The collapse of Carillion in January 2018 has already triggered disruption throughout the construction industry. Businesses subcontracted by Carillion will soon feel the effects of the liquidation of the second largest construction company in the UK, with smaller private companies likely to be hit the hardest. The domino effect of the collapse of such a massive company is unfortunately unavoidable at this stage. But what lessons could businesses learn from the fallout of Carillion’s demise?
- A robust and strategic business plan – Carillion saw its debts double in only a few years thanks to a few big contracts being far less profitable than expected. This put the company in a position where it needed money quickly to maintain cash-flow and pay suppliers, but banks were refusing its loan applications. As such, bids were put in for contracts for impractically low profit margins. Without any room for manoeuvre through cash reserves or contingency plans in case of overruns or complications, it only took three or four unprofitable contracts out of around 450 in total to push Carillion into insolvency. Of the many cautionary tales being told here, perhaps the key one is that businesses should never allow lenders or suppliers to hold sway over their business strategy.
- Never underestimate the importance of cash – the primary indicator of Carillion’s cash-flow crisis was the company extending its supplier payment terms to 120 days, double the accepted industry standard. Following Carillion’s profit warnings in July last year, more stringent terms would have been demanded by many of its subcontractors, which only made the flow of cash out of the company even worse. With the usual sources of finance run dry, Carillion was forced to ask banks to settle invoices worth £350 million so that essential contracts could continue, spiralling the company into further debt.
- If things aren’t working, don’t ignore it – the construction market is volatile, so if Carillion had admitted things weren’t going well and asked for help and advice earlier, the company may not have entered liquidation as it has. Other companies in the sector, such as Balfour Beatty and Serco, spent considerable time and money restructuring their businesses in the UK and avoided collapse. Simply put, realism not optimism should always be employed when considering the profitability of work. If restructuring is necessary, it should be done sooner rather than later – leaving things to the last moment won’t fix anything.