Carillion: What Can We Learn?

March 20, 2018

With the demise of Carillion, there are definitely some lessons that can be learnt by UK businesses.

 

If you are unaware of what has transpired, Carillion, the UK's second largest construction firm entered voluntary liquidation on the 15th of January following a 2017 that was plagued with financial troubles. The cessation of the firm has caused extensive redundancies for its staff and created fears among sub-contractors of the firm that they will not be reimbursed for the work they have carried out. There are also fears that pensions for ex-employees may be affected.

 

Carillion was involved in numerous government contracts across the UK including the maintenance of around 50,000 homes for UK servicemen and woman in 360 defence establishments worldwide, they also worked within the healthcare and prison services, their most notable current contract was work that they were carrying out on the HS2 railway line connecting between London and the North West.

 

These contracts and the size of Carillion made it almost unbelievable that such a large organisation could fail. This has effectively shattered the myth in business that some businesses are too large to go bust.

 

So what can we learn from this giant slain by bad debts? Firstly, the biggest lesson to take from this is related to the sub-contractors and supply chain companies who are unlikely to be paid out the money they are owed for the work they carried out on behalf of Carillion.

 

When someone contracts you to carry out work, you should reach some sort of agreement relating to payment up front if at all possible. This helps to safeguard against losing out on money owed if the company you are contracted to goes into a period of financial hardship. Even if it is only half of the payment up front and then half when the contract is completed, it would stop you making a total loss on the project.

 

Money isn't the only loss for the sub-contractors who worked for Carillion, they had devoted a lot of time and resources to these endeavours and that is now money they will not get back. By demanding some manner of payment up front you can also seek some form of protection against lost time and resources if there were an incident with the business you are contracted to.

 

What was one of the key components to the financial troubles faced by Carillion? According to the ex-chief executive of Carillion, Keith Cochrane, he went on the record to state that they had accepted too many projects that were unprofitable. This highlights the need for smart business planning and the evaluation of all contracts or transactions that you carry out.

 

When carrying out a project, contract or sale, you need to make sure that the operating costs of carrying out the work do not outweigh the financial gains you would receive. This sounds obvious but it is hidden costs that normally make these projects unprofitable. For example, if you spend money sourcing a product for your client and the product turns out to be of poor quality, you may have to order more of the product in an additional cost to yourself or refund the client entirely. In this situation, a loss would be made on the deal. This highlights the importance of evaluating the risk when you sub-contract to someone for a deal, and when you buy a product for a deal that will make a minimal profit in the first place.

 

Another lesson to be learnt from sub-contractors who will be facing financial turmoil due to the collapse of Carillion is "not to put all of your eggs in one basket". What I mean by this is that even if you get a big prospective contract or deal, do not operate with the assumption that the deal will close. Seek out other forms of revenue at the same time, so that even if the big one doesn't go off, you still have money coming into your company account. This may also seem obvious, however, when chasing the big money it is easy to forget about the smaller, more frequent deals that will keep a company floating.

 

Another lesson that can be learnt from what has happened with Carillion is that debt management is paramount to the survival of a company that is undergoing a period of financial hardship. If your company is struggling with debt, you should immediately seek out financial advice and make moves to reduce your overheads as much as possible, this could even mean cutting off deals that are especially at risk of falling through and require investment from yourselves. In the short term, your profits will be lower and you may lose some business "luxuries" however, in these situations you need to make sacrifices to survive.

 

What you cannot do when in financial hardship is take on long, expensive projects that you may not be able to complete or will not generate noticeable profit in comparison to costs. This is what Carillion did and they paid the price for this. These risks made their financial situation worse and caused them to actually lose money on projects due to poor management.

 

The demise of Carillion should serve as a lesson to companies in the UK that risks do not always pay off and that you should always make sure that your plans as a business are flexible and can cope with unforeseen failures or sales that break down.

 

Sources

 

The Times

 

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