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  • Matt Portt

The lessons small businesses should learn from Carillion



Small business owners would be forgiven for thinking that there was little for them to learn from the collapse of Carillion, the second largest construction firm in the country. From the outside however, it seems clear that the collapse can be put down to several financial management failings, many of which can also be relevant to small businesses.

Matching your costs to your revenue

One of the points coming out of the collapse is that Carillion Booked the Income too soon without sufficient allowance for future costs on jobs, thus overstating profits and failing to recognise future liabilities.

We still see this practice in many small businesses, for example where you invoiced for a job upfront but have not yet completed the work, or where a job is close to completion, but final snagging work Is still required. It can also be seen in professional service firms who value their work on an hourly rate but fail to make sufficient allowance for recoverability.

Be honest with yourself

Business owners are often optimistic about the future, sometimes at the sacrifice of reason. If your profits on an activity underwhelm historically, realistically what is going to change in the future to turn these fortunes around.

If an activity has been under delivering for a while, then undertake an objective root and branch review of that service offering and try to increase the profit margin or pivot into an alternative, more profitable service stream. Don’t be afraid to bring in an external opinion from a trusted advisor.

Don’t try to trade your way out of trouble

If you have liabilities, which the company can’t currently pay then don’t be drawn into future unprofitable contracts for the purposes of generating cash to meet your current liabilities. This may be a painful process, but it is far better to face the pain for your current predicament than making the problem 10 times larger.

Don’t overpay

Some experts feel that Carillion overpaid for their recent acquisitions which funded the growth. This can also be prevalent in small businesses, for everyday costs which often get overlooked at the expense of sexier turnover generating activities.

Cutting costs

Many business owners often feel very close to their staff and suppliers, choosing to rule out cutting back on any of their costs out of loyalty. Whilst admirable, unless a permanent solution can be found to the issues then you are simply delaying and magnifying the impact on your team and suppliers, which can then as it has with Carillion, hit them at very short notice.

Don’t be afraid to undertake triage when is required, if you’re open and honest with people they will understand.

Know who you’re getting into bed with

The opportunity to enter into a contract with a wealthy or large business, may on the face of it, seems like a brilliant opportunity to increase the size of your company. Ensure you still go through the same due diligence as you would any other contract. Don’t be afraid to check on the financials of your future trading partners and ask questions, if they’re genuine and have nothing to hide then they won’t be offended. Business isn’t all about being bigger, if there are insufficient profits available for the risk you are taking, don’t take the risk.

Only you can decide your risk profile but it’s an age-old adage that risk equals reward. There will now be many good businesses that contracted to Carillion that will sadly go bust due to their over reliance upon them.

You are not a bank

I understand and fully recognise that many large businesses will insist on 90 day payment terms to trade with them, you really need to consider before entering into such arrangements whether you are happy to give your product/service away and then lend your customer money until they get round to paying you. Be sure at the onset of any contract to make your payment terms clear and wherever possible, arrange for your customer to sign up to payment methods such as direct debit or a deposit upfront.

If the risk is too great, insure

If you are reliant on one customer and in particular the amount they currently owe you, you might want to consider selective invoice finance or credit insurance for that customer, whilst there will be an upfront cost of this, it will mitigate the potentially disastrous consequences of that company going bust and not being able to pay you.

Don’t extract too much profit

Business owners put a lot of time and effort into their businesses and they could be forgiven for wanting to enjoy the spoils when times are good. You should however ensure that you leave sufficient funds in the business to cope with the rainy days.

In Carillion’s 2016 and 2015 accounts they reported profit after tax of 129 million and 139 million respectively, paying out combined dividends of 155 million in those two years. I’m not saying it would’ve changed anything but I’m sure the company’s survival would have been more likely had that cash still been in the bank.

If you are concerned by any of the above factors in your business, please do not hesitate to get in touch for an initial chat.

#FinancialManagement #SmallBusiness #Carillion

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