Carillions collapse - the lesson for you

25th January 2018

It’s the story that’s dominating the headlines.

Right now, the media is buzzing about the collapse of Carillion, the massive construction and services business.

The numbers are frightening. Nearly £1 billion owed to the banks, a deficit of some £500 million in the pension fund, and some 40,000 employees who face an uncertain future at best.

Too big to fail?  Clearly not. Only a short while ago Carillion had a market capitalisation of some £2 billion. Someone thought it was worth a lot, but now it is worthless.

What really concerns me, though – and should concern you too – is the domino effect.

Carillion, like many similar business, outsourced a large element of its work to sub-contractors.

They most certainly will not be paid, and will lose what they may have thought was a lovely forward-order book.

Many of these business are small, with perhaps just a handful of employees. It is very likely that many of these small subcontractors were small concerns with debts of their own, personally guaranteed by the owners to their banks.

If they cannot ride the storm those small entrepreneurs could lose everything. Many will fail and many individuals will suffer significant financial hardship as a result.

The story we’re being spun is that this is the fault of a mismanaged and greedy corporate. This may or may not be the case – we will probably never know the whole truth.

But there is a lesson here for every small business.

The contractors working with Carillion may have thought all their Christmases had come at once when they first won work from such a big, well-known name. What kudos, what credibility.

Did they for one moment stop to think about the risks they were taking?

….And do you, when you win a big contract?

The reality is that all the risk lies with you, not them.

You need to check out your new customer properly, no matter how big they are.

It’s not enough to run a credit report and accept the limit they say. You need to dig deeper – looking at the financial press, checking out others’ experiences, looking at the trends and taking your own view.

Then stand back, let the adrenaline settle and take a cold, hard, sensible look at what you are about to take on.

What if they don't pay?  What if they pay late?  What if someone else fouls up?  What about your own suppliers?  What about… what about…

Let the euphoria settle and think about it.

All the signs were there with Carillion, for anyone who cared to look. As well as the massive debts and profit warnings, there was what you might call “credit creep”. They were taking longer and longer to pay their creditors – I have heard press reports of 120 and 150 days.

I can assure you they were not waiting that long to be paid by their customers. So why did they need to keep their small sub-contractors waiting so long for cash? Easy: This company, which already owed the banks almost £1 billion, was using them as another bank.

If any contractors noticed these rather prominent red flags before they accepted the work, they ignored them, trusting that everything would turn out fine – most likely because of Carillion’s size.

Now they stand to lose everything.

Sadly, it is a familiar story.

We have seen businesses that have lost major work overnight or have been hit by bad debts when they could ill afford it, and some have failed as a result.

What could they have done?

They could have checked the warning signs constantly….

…Been realistic, pessimistic, and weighed up the risks.

Sometimes no matter how good it seems on the surface, you have to walk away because the risks are just too great.

Only you can decide. But to do so, you need to be objective and you need to understand your numbers.

You also need a candid friend, a confidante you can trust to tell you the truth about the financial implications of your business decisions.

Does your accountant do that for you?  Probably not.

But we do.

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