Seven things small businesses can learn from the Carillion crisis

The collapse of the construction giant holds some useful lessons for SMEs, says Matt Dunham of Dunham Dean Advisory.

Carillion was the second largest construction firm in the UK, but it began experiencing financial difficulties in 2017, and went into compulsory liquidation on January 15. What can small businesses take away from the Carillion crisis?

1. Manage your margins

Construction firms often operate on low margins but, where projects overrun or costs rise, low margins can all too easily turn to losses. Avoid chasing turnover at the expense of profitability. If you are tempted to take on low-value work or offer a ‘loss leader’ – for example to win a new client or build experience in a new sector – set a time limit on how long you will keep it up before raising prices to amore realistic level.

In general it is worth looking more closely at pricing as even a small increase in margins can lead to a significant increase in profits. Put accurate and timely reporting systems in place so you can compare margins on different jobs and focus on the most profitable. And look at ways to improve margins overall, for example speeding up turnaround times, reducing waste and selling more to the same customers.

2. Beware of big clients

Many small firms dream of landing a big contract with a blue-chip customer or selling their products into a major supermarket chain. However big clients can pose a serious risk to your business! Being over reliant on one customer can make it difficult to recover if things go wrong, while being forced to scale up production too fast to meet demand can be a danger in itself. Big firms are also notorious for squeezing their suppliers on price and using them as a source of free finance by enforcing extended payment terms of 90 days or more.

3. Check out your customers

Don’t take new customers at face value – get a credit check. Credit reports take account of a company’s financial track record and that of their directors. While it might not protect you in the event of an unexpected business collapse, it can alert you to those which are persistent bad payers or are on the brink. Look out also for signs of distress in existing customers, such as delays in paying invoices or disputing bills on spurious grounds.

4. Leave some headroom

Businesses with high fixed costs or high levels of debt to service have little room for manoeuvre if the unexpected happens. Try to stay agile and always have a safety net. While holding large amounts of cash in the business is inefficient, having a few months’ reserves to fall back on will allow you to withstand sudden shocks and stay afloat long enough to adapt to the change in circumstances.

5. Look out for warning signs

While Carillion had issued profits warnings, few had anticipated its sudden collapse. Be alert to signs of trouble in your own business. Put systems in place to monitor key metrics such as the sales pipeline, hitting delivery dates on time or customer payment cycles. In a small firm, it’s easy for managers to become so engrossed in delivery that they fail to notice that projects have overrun or sales enquiries are tailing off.

6. Ensure your business is sustainable

Perhaps the most obvious lesson from Carillion is how easy it is to overlook that most basic business rule – cash is king, so make sure your business cash flow is in good order. No matter big or small the company, if there’s not enough money to pay the bills, and balance the books at the end of the day, it won’t survive for long. This mistake is often associated with small firms, but Carillion’s case shows that even large corporates can come unstuck.

7. Take action at an early stage

Finally, if you are facing financial difficulties, seek help at an early stage from an insolvency or restructuring professional. Over 15,000 businesses go bust each year but many more are successfully rescued without the need for an insolvency procedure. The good news is that there are now more options than ever for companies in distress – from negotiating with creditors to restructuring and raising new sources of finance.

While insolvency is not necessarily the end of the road, it is better to avoid it where possible and address the problems before things go too far. The earlier you seek advice, the more options are available and the more chance you will have of getting your business back on track.

Matt Dunham is a partner at Dunham Dean Advisory.

Further reading on business financial management

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Carillion

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