Friday, February 16, 2018
Use the Carillion collapse as an incentive to look at your trading practices, says Steve Hutin, the managing director of Rope and Sling Specialists Ltd.
I’ve blogged before about fallen giants and, once again, there are lessons to learn.
The crash of Carillion last month (January) was felt across the land. We work closely with the UK’s construction sector and headlines about unpaid bills, lost jobs, and incomplete projects made for unpleasant reading. With overwhelming debt combining with a cessation of credit from lenders, the writing was on the wall for some time.
Carillion was responsible for delivery of nearly £1.5 billion worth of government contracts tied up in the Aberdeen bypass, Royal Liverpool University Hospital, and the Midland Metropolitan Hospital. It’s an eye-watering amount of cash that finance directors at most companies could only dream of. However, the first lesson the nosedive teaches us is that turnover isn’t everything. In fact, it’s far less significant than cash flow and profit.
The aforementioned landmark projects looked great on paper but each has been fraught with difficulty and small profit margins were thereby stretched to the limit. Contractors have to be careful with such long-term projects as many years sometimes span the time between contracts being granted, work being completed, and payments received. Carillion acknowledged as much last summer when it issued the first, telling profit warning.
Imagine the knock-on impact to Carillion’s subcontractors, many of which were small or medium-sized businesses. As the construction giant was forced to pay its bills later and later, the suppliers, most of which were working with equally small margins, were pushed to the brink of bankruptcy. We’ve all read stories in which Carillion has been accused of taking up to 120 days to pay subcontractors, despite the fact that is was signed up to the government’s prompt payment initiative.
This blog isn’t about Carillion per se but it is opportune to remind ourselves how vigilant all businesses need to be in managing their profitability. We’ve had our fingers burnt in the past not just by big companies that didn’t show their subcontractors the respect they deserved, but also by good firms who over-traded. These harsh lessons taught us that we had to put processes and procedures in place to better protect ourselves. I’m not suggesting these systems have made us bulletproof but we’re certainly more insulated.
Integral to our plan was controlling the controllable. There are a number of reasons to make sure invoices are sent out accurately, on time, and issued as part of a rigorous accounting process. When a big company gets an invoice, it might be filed for weeks (months, even) before an accounts team views it. If they notice a mistake or discrepancy, it has to be resubmitted and it might go to the bottom of the pile. It’s bad practice, but some companies will query invoices or ask for them to be resubmitted as a payment-delaying tactic.
It’s important to be able to track, trace, and chase invoices. Only when a company knows exactly what monies it is owed, from whom, and how overdue they are, can it initiative procedures to get those bills paid. It’s not a pleasant thing to have to do, but there have been occasions when we’ve had to employ solicitors to draft letters and commence court proceedings. A company can only resort to this, however, if accounting administration is of a certain standard. No solicitor will help claim debt without a clear paper trail, including purchase orders, terms, invoices, and supporting correspondence. It’s advisable to have relevant insurances in place too.
Watching such legal wheels in motion sharpens the senses and one’s desire to avoid being the recipient of a summons. This is where the importance of profitability and cash reserves is emphasised again. Waiting for a 90-day payment to come in from a mega project before paying a loyal, local supplier that was owed its money 60 days ago is cutting it too close. If the contractor at the project goes the way of Carillion, a major supply artery could be cut off or, worse, put out of business.
Checks and balances
There are checks that can be carried out before a business decides to open an account with a customer. It’s a cliché, but not all business is good business. Companies owned by shareholders have to report their finances publicly anyway but there are ways to investigate other prospective clients before getting into a one-sided relationship. In a niche sector, keep an ear to the ground and consider the pros and cons. Often the two sides of the coin will be potential revenue and realistic profit. Certain requests that a new customer makes in relation to payment terms can serve as warning signs that good finance people will spot a mile off.
Turnover is important but only in perspective. What’s the point of budgeting for turnover of £3 million if outgoings amount to £3.2 million? In competitive tender situations there is a temptation to try to leverage a single-figure percentage profit margin to secure the work. I’ve even heard of businesses bidding for similar-sized jobs that would leave them with no margin at all, only the perceived prestige of delivering a service or solution to a major project. It’s foolhardy at the best of times but when those projects get delayed and / or costs soar, it can lead to disaster.
I can understand why the government has been questioned over its role in the Carillion scandal. It might argue that it was merely a customer, and there’s some truth in that, but the taxpayer is understandably anxious about, say, the new £335m Royal Liverpool Hospital being completed at their expense—and way behind schedule. One might raise further questions about what was done following last summer’s profit warnings. Perhaps the damage had already been done. Generally, government, like businesses, should look to work with companies with better profit and cash flow, and less reliance on credit.
My intent is certainly not to advise people against working with big companies; they’re not all monstrous in that sense. My company works with a lot of big businesses that are ethical and pay us very well. Further, many have given us a chance to showcase our capabilities, which has led to the reward of other contracts. But balance is key; don’t put a company’s turnover largely in the hands of a single contract, consortium, or project. That tilts the balance too much in their favour and a small firm will get bullied. Build a customer portfolio of all sizes and types of business.
Take recent headlines as a prompt to look closely at your own supply chains.
Thank you for reading.
Rope and Sling Specialists Ltd