders and all shareholders will have suffered a total loss of capital.
While Carillon’s demise is clearly unpleasant in the short run for those whom it directly affects, in the long run it will turn out to be a positive event. This is because companies that are not properly managed – poor profit margins, bad treatment of suppliers etc. – must face the consequences.
Business failures like Carillion are all part and parcel of the risk and reward evaluation that shareholders and lenders must make when they invest or loan companies’ capital. If badly managed businesses are not allowed to die, they tie up capital, plant and people who could otherwise be used elsewhere in the economy.
The failure of Carillion may to lead to improved supplier payment terms and more sustainable pricing by other companies bidding for state contracts. However, this might make outsourcing financially unviable for the state, leading to insourcing and better terms and conditions for directly employed staff. Either way good will eventually come from this chain of events.
There are three very important lessons we can learn from Carillon’s collapse.
Have an emergency fund
Depending on your living costs, the level of any unearned income and whether you have any expensive ‘bad’ debt (like overdrafts and credit cards) you should aim to hold between 2-12 months’ of living costs in an instantly accessible cash reserve.
This will enable you to meet living costs for a while if you lose your job or you incur unexpected expenditure like a car or home repair. It will also stop you taking on expensive ‘bad’ debt.
Always diversify your investments
Holding individual shares exposes you to much higher risk. As we have seen with Carillion, you can lose all your capital if the company goes bust, but there is no extra expected return as compensation.
Most people acquire company shares from their employer. For this reason, don’t hold them any longer than necessary, otherwise you ‘ll have the double risk of capital and income loss if your employer goes bang. For most people, investing regularly into a globally diversified low-cost index fund makes most sense for long term (25 years or more) savings.
Continually invest in yourself
Your human capital represents the cumulative value of your future earnings from selling your resources (time, energy, skills and knowhow) to an employer or customers.
The present value of higher future income from investing, say, £2,000 in improving your skills will be worth a lot more than 1 or 2% investment returns on that money. It also makes you much more employable in the event your employer does go bust or makes you redundant.
If you follow these three simple lessons, you’ll be much more financially resilient so that a future Carillion type event doesn’t blow your own plans off course.
My latest book – Money Moments: Simple steps to financial well-being is packed full of insights, strategies and tactics to help you improve and maintain personal financial well-being.
Jason Butler is a personal financial well-being expert and who writes regularly for the Financial Times. You can follow in on twitter @jbthewealthman